The banking relationship and in particular the degree of participation in that relationship are, from a theoretical perspective, important mechanisms for easing the problems of information asymmetry and reducing the potential for credit rationing. Based on this theoretical analysis, 3 general propositions have been derived based on benefits to firms from participation, benefits to banks from participation and benefits to firm performance from participation. Using data from a survey of banks and small businesses in the UK, different dimensions of participation were identified including personal interaction, information sharing and responsible behaviour. An exploratory analysis suggests that there is support for the first two propositions but that evidence for the third proposition is weak. Specifically, firms benefit through service quality and financing terms and conditions while banks benefit through higher levels of customer satisfaction and loyalty. However, it is not immediately clear that these benefits translate into improved firm performance as measured by either profitability or growth rate. However, the absence of conclusive evidence with respect to the last proposition may not be surprising given the cross sectional nature of the data.
There are a number of limitations associated with the current study which must be borne in mind when considering the generalisability of the results. First, many of the measurement instruments are relatively simple with a number of single item scales. Second, no attempt has been made in the study to consider the issue of causality explicitly. In particular with respect to quality and relationship variables, there is clearly opportunity to debate the extent to which relationship participation leads to improved service or whether better relationships increase willingness to participate. Intuitively it would seem likely that there is an element of both and clearly the issues of causality and interdependence represents an important area for future research. In addition, the findings are based only on a survey of customers and thus the measure of bank manager participation is based on the firms perception rather than the managers actual behaviour. the former serves as a useful proxy but can only be indicative of what bank managers actually do.
However, the preliminary findings do suggest that the issue of participation may be an important area for future academic research. Furthermore, despite their preliminary nature the findings do have important implications. The whole issue of managing relationships is likely to be of growing importance in the banking sector; faced with cost and competitive pressures, banks may need to consider carefully what types of relationship they wish to offer and how they might charge for associated services. Similarly, from the perspective of firms, there is clearly a strong case for more active information sharing and also perhaps a need to consider what type of relationship is most appropriate for a given business. In some cases, the 'hands-off' style which characterises the less participative relationships may be entirely appropriate if the business concerned is stable and mature with no obvious growth aspirations. However, for the entrepreneurial, young firm with ambitions to grow fast, the more participative style of relationship may be desirable and even essential if growth opportunities are to be realised.
Anderson, R.D., Granbois, D.H. and Rosen, D.L. (1994). 'The effects of Consumership on Financial Satisfaction: Are Good Consumers more Satisfied?, Developments in Marketing Science, XVII pp 427-431
Bannock, Graham and Doran, A. (1991). Business Banking in the 1990s: A New Era of Competition, Lafferty Group, Dublin.
Berger, A N and Udell, G F (1992). 'Some Evidence on the Empirical Significance of Credit Rationing', Journal of Political Economy, vol 100 (5) pp 1047-1077
Berger, A N and Udell, G F (1993). 'Lines of Credit, Collateral and Relationship Lending in Small Firm Finance', Working Paper (S-93/17), Salomon Brothers Center for the Study of Financial institutions, New York University
Berry, L L (1995). 'Relationship Marketing of services-Growing Interest, Emerging Perspectives' Journal of the Academy of Marketing Science, vol 23(4) pp 236-245
Bester, H (1987). 'The Role of Collateral in Credit Markets with Imperfect Information', European Economic Review, vol 31 pp 887-899
Binks, M and Ennew, C T (1996). 'Growing Firms and the Credit Constraint, Small Business Economics vol 8 (1) pp 17-25
Binks, Martin R., Ennew, Christine T. and Reed, Geoffrey V. (1992). 'Information Asymmetries and the Provision of Finance to Small Firms', International Journal of Small Business, vol 11(1) pp 35-46
Bowen, David E. and Schneider, Benjamin. (1988). 'Services Marketing and Management: Implications For Organizational Behaviour', in Stow, B and Cummings, L L (eds), Research in Organizational Behaviour, JAI Press, Greenwich, Vol. 10.
Christopher, M., Payne, Adrian F.T. and Ballantyne, D. (1991). Relationship Marketing: Bring Quality, Customer Service and Marketing Together, Butterworth Heineman, Oxford.
Cressy, R (1996). 'Are Business Start-ups Debt Rationed?', Economic Journal, vol 106(Sept) pp 1253-1270
de Meza, D and Webb, D C (1987). 'Too Much Investment: A Problem of Asymmetric Information', Quarterly Journal of Economics, vol 102 pp 281-292
Ennew, C T, Reed, G V and Binks, M R, (1993). 'Importance Performance Analysis and the Measurement of Service Quality', European Journal of Marketing. vol 27 (2) pp 59-70
Evans, D S and Jovanovic, B (1989). 'An Estimated Model of Entrepreneurial Choice under Liquidity Constraints', Journal of Political Economy, vol 97 (4) pp 808-827
Gronroos, C. (1984). 'A Service Quality Model and Its Marketing Implications', European Journal of Marketing, vol 18(4) pp 36-44
Holtz-Eakin, D, Joulfaian, D and Rosen, H S (1994). 'Sticking it Out: Entrepreneurial Survival and Liquidity Constraints, Journal of Political Economy, vol 102 (1) pp 53-75
Keasey, K and McGuiness, P (1990). 'Small New Firms and the return to Alternative Sources of Finance', Small Business Economics, vol 2 pp 213-222
Keasey, K and Watson, R (1992). 'Investment and Financing Decisions and the Performance of Small Firms', National Westminster Bank, London.
Reichheld, Frederick F and Sasser, W Earl. (1990). "Zero Defections: Quality Comes to Services", Harvard Business Review, September/October, pp. 105-111.
Rust, R T and Zahorik, A J (1993). 'Customer Satisfaction, Customer Retention and Market Share', Journal of Retailing, vol 69 pp 193-215.
Scherr, F C, Sugrue, T F, Ward, J B (1993). 'Financing the Small Firm Start-up: Determinants of Debt Use', Journal of Small Business Finance, vol 3(1) pp 17-36
Sharpe, S A (1989). 'Asymmetric Information, Bank Lending and Implicit Contracts: A Stylized Model of Customer Relationships', Finance and Economics Discussion Series no 70, Federal Reserve Board, Washington, May.
Solomon, M.R., Surprenant, C., Czepiel, J. A. and Gutman, E.G. (1985). 'A Role Theory Perspective on Dyadic Interactions: The Service Encounter', Journal of Marketing, 49 (Winter) pp 99-111
Stiglitz, J and Weiss, A (1981). 'Credit Rationing in Markets with Imperfect Information' American Economic Review, vol 71 pp 393-410.
Turnbull, P. W. and Gibbs, M. L. (1987). 'Marketing Bank Services to Corporate Clients: The Importance of Relationships', International Journal of Bank Marketing, vol 5(1) pp19-26
Watson, I. (1986). 'Managing the Relationship with Corporate Clients', International Journal of Bank Marketing, vol 4(1) pp19-34
© 1997 Babson College All Rights Reserved
Last Updated 06/06/98