There is growing recognition of the important role small and medium enterprises (SMEs) play in economic development. The SMEs constitute a...
There is growing recognition of the important role small and medium enterprises (SMEs) play in economic development. The SMEs constitute about 90% of total business units in Ghana and account of 60% of Ghana’s employed labour force (KDI, 2008). They are often described as efficient and prolific job creators, the seeds of big businesses and the fuel of national economic engines. Even in the developed industrial economies, it is the SME sector rather than the multinationals that is the largest employer of workers (Mullineux, 1997). This is also supported by a research done on small businesses in the United States by Dr. Charles Ou in June 2006, which indicated that U.S. small businesses numbered 23 million in 2003, and it employed about half of the private sector work force
, and also produces about half of the nation’s private sector output. The Korean Development Institute (KDI) in its study, “Building the Foundations for the Development of SME in Ghana” (September 2008) noted rather grimly, the obstacles these SMEs face daily in Ghana. The study enumerated these as smaller sizes of the SMEs; they are few in number and lack competitiveness internationally. These factors affect the SMEs in many ways. For instance, over 80% of SMEs in Ghana are reportedly having employees numbering less ten. The smaller size of these SMEs means less value addition as fewer processes are possibly involved in the production. A 1992 study by the Ghana Statistical Service revealed that nearly 93 percent of all registered businesses in Ghana are of the SME category. The National Board of Small Scale Industries (NBSSI) defines SMEs as enterprises that employ no more than 29 workers, with investment in plant and machinery (excluding land and building) not exceeding the equivalent of $100,000. Small enterprises in Ghana are said to be a characteristic feature of the production landscape and have been noted to provide about 85% of manufacturing employment of Ghana (Steel and Webster, 1991; Aryeetey, 2001). SMEs are also believed to contribute about 70% to Ghana’s GDP and account for about 92% of businesses in Ghana.
Again, from an economic perspective, however, enterprises are not just suppliers, but also consumers; this plays an important role if they are to position themselves in a market with purchasing power: their demand for industrial or consumer goods will stimulate the activity of their suppliers, just as their own activity is stimulated by the demand of their clients. Demand in the form of investment plays a dual role, both from a demand-side (with regard to the suppliers of industrial goods) and on the supply-side (through the potential for new production arising from upgraded equipment) (Berry et al., 2002). In order for the Ghanaian SME’s to continue to fulfil the above and much more, they need access to finance to carry out their business operation and expansion. The seeming lack of finance for SMEs is not only retarding their expansion but also the growth of the nation’s economy. Macroeconomic conditions in Ghana in 2000 severely constrained private sector access to credit. High levels of government borrowing pushed interest rates up and crowded the private sector out of the financial markets. With government treasuries paying real interest of 16.8 percent, banks had little incentive to take on what they perceived as riskier private sector debt. (USAID’s DCA Ghana Impact Brief, 2009) In view of the perennial financing challenge faced by these SMEs, many interventions have been made by the government through its recent monetary policy and financial sector reforms. These have substantially increased banks’ lending to the private sector but limited access to credit, high interest rates and prohibitive collateral requirements still pose significant constraints to the growth of many SME’s. Access to medium to long- term financing necessary for capital investment is still tight. (USAID’s DCA Ghana Impact Brief, 2009) Another area of constraint, which tends to block the flow of credit to SMEs, is lack of information. Small business owners most often possess more information about the potential of their own businesses but in some situations it can be difficult for business owners to articulate and give detailed information about the business as the financiers want. Additionally, some small business managers tend to be restrictive when it comes to providing external financiers with detailed information about the core of the business, since they believe in one way or the other, information about their business may leak through to competitors (Winborg and Landstrom, 2000).
Aside their unwillingness to disclose information to financiers, SMEs in Ghana are also faced with the challenge of proper book keeping practices that makes it difficult for financiers who are even willing to assist to do so.
1.2 Statement of the Problem Despite the role of SMEs in the Ghanaian economy, the financial constraints they face in their operations are daunting and this has had a negative impact on their development and also limited their potential to drive the national economy as expected. This is worrying for a developing economy without the requisite infrastructure and technology to attract big businesses in large numbers. Most SMEs in the country lack the capacity in terms of qualified personnel to manage their activities. As a result, they are unable to publish the same quality of financial information as those big firms and as such are not able to provide audited financial statement, which is one of the essential requirements in accessing credit from the financial institution. This is buttressed by the statement that privately held firms do not publish the same quantity or quality of financial information that publicly held firms are required to produce. As a result, information on their financial condition, earnings, and earnings prospect may be incomplete or inaccurate. Faced with this type of uncertainty, a lender may deny credit, sometimes to the firms that are credit worthy but unable to report their results (Coleman, 2000). Another issue has to do with the inadequate capital base of most SMEs in the country to meet the collateral requirement by the banks before credit is given out. In the situation where some SMEs are able to provide collateral, they often end up being inadequate for the amount they needed to embark on their projects as SMEs assets- backed collateral are usually rated at ‘carcass value’ to ensure that the loan is realistically covered in the case of default due to the uncertainty surrounding the survival and growth of SMEs (Binks et al., 1992). These are some of the factors already acknowledged by some researchers as blocking most SMEs in accessing credit from the financial institution in the country. But are these really the case in Ghana?
SMEs in Ghana do not also have the luxury of picking a financing scheme that will be appropriate for their businesses. The major type of financing open to them is debt financing from the financial institutions, which most often comes with a long list of requirements that most SMEs find them difficult to meet. The other type that is Asset financing, aside the long list of criteria also requires operators of SMEs to provide 50% of the funds and the financing institution providing the other half to fund the purchases of the assets. This type of financing do not allow for growth of the SMEs sector since they are all short term in nature.
1.3 Objective of the study To highlight the specific challenges inhibiting SMEs in accessing credit in Ghana with a view to proposing some recommendation to help mitigate these challenges. In pursuance of this objective, the following research questions were administered: ¾ Does SMEs have challenges in accessing credit in Ghana? What are they? ¾ To what extent has these challenges afftected their operations? ¾ What alternative sources of funding are SMEs resorting to and how viable are these? 1.4 Motivation of the study Studying why SMEs in Ghana have difficulty in accessing credit or funding from financial institutions from the perspective of the operators of these SMEs is crucial since it would present the problem from the perspective of the SMEs thereby making it a base line study for policy interventions by state agencies, development partners and non-governmental organisation with missions to develop the SME sector. 1.5 Organisation of the Study The Thesis is organised as follows: The first chapter contains the background which introduces the topic and touched on some of the issues with regards to SME access to credit. The literature review that forms the second
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