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
