History Of Exploring The Meaning Of Smes

Published Date: 02 Nov 2017

No doubt, SMEs play an important role in the growth and development of any nation. According to KDI( KOREAN DEVELOPMENT INSTITUTE), 2008, about 90% of the total businesses in Ghana are SMEs. Furthermore, the sector contributes to about 60% of the labour force in Ghana. It is in the light of this assession that the SMEs are often seen as one of the largest sources of employment in many countries. It has further been argued that the now developed nations have ridden and continue to ride over the shoulders of the SMEs.

The Economic Recovery Programme (ERP) instituted in 1983 has broadened the institutional support for SMEs. The National Board for Small Scale Industries (NBSSI) was also established within the Ministry of Industry, Science and Technology to address the needs of small businesses. The NBSSI established an Entrepreneurial Development Programme, intended to train and assist persons with entrepreneurial abilities into self employment so in 1987, the industry sector also witnessed the coming into operation of the Ghana Appropriate Technology Industrial Service (GRATIS) which was to supervise the operations of Intermediate Technology Transfer Units (ITTUs) in the country. Gratis aims at upgrading small scale industrial concerns by transferring appropriate technology to small scale and informal industries at the grass root level. ITTUs in the regions are intended to develop the engineering abilities of small scale manufacturing and service industries engaged in vehicle repairs and other related trades. They are also to address the needs of non-engineering industries (Kayanula and Quartey, 2000). The setting new ministry for private sector development by the current government is also an attempt to focus on the development of the SME sector.

In view of the relatively low level of response from the private sector to early ERP reform measures the focus was on the liberalization of various sectors, including the financial sector under the Financial Sector Adjustment Programme (FINSAP). Under the FINSAP, direct institutional measures aimed at supporting small enterprises were also been put in place. With World Bank assistance, the Program of Action to Mitigate the Social Costs of Adjustment (PAMCAD) created a special fund to assist microenterprises and the fund for Small and Medium Enterprises Development (FUSMED) was initiated to increase the amount of credit available to SMEs through commercial and development banks.

For the SMEs sector to continue to play its enviable role in nation building there is the need to access to finance in order to perform its operations. According to a study conducted by John Ackah and Sylvester Vuvor in a study contend that there is 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).

STATEMENT OF THE PROBLEM

Small and medium enterprises account for a large share of enterprises and a large share of overall employment in the private sector of most economies. Employment in enterprises went up to 250 employees constitutes over 60% of total employment in manufacturing in many countries which justifies the statement that "SMEs are the emerging private sector in poor countries and thus form the base for private sector-led growth" (Hallberg, 2001). For this reason, these SMEs would have to rely on the provision of finance and the access to credit for their operations. Research evidence, however, shows that small and medium enterprises are more constrained in their bid to source credit funding from financial institutions for their operations (Ayyagari, Demirgüç-Kunt and Maksimovic, 2006). For instance according to Lader, R. (1996), a major barrier to rapid development of the (SME) sector is a shortage of both debt and equity financing. For him, access to finance has also been identified as a dominant constraint facing the Ghanaian SME sector. Again, Levy, Y. (1993) also admitted that there is limited access to financial resources available to smaller enterprises compared to larger organizations and the consequences for their low growth and development. Again, John Ackah and Sylvester Vuvor contend that a Korean Development Institute (KDI) in a study on "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.

It is in the light of the above that this study is set out to identify the challenges facing the SME sector in Ghana.

1.2 RESEARCH QUESTIONS

The research study sought to answer the under listed questions

General Objective

To examine the challenges facing SMEs in accessing credit funding for their operations

Specific Objectives

To what extent do SMEs help to promote the growth and development of nations?

What are the difficulties SMEs face in accessing credit finance from banking institutions in Ghana?

What are the solutions to the challenges facing SMEs to access credit finance?

1.3 OBJECTIVES OF THE STUDY

The study was aimed at achieving two main objectives: the general and the specific objectives

General Objective

To examine the difficulties facing SMEs to access credit finance from financial Institutions

Specific Objectives

To examine the role of SMEs in the growth and development of nations

To examine the difficulties SMEs face in accessing credit finance from banking institutions in Ghana

To identify and assess the solutions to the challenges facing SMEs to access credit finance

1.4 SIGNIFICANCE OF THE STUDY

This study will be of great importance to the banking industry as they might find a niche amongst the difficulties that SMEs face and embark on it as their policy. An example is, requesting for collateral is a difficulty most SMEs face so can have a policy as "no collateral" will be required by the SME.

Government and policy makers and individuals will be informed on the difficulties SMEs face in accessing credit finance from banks in Ghana. Policy makers would have to place emphasis on facilitating equity capital. Equity capital provides a base for further borrowing, reduces businesses sensitivity to economic cycles, and provides SMEs with access to syndicates of private and institutional venture capital suppliers.

1.5 DEFINITION OF KEY TERMS

Credit financing is defined as a legal contract where one party receives resource or wealth from another party and promises to repay him on a future date along with interest. In simple terms, a credit is an agreement of postponed payments of goods bought or loaned. With the issuance of a credit, a debt is formed.

Small and Medium Enterprise, SME in this study refers to an established small or medium business with the sole aim of making profit.

According to this study, banking institutions are authorized financial institution Ghana to provide financial assistance to businesses to support them in their operations

1.6 SCOPE OF THE STUDY

The study covered loan managers of two banks and three SMEs within the environs of Tema.

1.7 LIMITATIONS OF THE STUDY

In our quest to investigate the difficulties SMEs face in accessing credit finance from banking institutions we are limited by: Time Constraints: we are limited by time because we are working students and asking permission from our work place to go out to conduct interviews and collect data is difficult due to our various schedules at work.

Access to Bank and SMEs information Constraints: Secondly, we perceive the problem of not getting all banks as well as most SMEs in Ghana to respond to our call for their opinion on our research. Financial Constraints: There will also be financial constraints such as printing of the questionnaires, travelling expenses etc.

1.8 ORGANISATION OF THE STUDY

The study will be classified into 5 chapters and each chapter will address a peculiar topic. Chapter one consists of the background of the study, the statement of the problem, research questions, objectives of study, the research significance, and the scope of the research. The rest are the limitations of the study, definition of terms and organization of the study. Chapter two which is the literature review looks at previous related studies that are related to the topic under investigation. Chapter three consists of methodology; that is the research design, and target population, the sample size and sampling procedures, the data collection instruments, sources of data collection, administrative procedures and the data analysis. Chapter four consists of data presentation, analysis, and discussion of the findings. Chapter five concludes the study with summary, conclusion and recommendations.

CHAPTER TWO

LITERATURE REVIEW

2.1. Exploring the meaning of SMEs

Small and Medium-Scale Enterprises (SMEs) face a definition problem. A review of the literature reveals that many researchers have struggled with the question of defining relevant criteria. This definition problem has stemmed from two main factors:

The first is the conflicting ideas upon which economic aggregates to base the analysis. Should SMEs be classified according to number of employees, turnover, profitability or net worth? Secondly, are the industrial and economic differences across sectors and countries? For example, a "small firm" in such as the petrochemical industry will probably have much higher levels of capitalization, sales and possible employment than a "small firm" in the car repair trades (Tonge, 2001, Potobsky, 1992).

The first attempt to overcome this definition problem was by the Bolton Committee (1971) when they formulated an "economic" definition which classifies a firm as small firm if meets a criteria of market share, management and independence. Again, there is also a "statistical" definition which offers different definitions of a small firm in different sectors. The criteria upon which the judgment of "smallness‟ was made also varied by sectors.

However, despite its status as one of the most widely quoted sources of definitions and understandings of the small business sector, the Bolton Committees Report drew a number of criticisms (Storey, 1994).

To overcome these criticisms, the term "small and medium enterprise" (SME) was coined. This followed the lead of the European Commission (EC) in February 1996 which adopted a communication setting out a single definition of SMEs (the Bolton Committee Report, 1997).

In almost all senses, Storey (1994) argues that the EC definitions are more appropriate than those of the Bolton Committee. The major advantage of the EC definition is that, unlike Bolton, it does not use any criteria other than employment and it does not vary its definition according to the sector of the enterprise (Storey, 1994). A key problem with the EC definitions of an SME however, is that for a number of countries it is too "all embracing" (Storey 1994). Thus, for "internal" purposes within these countries, the SME definition is not helpful.

Following from the above, the trend has been for each country to define an SME based on criteria that reflects its own micro and macro-economic characteristics. This is because according to Storey, (1994), the heterogeneity of the small firm sector means it is often necessary to modify definitions according to the particular sectoral, geographic or other contexts in which the small firm is being examined.

In Ghana, there have been various definitions given for small-scale enterprises but the most commonly used criterion is the number of employees of the enterprise (Kayanula and Quartey, 2000). In applying this definition, confusion often arises in respect of the arbitrariness and cut off points used by the various official sources. In its Industrial Statistics, the Ghana Statistical Service (GSS) considers firms with fewer than 10 employees as small-scale enterprises and their counterparts with more than 10 employees as medium and large-sized enterprises. Ironically, the GSS in its national accounts considered companies with up to 9 employees as SMEs (Kayanula and Quartey, 2000).The value of fixed assets in the firm has also been used as an alternative criterion for defining SMEs. However, the National Board for Small Scale Industries (NBSSI) in Ghana applies both the"fixed asset and number of employees" criteria. It defines a small-scale enterprise as a firm with not more than 9 workers, and has plant and machinery (excluding land, buildings and vehicles) not exceeding 10 million Ghanaian cedis. The Ghana Enterprise Development Commission (GEDC), on the other hand, uses a 10 million Ghanaian cedis upper limit definition for plant and machinery. It is important to caution that the process of valuing fixed assets poses a problem. Secondly, the continuous depreciation of the local currency as against major trading currencies often makes such definitions outdated (Kayanula and Quartey, 2000).

In defining small-scale enterprises in Ghana, Steel and Webster (1991), and Osei et al (1993) used an employment cut-off point of 30 employees. Osei et al (1993), however, classified small-scale enterprises into three categories. These are:

micro - employing less than 6 people;

very small -employing 6-9 people;

small - between 10 and 29 employees.

A more recent definition is the one given by the Regional Project on Enterprise Development Ghana manufacturing survey paper. The survey report classified firms into:

micro enterprise, less than 5 employees;

small enterprise, 5 -29 employees;

medium enterprise, 30 – 99 employees;

large enterprise, 100 and more employees (Teal, L. 2002).

Also the Venture Capital Trust Fund Act 2004, Act 680, defines an SME as an industry, project, undertaking or economic activity which employs not more than 100 persons and whose total asset base excluding land and buildings does not exceed the cedi equivalent of 1 million dollar in value.

2.2. Evolution of SMEs Businesses in Ghana

The idea of SME promotion has been in existence since 1970 though very little was done at the time. Key institutions were set up to assist SMEs and prominent among them are the office of business promotion and the present Ghana Enterprise Development Commission (GEDC). The main objective of GEDC was to assist Ghanaian businessmen to enter into fields where foreigners mainly operated. It also had packages for strengthening small scale industry in general, both technically and financially (Christen, et al (2004)

The Economic Recovery Programme (ERP) instituted in 1983 has broadened the institutional support for SMEs. The National Board for Small Scale Industries (NBSSI) was also established within the Ministry of Industry, Science and Technology to address the needs of small businesses. The NBSSI established an Entrepreneurial Development Programme, intended to train and assist persons with entrepreneurial abilities into self employment. In 1987, the industrial sector also witnessed the coming into operation of the Ghana Appropriate Technology Industrial Service (GRATIS). It was to supervise the operations of Intermediate Technology Transfer Units (ITTUs) in the country. GRATIS aims at upgrading small scale industrial concerns by transferring appropriate technology to small scale and informal industries at the grass root level. ITTUs in the regions are intended to develop the engineering abilities of small scale manufacturing and service industries engaged in vehicle repairs and other related trades. They are also to address the needs of non-engineering industries (Kayanula and Quartey, 2000).

The most significant institutional weakness facing dynamic SMEs is their lack of access to external finance. Repressive financial policies in the past, especially low interest, and a monopolistic banking system minimized the interest of banks in developing this market. To reverse the consequences of these practices, a combination of financial liberalization and institutional reform was in order (Aryeetey et al., 1994).

In view of the relatively low level of response from the private sector to early ERP ( Economic Recovery Programme) reform measures the focus was on the liberalization of various sectors, including the financial sector under the Financial Sector Adjustment Programme (FINSAP). Under the FINSAP, direct institutional measures aimed at supporting small enterprises were also been put in place. With World Bank assistance, the Programme of Action to Mitigate the Social Costs of Adjustment (PAMSCAD) created a special fund to assist microenterprises, and the Fund for Small and Medium Enterprises Development (FUSMED) was initiated to increase the amount of credit available to SMEs through commercial and development banks. This was based on the presumption that poor availability of credit from formal sources was one of the major reasons why the private sector investment had not grown as expected. A major argument was that small firms with good growth potential were being discriminated against (Aryeetey et al., 1994).

There are currently a number of financing schemes set up by government and the donor agencies available to the SME sector, including Private Enterprises and Export Development Fund, Export

Development and Investment Fund, Deutsche Gesellschaft Fuer Technische Zusammenarbeit

(GTZ), Business Assistance Fund, Ghana Investment Fund, Trade and Investment Programme,

Africa Project Development Facility, Support for Private Enterprise Expansion and Development, Promotion of Small and Micro Enterprise Fund, Business Sector Programme Support, Revolving Loan Fund, Ghana Private Sector Development Fund etc. In spite of these developments, the finance gap continues to be a major problem to SME development in Ghana.

2.3. Characteristics of SMEs and Areas of operations in Ghana.

According to Burns (1996), Small businesses in general do have many characteristics that set them apart from larger ventures. These include personalized management, small market share, loyal but limited customer base, family-ownership and difficulty in obtaining finance.

In terms of financial reporting, research focusing on internal preparation seems to suggest that financial awareness amongst owner-managers of the smallest entities is quite low and that there is inadequate record-keeping (UNCTAD, 2002). Inadequate financial record keeping, and the consequent failure to make good use of available financial information, is characteristic of microenterprises and many small businesses in developing economies.

(Storey, 1994) argues that there are three central respects in which small firms are different to large firms – uncertainty, innovation and evolution. Their claim is well supported by literature. There is seen to be greater external uncertainty of the environment in which the small firm operates, together with the greater internal consistency of its motivations and actions Small firms are also more likely to introduce fundamentally new innovations than larger firms, a feature often attributed to small firms having less commitment to existing practices and products. He furthermore argues that there is a much greater likelihood of evolution and change in the smaller firm.

In Ghana, SMEs are predominantly owner-managed and sole proprietorship is the norm. It is also interesting to note that small scale enterprises make better use of scarce resources than large scale enterprises. Research in Ghana and many other countries have shown that capital productivity (value added per unit of capital invested) is often higher in SMEs than is the case with LSEs ( Teal, L, 2002). The reason for this is not difficult to see, SMEs are labour intensive with very small amount of capital invested. Thus, they tend to witness high capital productivity which is an economically sound investment. Thus, he argues that promoting the SME sector in developing countries will create more employment opportunities, lead to a more equitable distribution of income and will ensure increased productivity with better technology.

2.4. The role of SMEs in the economic development of nations.

There is a general consensus that the performance of SMEs is important for both economic and social development of developing countries. From the economic perspective, SMEs provide a number of benefits (Huanga, H. & Weib, S, J. (2005). According to them, SMEs have been noted to be one of the major areas of concern to many policymakers in an attempt to accelerate the rate of growth in low-income countries. These enterprises have been recognized as the engines through which the growth objectives of developing countries can be achieved. They are potential sources of employment and income in many developing countries. SMEs seem to have advantages over their large-scale competitors in that they are able to adapt more easily to market conditions, given their broadly skilled technologies. They are able to withstand adverse economic conditions because of their flexible nature. SMEs are more labour intensive than larger firms and therefore have lower capital costs associated with job creation. They perform useful roles in ensuring income stability, growth and employment. Since SMEs are labour intensive, they are more likely to succeed in smaller urban centers and rural areas, where they can contribute to a more even distribution of economic activity in a region and can help to slow the flow of migration to large cities. Due to their regional dispersion and their labour intensity, it is argued, small-scale production units can promote a more equitable distribution of income than large firms. They also improve the efficiency of domestic markets and make productive use of scarce resources, thus facilitating long-term economic growth (Kayanula and Quartey, 2000).SMEs contribute to a country’s national product by either manufacturing goods of value, or through the provision of services to both consumers and/or other enterprises. This encompasses the provision of products and, to a lesser extent, services to foreign clients, thereby contributing to overall export performance. In Ghana SMEs represent a vast portion of businesses. They represent about 92% of Ghanaian businesses and contribute about 70% to Ghana’s GDP and over 80% to employment. From an economic perspective, however, enterprises are not just suppliers, but also consumers; this plays an important role if they are able 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 demands 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). In addition, demand is important to the income-generation potential of SMEs and their ability to stimulate the demand for both consumer and capital goods (Berry et al., 2002).

2.5. Challenges facing SMEs in accessing credit finance for their operations

Despite the wide-ranging economic reforms instituted in the regions, SMEs face a variety of constraints owing to the difficulty of absorbing large fixed costs, the absence of economies of scale and scope in key factors of production, and the higher unit costs of providing services to smaller firms. Below is a set of constraints identified with the sector.

Input Constraints: SMEs face a variety of constraints in factor markets. However, factor availability and cost were the most common constraints. The specific problems differed by country, but many of them were related, varying according to whether the business perceived that their access, availability or cost was the most important problem and whether they were based primarily on imported or domestic inputs (Abor, J. (2003). SMEs in Ghana emphasized the high cost of obtaining local raw materials; this may stem from their poor cash flows (Parker et al, 1995). Aryeetey et al (1994) found that 5% of their sample cited the input constraint as a problem. This can also be contrasted with only 8.2%, 7.5% and 6.3% of proprietors in Botswana, Swaziland and Lesotho. It was also found that input constraints vary with firm size.

• Finance: Access to finance remained a dominant constraint to small scale enterprises in Ghana. Aryeetey et al (1994) reported that 38% of the SMEs surveyed mention Credit as a constraint . This stems from the fact that SMEs have limited access to capital markets, locally and internationally, in part because of the perception of higher risk, informational barriers, and the higher costs of intermediation for smaller firms. As a result, SMEs often cannot obtain long-term finance in the form of debt and equity.

• Labour Market: This seems a less important constraint to SMEs considering the widespread unemployment or underemployment in these countries. SMEs generally use simple technology which does not require highly skilled workers. However where skilled workers are required, an insufficient supply of skilled workers can limit the specialization opportunities, raise costs, and reduce flexibility in managing operations (Dogbert, P. (2000). Below is a set of constraints identified with the sector.

• Equipment & Technology: SMEs have difficulties in gaining access to appropriate technologies and information on available techniques. This limits innovation and SME competitiveness. Besides, other constraints on capital, and labour, as well as uncertainty surrounding new technologies, restrict incentives to innovation. 18% of the sampled firms in Aryeetey et al (1994) mentioned old equipment as one of the four most significant constraints to expansion.

• Domestic Demand: while 5% of respondents were the figure quoted in the Ghanaian case (Aryeetey et al, 1994). The business environment varied markedly among SMEs in Ghana, reflecting different demand constraints after adjustment. There were varying levels of uncertainty caused by macroeconomic instability and different levels of government commitment to private sector development. Recent economic policies have led to a decline in the role of the state in productive activity but a renewed private investment has created new opportunities for SMEs. Nonetheless, limited access to public contracts and subcontracts, arising from cumbersome bidding procedures and/or lack of information, inhibit SME participation in these markets. Also, inefficient distribution channels often dominated by larger firms pose important limitations to market access for SMEs. As noted in the case of Ghana, demand constraints limited the growth of SMEs.

• International Markets: Previously insulated from international competition, many SMEs are now faced with greater external competition and the need to expand market share. However, this problem was mostly identified in medium-sized enterprises in Ghana (12.5% in Aryeetey

et al, 1994:13), less than1% of the total sample complained there were too many imported substitutes coming into the country. . However, Riedel et al (1988) reported that Tailors in Techiman (Ghana) who used to make several pairs of trousers in a month went without any orders with the coming into effect 15 of trade liberalisation. Limited international marketing experience, poor quality control and product standardization and little access to international partners, impede expansion into international markets. It is reported that only 1.7% of firms export their output (Aryeetey et al, 1994).

Regulatory Constraints:

Although wide ranging structural reforms have improved, prospects for enterprise development Dogbert, P. (2000) contends that a lot remain to be addressed at the firm-level. He thus enumerated the under listed regulatory and managerial contstraints.

• Legal: High start-up costs for firms, including licensing and registration requirements can impose excessive and unnecessary burdens on SSEs. The high cost of settling legal claims and excessive delays in court proceedings adversely affect SME operations. In the case of Ghana, the cumbersome procedure for registering and commencing business were key issues often cited. Meanwhile, the absence of antitrust legislation favours larger firms, while the lack of protection for property rights limits SME access to foreign technologies.

Managerial Constraints

• Lack of Entrepreneurial & Business Management Skills: again, Dogbert, P. (2000) says that lack of managerial know, who places significant constraints on SME development. Even though SMEs tend to attract motivated managers, they can hardly compete with larger firms. The scarcity of management talent, prevalent in most countries in the region, has a magnified impact on SMEs. The lack of support services or their relatively higher unit cost can hamper SME efforts to improve their management because consulting firms often are not equipped with appropriate cost effective management solutions for SMEs. Furthermore, absence of information and/or time to take advantage of existing services results in weak demand for them. Despite the numerous institutions providing training and advisory services, there is still a skills gap among the SME sector as a whole. In Ghana, a lot has actually been achieved in this regard, though there is still room for improvement

Institutional Constraints:

The lack of cohesiveness and the wide range of SME interests limit their capacity to defend their collective interests and their effective participation in civil society.

Associations and collective action: Associations providing a voice for the interests of SMEs in the policy-making process have had a limited role compared to those of larger firms. Many of the entrepreneurs associations have yet to complete the transition of their goals from protectionism to competitiveness (World Bank, 1993). Additionally, the potential economies of collaborative arrangements in production and sales among SMEs have not been adequately explored. There are very few forward linkages. However, backward linkages were common with 71% of enterprises procuring unprocessed, semi-processed or finished products. The dependence of the SME sector in Ghana on large-scale enterprises as purchasers of output, either for sale, as final goods or to be used as intermediate inputs, is very limited. Only 13% of firms produce any item for or component for larger firms. Interdependence among SMEs is very minimal. As reported in Osei et al (1993), only 17.6% of firms with growing output and 8.4% of those whose output stagnated have other SSEs as customers.

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.

2.5. The solutions necessary to overcome the problems facing SME’s in Ghana.

Successive governments over years continue to lend support for the operations of SMEs in the country. In line with this, several interventions have been put in place to help the SMEs to operate smoothly. According to Wolff, H.W. (2004), one of such important interventions is the establishment of the Ghana Appropriate Technology Industrial Service (GRATIS). In his view, the industrial sector welcomed the coming into operation of the Ghana Appropriate Technology Industrial Service (GRATIS) with great anticipation. Wolff H.W. again noted with great satisfaction that GRATIS aims at upgrading small scale industrial concerns by transferring appropriate technology to small scale and informal industries at the grass root level. GRATIS supervises the Intermediate Technology Transfer Units, which develop the engineering abilities of small scale manufacturing and service industries engaged in vehicle repairs and other related trades.

Another source of funding the activities of SME’s in the country identified by Aryeetey E (2002) is the private sector development and presidential special initiative. According to him, these initiatives were set up to reduce bottlenecks between private-public sector collaboration for national development. Again, the initiatives made funds available at low interest rates to entrepreneurs who would want to start their own SME’s. In his view, the initiative was a valuable source of funding SME’s in the country because thousands of SMEs assessed the fund.

Another unfortunate challenge in the view of Adams et al (2004) is the politicization of this valuable initiative which appears to take away the inherent benefits within the system. He contends that it is imperative for successive governments to give backing to initiatives meant to boost the operations of SME’s in the country. According to them therefore, the ‘Golden Age of Business’ would be meaningless if such initiatives are politicized to the detriment of their benefits.

Reilly et al, (2009) also identified the creation of free zone industrial enclave in Ghana as an incentive to creating small scale businesses. According to Hume, the creation of the free zone industrial enclave as provided incentive package for investors who are operating in the free zone enclaves in the country. These incentives include a 100% exemption from payment of direct and indirect duties and levies on all imports for production and exports from free zones. Hume argued that the opening of centers in the districts will facilitate effective collaborated with international agencies and NGOs in order to promote the sector. The idea is that with this help, the sector will grow and create new jobs.

Again, Dogbert P (2004) argued that the setting up of National Board for Small Scale Industries (NBSSI) to promote the private sector at the local level was a laudable idea. The National Board for Small Scale Industries (NBSSI) is the apex governmental body for the promotion and development of private sector in Ghana. The Board opened business advisory centers and performed the functions of private sector promotion.

Also, Wolff, H.W. (2004), there is a strong need for a more sophisticated approach to customer service and risk assessment to serve SMEs adequately, keeping credit risk under control and avoiding irresponsible financing practices. In addition, the dissemination of good practices to agencies, groups of funders and regional networks needs to be better promoted in order to improve the effectiveness of SME financing models.

The SME Finance Forum is a collaborative knowledge sharing platform for data, research and best practices for small and medium enterprise (SME) finance. According to Wolff, H.W. (2004), it promotes the dissemination of good practice guidance to agencies, donors and regional networks to improve the effectiveness of the industry; hence it should be encouraged to promote interactions and collaborations among the various SMEs.

CHAPTER THREE

RESEARCH METHODOLOGY

3.0 Introduction

In this chapter, the researchers discussed all the various strategies used for the collection of data. They include research design, the target population and the sample size and sampling procedure and the sources of data collection as well as the analytical methods used for this research.

Research design

The researchers employed a survey method which was based on a case study involving Merchant Bank Limited, Ghana Commercial Bank, Legend Titles and Bricks Ltd, Midland Rubber Products Limited and Seawave Aluminum Ltd. within the Tema Metropolis. The researcher used a case study because of its advantages of enabling the researchers to gather data on the individual units and then used that data to represent the generality. The approach has the advantage of narrowing down the scope of the research into small researchable unit to make it more effective.

3.2 Target Population

The target population of the research comprised of the loan officers of Merchant Bank Limited, Ghana Commercial Bank, Midland Rubber Products and Seawave Aluminum Ltd.

3.3 Sample Size

A total sample size of seventy was selected. This number is distributed in the table below:

Table 1. Sample size

Segment

No

Ghana Commercial Bank

15

Merchant Bank

15

Midland Co Ltd

20

Seawave Co Ltd

20

Total

70

Source: Researcher’s Field Survey 2012

3.4 Sampling Method

Convenient Sampling method was used in selecting sample size for the research. This type of method is one that enables the selection of people or the units that are most conveniently available. This is because as loan officers they have a lot on hand to deal with, and therefore it was important to use this method in selecting those who would be available at the time of survey. 3.5.Data collection instrument

The researchers made use of both closed and open ended questionnaires because they found it to be convenient and appropriate, considering the topic of the study. The questionnaires were measured using Likert scale rating scale. The use of the Likert scale rating style enables the respondents to answer the questions with ease. In addition, this scale will permit easy interpretation of the data.

3.6.Sources of Data Collection

In collating the information, two sources of data gathering were used. These included primary data and secondary data. Primary data were gathered from the responses of respondents and the secondary data were from relevant published documents on the subject matter being investigated. These included books, documents from the selected SMEs and banks, periodicals and the internet among others.

3.7.Administration Procedure

The questionnaires were given to the respondents with a collection notice of two weeks to enable enough time for them to complete. It gave way for people to express their thought and opinions concerning the challenges they face in accessing credit from the financial institutions. The researchers made phone calls to respondents during the period, to find out the difficulties they were facing in completing the questionnaires. All the questionnaires were successfully completed for analysis.

3.8.Data Analysis

The researcher used Microsoft Excel to analyze data gathered. The data for analysis were in both quantitative and qualitative ways. The qualitative data helped the researcher to appreciate the real or actual challenges confronting the SMEs in respect to credit accessibility. The results were then presented in tables.

CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND DISCUSSION OF RESULTS

4.1 Introduction

Chapter four consisted of two major sections; presentation and analysis and discussion of data collected through the questionnaire administrated. The data is presented in the form of tables in order to make proper analysis.

Data presentation and analysis

Table 1. Respondents Distribution by Gender

This was to enable the researcher to identify gender proportion of the respondents.

Gender

Number of Responses

Percentage (%)

Male

40

57.14%

Female

30

42.85%

Total

75

100

Source: Field Survey 2012

The table above measures gender representation of the study by the sampled respondents of the selected banks and SMEs. It was revealed that the male respondents were more than the female respondents. The male respondents recorded forty (40) representing fifty seven percent, whereas the female respondents recorded thirty (30) representing nearly forty three percent of the entire study. This suggests that the loan officers of the selected banks and SMEs are much represented by male than female.

Table 2. Education background of respondents

Educational qualification

Number of Respondents

Percentage (%)

Masters

17

24.28

First degree

26

37.14

HND

27

38.57

Total

70

100

Source: Field Survey 2012

Education is very important factor in measuring the performance and success of any organization. The above indicated table shows the educational level of the seventy respondents sampled for this study. The study discovered that twenty-seven respondents representing the highest number have their HND honors. This represents thirty-nine percent; twenty six are degree holders representing a little over thirty seven percent of the entire respondents of the research. Again, seventeen respondents representing nearly twenty five percent have their Masters degrees. This implies that the respondents on this study have satisfactory level of education background that enabled their understanding on the study topic. It also implies that most of the respondents were graduates, hence will be able better initiation and implementation of policies to help address the challenges being encountered by their organizations.

Number of years of working experience

Table 3: duration of working experience

Years of Work

Number of Responses

Percentage (%)

1-5

8

11.42

6-11

27

38.57

12-17

20

28.57

18+

15

21.42

Total

70

100

Field Survey 2012

The table above indicates the number of years the respondents have served the organization in their respective capacities. It was discovered that more of the respondents have worked for more than ten years with their respective organization. For instance, 38.57% have worked for 6-11 years, 28.57% for 12-17 years, 21.42% for 18 years and above, whilst 11.42% for 1-5 years. This means that they have gained enough experience and are in a better position to understand the the challenges as well as the needs of their respective organizations. This will facilitate the formulation of policies for the betterment of the organization.

Does your business face challenges in sourcing credit funding?

Table 4: Challenges of obtaining credit

Comment

Number of Responses

Percentage (%)

Yes

59

84.28

No

11

15.71

Total

70

100

Source: Field Survey 2012

These challenges can be attribute to many factors, however it is important to identify the extent to which they affect the operations of SMEs. This study revealed that as many as fifty-nine representing eighty-four percent answered in the affirmative. Eleven of them representing fifteen percent said No. This therefore means that the SMEs are still facing challenges when it comes to accessing credit funding from financial institutions, in order to continue their operations.

Is the bank able to meet expectations of SMEs?

Table 5; Expectations of SMEs

Comment

Number of Responses

Percentage (%)

Yes

30

42.85

No

40

57.14

Total

70

100

Field Survey 2012

Every customer wants his\her needs to be satisfied. It is therefore important to measure the extent to which the bank is able to fulfill the expectations of the SMEs. It was proven that out of the seventy respondents thirty respondents representing 42.85% admitted that their expectation are fulfilled, whereas forty respondents representing 57.14% said the banks have failed to fulfill their expectations. This is where the dissatisfaction begins, where there is no fulfillment of expectations. This probably explains why financial organizations are increasing in numbers. This is because unfulfilled expectations bring about dissatisfaction, which compel customers to move from one bank to another seeking good service and quality banking products.

Which of the under listed does your SME consider a serious challenge to credit sourcing?

Table 6; Seriousness of challenges

Comment

Number of Responses

Percentage (%)

Interest rates

28

40

Lack of business Mgt skills

8

11.42

Legal constraints

5

7.14

Easy access to funding

29

41.42

Total

100

Field Survey 2012

Clearly from the table the two major challenging factors to SMEs bid to access credit funding are interest rates and easy access to funding. Interest rates for instance constitute 40% whilst easy access to funding accounted to 41.42%. This will help to establish the empirical evidence about the perception of the researchers with regards to challenges SMEs face in accessing credit funding. The study discovered that lack of business management skills and legal issues also constitute 11.42% and 7.14% respectively as challenges to the SMEs. This shows that majority of the SMEs do face challenges in accessing funding. Therefore, it is very important to identify and address these challenges in order to enable them to perform better.

Does the financial institutions’ inability to meet your expectations affect your operations?

Table 7: effect of financial institutions’ inability to meet expectations of SMEs

Comment

Number of Responses

Percentage (%)

Yes

65

92.85

No

5

7.14

Total

70

100

Field Survey 2012

Unfulfilled expectation is having dire consequences on the activities of SMEs. Out of the seventy respondents sixty-five respondents representing 92.85% of the study indicated that unfulfilled expectation affect their operations, whereas five respondents representing 7.14% said unfulfilled expectation has no impact on their operations. This clearly indicates that the activities of SMEs can be affected by unfulfilled expectations. It is important for banking organizations to design systems that will address the needs of the SMEs.

As an SME owner, do need to a customer before accessing credit from a financial institution?

Table 8: criterion for sourcing loans and its impact.

Suggestion

Number of Responses

Percentage (%)

Strongly Agree

25

35.71

Agree

38

54.28

Unsure

5

7.14

Not Agree

2

2.85

Strongly Disagree

0

0

Total

70

100

Filed Survey 2012

The respondents of the SMEs were asked whether they have to customers of a financial institution before they can access funding. Twenty-five respondents representing 35.71% strongly agreed to the fact that they have to belong to a financial institution before they can access funding, thirty-eight respondents representing 54.28% agree to the question, five respondents representing 7.14% were unsure, two of the respondents representing 2.85% do not agree to this assertion, whilst none of them representing 0% strongly. This indicates that sixty-three respondents representing 90% felt that an SME owner has to belong to a financial institution before he/she can access loan from them. This outcome confirms what has been indicated in table … above about unfulfilled expectations. This means that when there are unfulfilled expectations, it affects the operations of the SMEs.

As an SME owner, I am happy with the performance of your business in spite of the challenges?

Table 9: The impact of the level of performance by SMEs on owners

Attributes

Number of Responses

Percentage (%)

Strongly Agree

20

28.57

Agree

15

21.42

Unsure

0

0

Not Agree

18

25.71

Strongly Disagree

17

24.28

Total

75

100

Field Survey 2012

SME owners’ happiness about the current performance was measured. Out of the seventy respondents of the study, twenty respondents representing 28.57% strongly confirmed their happiness about the existing performance of their businesses, fifteen respondents representing 21.42% agree that they are happy, eighteen respondents representing 25.71% do not agree to this assertion, whilst seventeen representing 24.28% strongly disagree, and none of them was sure of what to say. The above table reflects on the fact that 35 respondents representing nearly 50% of the entire sample are not happy about the current performance of their businesses. This means something must be done to address the challenges facing SMEs as quickly as possible.

Level of satisfaction of SMEs with mode of loan repayment

Table 10: views of SMEs on mode of loan repayment

Suggestion

Number of Responses

Percentage (%)

Satisfy

27

38.57

Not Satisfy

43

61.42

Total

70

100

Field Survey 2012

It is always important to assess the satisfactory level of their customers in order to determine the quality level of the existing services and how it is accepted by customers. The above table shows the satisfactory level of SMEs with regards to the mode of loan repayment. It was discovered that out of the seventy respondents, twenty seven of respondents representing 39% were satisfy with the mode of repayment, whereas forty three respondents representing 61% indicated their dissatisfaction about the manner of loan repayment. This means that majority of the SMEs are not satisfied with the loan repayment schedule.

I am given enough Investment Information when sourcing for credit funding?

Table 11: Access to investment information by SMEs

Attributes

Number of Responses

Percentage (%)

Strongly Agree

21

30

Agree

37

52.85

Not Agree

9

12.85

Strongly disagree

3

4.28

Total

70

100

Field Survey 2012

One of the expectations of every SME is to get investment opportunities that yield better returns. Prompt information on investment opportunities brings about satisfaction to them. When the researcher wanted to find out whether SMEs receive in time information about investment opportunities, twenty one respondents representing 30% strongly agreed to the fact that they do receive investment information opportunities; thirty-seven respondents representing 52.85% agreed that they receive information on investment opportunities, whereas nine respondents representing 12.85% indicated otherwise, and three of them representing 4.28% strongly disagreed. This means that in terms of investment information, the financial institutions are providing the needed service to the SMEs. It is therefore up to the SMEs to make use of this information to explore other areas in order to expand and grow their businesses.

Do the high interest rates have any impact on your Savings?

Table 12: impact of interest rates on savings of SMEs

Comment

Number of Responses

Percentage (%)

Yes

60

85.71

No

5

7.14

Total

70

100

Field Survey 2012

The SME sector encounter great challenges raising funds to meet their operations, saving is therefore very important product to all SMEs. It is therefore, important to ensure a level amount of savings. Out of the seventy respondents, sixty of them representing 85.71% indicated that the high interest rates charged by the financial institutions are having consequences on their savings, whereas five respondents representing 7.14% answered in the negative. This shows that the interest rates charged on the loans for SMEs to pay has direct negative impact on the savings. This means more funds are being channeled into paying the loans which consequently decreases savings.

Government provide assistance to the SME sector

Table 13: Level of Government assistance to the SMEs

Suggestion

Number of Responses

Percentage (%)

Strongly Agree

11

15.71

Agree

22

31.42

Not Agree

17

24.28

Strongly disagree

20

28.57

Total

70

100

Field Survey 2012

Respondents on the study were asked about government’s assistance to the sector. As found by the study, eleven respondents representing 15.71% strongly agreed to the fact that government provides some assistance, twenty-two respondents reprsenting 31.42% agreed, whilst seventeen respondents representing 24.28% did not agree, and twenty of them reprsenting 28.57% strongly disagree. This means that although there is some level of assistance from government, it appears such assistasnce is not much as indicated by the findings. Therefore, for the SME sector to be able to provide the needed support in the growth and development of the country, there is the need for vigorous assistance on the part of government.

Do you have to provide collateral before access loan facility from your bankers?

Comment

Number of Responses

Percentage (%)

Yes

68

97.14

No

2

2.85

Total

70

100

Field Survey 2012

The researchers found it important to investigate whether or not SMEs need to provide some guarantee before they access loans from their bankers. This was to enable the researcher to know whether or not loan conditionalities constitute a challenge to obtaining loans. As many as sixty of the respondents representing 97.14% as against only two respondents representing 2.85% totally agreed that their bankers usually demand collaterals before they can give them loans. From the results it indeed confirmed the researchers’ suspicion. According to most of the respondents contacted individually, it came out clearly that collaterals are indeed serious challenge to SMEs when sourcing loans especially the young ones as well as up and coming entrepreneurs.

CHAPTER FIVE

SUMMARY, CONCLUSION, AND RECOMMENDATION

5.0. INTRODUCTION

In this final chapter, the researchers gave a summary of the research work completed. They also drew conclusions and made some recommendations for the way forward in the future.

5.1 SUMMARY

The researchers examined the challenges facing SMEs in accessing credit finance from financial institutions. It was discovered that the high interest rates is still a serious challenge facing the SME sector. It was found that the interest rates have a negative impact on the savings of the SMEs. The researchers also discovered that conditionalities in sourcing loans also constitute a challenge to SMEs. For instance, thirty SMEs forming 97.14% of the total SMES contacted cited collateral in the form of landed property as a basic requirement when accessing loans from the formal banking institution. The study again found that the SMEs are not very happy with the service of the financial institutions that they belong to. In spite of this however, SMEs are happy with their current level of performance, their expectations remain so high and the confidence level continue to soar.

5.2. CONCLUSION

From these findings therefore, the researchers can conclude that SMEs in Ghana are facing challenges in accessing credit facilities from financial institutions. It behooves on all major stakeholders to play their role effectively to ensure that these challenges are quickly addressed to enable the sector to play a more effective role in the growth and development of the country.

5.3 RECOMMENDATIONS

Base on the data gathered and the analysis made, the researchers considered it important to make the following recommendations:

There is the need for an effective collaboration by all stakeholders to address the high interest rates. As already indicated above, this challenge must be addressed to enable the sector to play a viable role in the nation’s development. All stakeholders must therefore develop systems that will help address these concerns.

Again, the financial institutions must ensure that the needed financial assistance requested for by the SMEs is provided timely and without conditionalities. The success; of the programs of the SMEs cannot be realized if such needed assistance is not provided them.

The effective participation and interest in the affairs of the SMEs by top management of the financial institutions is also key to their success. This can only happen if top management believes in and is committed to developing policies that are aimed at lowering interest rates, providing quick service among others to the SME sector.

SMEs themselves must also wake up to the challenge of working themselves out their challenges. This includes make effective use of investment information and opportunities provided them by the financial institutions to grow and expand their businesses. There must be total commitment from them

To ensure that the operations of SMEs are stable over time so as to contribute towards growth and development of the country, the National Board for Small Scale Enterprises of Ghana should be empowered so that it does not only seek to help to facilitate the setting up of SMEs, but also to formulate broader strategy to ensure their survival.

Again the Rural Enterprises Development Program set up by government to assist people to own their businesses should be strengthened to include key policy makers and representatives of businesses, who are highly skilled, with an intimate understanding of the private sector, credit sourcing and credit management to ensure that SMEs use credit facilities granted them in viable areas for which they have been obtained.

REFERENCES

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APPENDIX 1

RESEARCH QUESTIONNAIRES

We, Afua Twenebooa Danso and Tossou Sitoh Abra are final year students of Wisconsin International University College. We are conducting a research on the challenges facing SMEs in accessing funding from the financial institutions. We would be grateful if you could assist us by completing these questionnaires. We would like to assure you that this information will be used mainly for the purposes of our research work, therefore confidentiality highly guaranteed. We would appreciate your cooperation to make this research a successful one.

Thank you.

QUESTIONNAIRES FOR THE BANKS

Name of the Bank (optional)

………………………………………..

Ownership of the bank

Local

Foreign

How many years have you been operation in Ghana?

A-below 5years B- up to 5years

C-5-10years D-above 10 years

What is your customer base (in terms of percentage) in line with the following customer classification?

Public

Corporate

SMEs

Retailers

Others

Does the bank provide credit facility to its SME customers?

Yes

No

Are customers regular in repayment of the loans granted them?

Yes

No

Did you face difficulties recovering the loans?

Yes

No

What are your requirements for granting loans?

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

Are your clients able to meet these requirements?

Yes

No

The bank’s interest r