SME financing in Ghana - enhancing access and reducing cost
The Government of Ghana’s (GOG) Medium Term Growth Strategy aims to develop a thriving private sector with the capacity to create new jobs and improve livelihoods, especially for the youth, the poor, marginalised and vulnerable in society.
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Considering that Small and Medium Enterprises (SMEs) make up about 92 per cent of all businesses registered in the country according to figures from the Registrar General’s Department, key to this strategy is the need to enhance their ability and capacity in a sustainable way. Various studies initiated by GOG and Development Partners have identified access to finance as a critical constraint on the ability to unleash the full potential of Micro, Small and Medium Enterprises (MSMEs).
For this reason, enhancing the access of (SMEs) at reduced rates than those currently prevailing has become a critical issue that government, policy decision makers and other key stakeholders are making frantic efforts to deal with to ensure the growth and productivity of these businesses to ensure that they play their part in economic growth and development of the country.
Current situation
Various institutions, including the government, have pioneered various initiatives to address the financing constraints that SMEs face. Specifically, the government has set up various institutions and funds, either alone, or with the support of donor agencies, aimed at addressing joblessness through empowering entrepreneurs, the youth and SMEs through the provision of start-up capital and other funding opportunities, often at concessionary rates. Some of the funds under these schemes include but are not limited to YES, MASLOC, EDAIF, and Venture Capital Fund, The motivation for their establishment of these official schemes has been to increase the flow of finance and credit to SMEs in order to assist them gain enough strength to increase their operational capacities, increase productivity, and improve both their local and international competitiveness.
The other channel through which money flows to the SME sector in Ghana is the private financial sector. Local banks, NBFIs and private equity firms have also led various initiatives and have specific financing solutions that could be accessed by SMEs.
Estimates by the World Bank suggest that in 2012 Ghana had in excess of USD$1b accessible funds dedicated to MSME financing across various platforms.
Contrary to the expectation that SME financing would improve with the availability of these different sources of finance and training schemes, the successful utilization of these opportunities remains limited and access to finance still remains a key constraint on MSME growth and effectiveness.
Admittedly, various reasons, including high interest cost, account for this. In addition, the high information asymmetry that leads to lack of awareness of the various funding opportunities and how to access them could also have a direct bearing on the cost of access and hence the low rate of successful utilisation. Information asymmetry could also affect the ability of financial intermediaries to adequately understand the specific and peculiar needs of MSMEs to guide product or solution development.
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Evidence exists from other economies such as Bangladesh that constant linkages between financial intermediaries and MSMEs in a coherent and consistent manner can help build trust among the actors in the value chain, reduce the cost of funding and improve financing of MSMEs operations.
The way forward
It appears that one of the main reasons why SMEs struggle in accessing finance has to do with the lenders’ lack of confidence in their ability to manage their operations effectively so as to be able to repay the loans they access. This in most cases is genuine, looking at the way some businesses operate in secrecy and the default history of SMEs in financial institutions.
The upcoming maiden SME financing fair is deemed as an excellent opportunity for players in the industry to dialogue and share ideas on initiatives, products solutions and innovations aimed at promoting SMEs in a coherent manner. It also presents a platform to engage all key stakeholders to bring some coordination and rigour into SME activities as it will bring banks, government agencies and NBFIs together with the SMEs in order to bridge the financial intermediation gap.
Making the financial sector more efficient and relevant to the needs of the private sector is critical to the success of Ghana’s Medium Term Growth Strategy. This will be achieved by improving the quality of financial intermediation to overcome the market failures that undermine the ability of innovative firms to access credit; promoting financial innovation; and increasing long term credit. There are still major issues to overcome in the quality of financial intermediation to increase credit to more innovative SMEs that may not have sufficient collateral, providing longer-term loans that are suited to longer gestation investments and to promote financial innovation in areas such as leasing, micro insurance, etc. to meet the needs of smaller businesses.
It is also imperative to improve the Management and Accounting abilities of SME entrepreneurs to reduce the risk of their mismanaging funds. The issue of collateral and loan security can also be managed collectively by both government and financial institutions to encourage financial institutions to lend to SMEs. The availability of loan guarantees for SME lending, computerised registration system for pledges, mortgages, leases as well as centralised database of information on businesses will greatly increase the confidence in the SME credit market.
It is worth nothing that a necessary condition for an efficient financial system is the existence of readily accessible information about participants in the system. The absence of such information creates moral hazards and adverse selection costs that have the potential of causing credit markets to fail. Having systems of information on the operations of businesses, their assets, among other details, will increase credibility in the SME credit market.
Credit referencing
In this regard, the establishment of credit referencing agencies in the country is a step in the right direction. In fact, according to the World Bank, their introduction led to the reduction of non-performing loans of financial institutions by 262 basis points from 2010 to 2013. What is required is enforcement of the need to report accurate and up to date information on borrowers to the bureaus and the use of bureau information in credit underwriting, and widening the scope of credit referencing to include all providers of credit.
Some coordination and rigour should also be brought into SME training. Efforts towards centralisation of the many disparate training programmes, perhaps under the NBSSI and a few other training agencies will ensure the design and implementation of effective training programmes for SMEs. Training programmes in Accounting, Business Management, preparation of Business Plans, Financial Statement Analysis, Personnel Management, Marketing and other subjects as well as one-on-one counselling sessions for business owners will greatly help in the proper management of SMEs and the funds extended to them. SMEs should be encouraged to keep good Accounting records.
The two-day fair, scheduled to take place from April 26 to 27 , 2016 at the Accra International Conference Centre, seeks to bring all industrial players together to discuss the most efficient means to finance SMEs by putting in place the necessary structures that will make financing easily accessible to viable firms to grow and expand their businesses and make them the main drivers of Ghana’s economy.
At a time when the country is combating rising imports and increasing Balance of Payment deficits, efforts towards increasing the capacity of local businesses to expand and increase local production in order to cut down imports could not be more urgent.
On April 26, 2016, President John Dramani Mahama will open the Fair and the Exhibition. There will also be other fora that will bring together representatives of the various stakeholders to discuss crucial issues touching on the SME financing space.
We expect that the two day fair will yield a cohesive policy for improving the access of existing SMEs to financing at reduced cost to enhance their growth and employment generation, as well ensure the birth of many new businesses which have not been set into operation as a result of the lack of sufficient start-up capital.
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