Demystify risk perception about SMEs — CBG boss to banks

The Managing Director of Consolidated Bank Ghana (CBG), Daniel Wilson Addo, wants banks in the country to demystify the perception of risk associated with small and medium-sized enterprises (SMEs).

He said risks might be elevated “but our business is the business of managing risks, not fleeing from risks”.

His call comes at a time when many players in the financial services sector, particularly banks, shy away from SMEs because they consider them risky ventures, which action and inactions often negatively impact their loan books.

Mr Addo, during an interaction with a cross-section of the media in Accra, said: “The challenge of SME financing is one that we must address head-on,” and added: “The first step is to break from the past and jettison the notion that the risks are elevated in the SME segment. As the environment changes, it is incumbent on us to reexamine our established paradigms, question our perception of risk, and develop financing structures that meet the evolving needs of our customers.”

The strength of SMEs

The Ghana SME Sector Report 2023, authored by the Strategy & Research Department of GCB Bank Plc (the Bank) solely for information purposes, confirms the importance of the SME sector to the economy.

For instance, the report alluded to the fact that the SME sector in Ghana played a crucial role in the country's economic development, contributing significantly to employment generation, innovation and GDP growth. 

This sector is made up of a diverse range of businesses, spanning various industries such as agriculture, manufacturing, commerce (import trade) and services. They contribute to reducing unemployment rates, particularly in urban and rural areas and play a crucial role in addressing youth unemployment challenges. 

Despite their significant contributions, SMEs in Ghana face several challenges and constraints.

These include limited access to finance, which is a key challenge for SMEs in the country because they are considered to be risky. 

Connected to that is the foreign exchange dynamics in the country. For instance, the activities of major players in this sector result in the inflow and outflow of foreign exchange through their local banks. Therefore, the availability of forex plays a major role in this sector. 

Exchange rate fluctuations have a major effect on this sector because some of the customers in the sector generate their revenues in cedis but import finished goods, machines and raw materials in foreign currency. The sector requires forex demands of about US$5 billion annually.

Other challenges, which are linked to the lack of access to funds, are inadequate infrastructure, regulatory burdens, skills gaps and market access constraints. 

Hence, continued efforts from the government, financial institutions and other stakeholders are crucial to addressing the constraints and creating an enabling environment for SMEs to thrive and contribute even more to Ghana's sustainable development, an observation that directly confirms the demand on banks to change their perception about the sector, which employs more than 75 per cent of the country’s workforce, as risky.

Recent developments

In recent times, almost all the banks in the country have claimed to be ‘friends’ of SMEs; yet, their exposure to the sector is very minimal.

The January Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) revealed how private sector [players, most of which are SMEs are financially constrained due to the reluctance of banks to lend to them on grounds of risk.

It said with a tight monetary policy stance and increased risk aversion of banks due to rising credit risks, private sector credit expansion broadly remained sluggish in the year. 

In December 2023, the pace of growth in private sector credit slowed to 10.7%, compared with 31.8% annual growth in December 2022. In real terms, credit to the private sector contracted by 10.2%  relative to a 14.5% contraction, recorded over the same comparative period.

Conclusion

In Ghana, 373 small and medium-sized enterprises (SMEs) from 15 regions received US$5 million (equivalent to GH₵28,733,200) from the Ghana Economic Transformation Project (GETP) to support their recovery from the COVID-19 crisis. 

According to a World Bank report of 2022 titled - Ghana: Supporting Small and Medium Enterprises to Recover from the COVID-19 Pandemic, “Four months after receiving the grants, 93 of the 165 firms surveyed reported that they had created a total of 369 new jobs.”

This clearly confirms the position of the Managing Director (MD) of the CBG that the excuses made by some banks regarding the issue of risk associated with SMEs must be done away with because once they are supported, they tend to make a positive impact not only on gross domestic product (GDP) but create jobs.

CBG has been a major player when it comes to the SME space. The bank is on record as having worked with key stakeholders in the financial sector to raise medium-term funding at a cost lower than the Ghana Reference Rate for borrowing in this market.

Mr Addo referenced the deal with Kasapreko PLC where the bank partnered to list its GH₵600 note programme on the local bourse.

To him, it has been said time and again that the local corporate and the SME sector are the key to the country’s economic growth. 

Consequently it, therefore, stands to reason that as a country, there is a need to commit resources to this sector, build productive capacity, invest in human capital, and create the environment for the SME sector to grow.