ALTERNATIVE MODEL FOR FINANCING SMEs IN GHANA
Patrick Akorsu2012
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Abstract
The role of SMEs in the economic development of a country cannot be over-emphasized. They contribute to employment, GDP, innovations, human resource development and poverty alleviation. However, they are constrained by access to credit. The main objective of this paper was to develop an alternative model for raising funds. It also looked at why lenders are cynical in advancing credit to SMEs. It was found that inappropriate risk management, moral hazard and possible adverse selection limit their access to credit. The SMEs Network Fund developed suggested the formation of a self managed fund by the SMEs to finance their activities, which would require no collateral if SMEs access funds and offer relatively cheaper capital to SMEs.
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The largest portion of enterprises in the world are Small and medium enterprises (SMEs.) These consist of firms varying widely in size and characteristics, namely from very small start-up firms in an infant stage of development to established SMEs already listed on the stock market. Small and medium enterprises face significant financing gaps that stifle innovation and economic growth. The credit gap alone is estimated at $4.5 trillion as of 2017 for Emerging Markets and Developing Economies (EMDEs) only. This represents the unmet financing needs of 21 million SMEs. The inability of these enterprises to sufficiently fund their development threatens larger growth trends in EMDEs as formal SMEs constitute 45 percent of employment and 33 percent of gross domestic product (GDP) in EMDEs.1 Key reason for SMEs limited access to finance is due, in part, to the relatively higher risks associated with investing in them. The SME financing challenge has been particularly exacerbated following the introduction of significant financial regulatory reforms in the aftermath of the global financial crisis, heightening banks’ risk aversion when extending loans. Capital markets, therefore, have an imperative role in bridging this financing gap through the provision of alternative funding sources for SMEs, particularly as their needs evolve over the different phases of their life cycle. The objective of this paper is therefore, to present capital market solutions that help mobilise financing for SMES, discuss preconditions and challenges for establishing them, and make recommendations which will enable the SME sector to fully reap the benefits of a more diversified sources of funding. The paper is broadly structured into four parts. The first part presents type of financing required at each stage of an SME life cycle. The second presents factors constraining SMEs in accessing financial resources while section three discusses capital market solutions that help mobilise financing for SMES. Section four presents preconditions and challenges for the emergence of many of the solutions. Section five highlights some country experiences in equity capital markets for SMES. The paper concludes by making recommendations for capital markets policy actions in the development and financing of the SME sector in Africa.
Bank Credit and SMEs Financing in Nigeria
Journal of Economics and Sustainable Development, 2021
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Criteria for Assessing Small and Medium Enterprises' Borrowers in Ghana
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Small and Medium enterprises act as catalysts in the economic development of the developed and developing countries. Developing countries like Nigeria that require sustained economic growth in their economies must pay attention to the SME sector and harness the great potential to generate employment, improved local technology, output diversification, developed indigenous entrepreneurship and forward integration with large-scale industries that can be provided by the sector. Unfortunately, the SMEs in Nigeria have underperformed despite the fact that the SMEs in Nigeria constitute more than 90% of Nigerian businesses, their contribution to the nation's GDP is below 10%. This very low percentage contribution of the SMEs to Nigeria's GDP could be attributed to amongst others; unfriendly business environment, poor funding, low management skills and lack of assess to modern technology. However, this paper focuses on adequate funding which will take care of some of the problems such as provision of modern technology and low managerial skills. It examines the financing of SMEs in Nigeria and the various financing options available to the SMEs. This involved looking at debt financing by considering the role commercial, microfinance banks, cooperatives and other finance institutions play in the financing of SMEs in Nigeria. It also considered the role of equity financing through Venture capital and Business angels financing. It concluded that funding of SMEs in Nigeria is very critical if they are to perform their role of growth and development of the nation's economy.
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ASSESSING ALTERNATIVE SOURCES OF FINANCING FOR SMALL & MEDIUM SCALE ENTERPRISES IN GHANA CASE STUDY OF SAVINGS AND LOANS COMPANIES (S&Ls) IN THE GREATER ACCRA REGION OF GHANA.
SciResPub., 2014
The study was undertaken to analyse the alternative sources of finance for Small and Medium Scale Enterprises (SMEs) in Greater Accra Region of Ghana. It specifically identified the role of the non-banking financial institutions, particularly savings and loan companies as a reliable and alternative source of finance for SMEs in Greater Accra Region. In undertaking the research, questionnaires were distributed to one hundred and twenty (120) SME operators selected using the convenience sampling procedure of which one hundred (100) questionnaires were retrieved. A purposive sampling technique was used to select fifteen (15) savings and loan companies and questionnaires administered therefore; of which thirteen (13) of them was fully answered and retrieved. From the research, it was found out that SMEs contribute immensely to job creation and other sectors of the economy. However, the study revealed that SMEs have very limited access to deposit and credit facilities provided by formal financial institutions. The study further revealed that non-bank financial institutions like savings and loan companies have considered the neglect of SMEs’ financial needs of banks as an opportunity to serve the informal sector businesses. The research also determined some of the challenges encountered by savings and loan companies in lending to SMEs which included asymmetry of information, high informal nature of business ownership and high level of managerial as well as financial illiteracy. The study concludes with some recommendations to improve credit to the SME sector by savings and loan companies. Among the recommendations were savings and loan companies should accept other forms of collateral security apart from land collateral security, train operators of SMEs on proper business practices and SMEs should improve their business management skills as well as be transparent in the providing business records and information in order to avoid information asymmetry.
Nature of the SME Financing Gap: Some Evidence from Ghana
International Journal of Economics and Finance, 2014
SMEs are pivotal to economic growth globally. They are however, often said to be constrained by the lack of or limited access to funding. Despite this assertion, the nature of the credit constraint problem is not well known in Ghana especially regarding its various dimensions. Knowing these dimensions is critical to formulating appropriate policies to deal with the problem. The purpose of this paper is to provide empirical evidence on the various dimensions of the credit constraint problem in Ghana. The survey strategy of enquiry was employed based on the adoption of the direct method of determining credit constraints. It was observed amongst other things that the credit constraint is almost entirely a supply-side problem as the demand-side constraint is almost non-existent. It has been recommended amongst other things that intervention policies should focus on the very small business as the incidence and degree of constraint tends to be higher amongst them.
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