Problems For Small And Medium Enterprises In Ghana Economics Essay

Ghana is one of the fast emerging developing states in West Africa with bosomy natural resources ; Ghana still relies to a great extent on international fiscal and proficient aid. Gold, chocolate and lumber are the major beginnings of foreign exchange. The debut of Ghanas Economic Recovery Program ( ERP ) in 1983 to retrieve the ab initio really weak private sector engagement did better systematically but although still degrees were modest during 1987-91.

SMEs play a dynamic function in the economic growing of developing states. There are many who believe that the most factor restraining the growing and development of SMEs is the deficiency of entree to finance. In add-on to this factor, other factors can be adduced for this deficiency of finance. Institutional model, involvement rate policy, and legal constructions play a cardinal function in easing the direction of hazard in giving out loans. Fiscal establishments have traditionally focused on micro and big multi corporate concerns due to the high hazards and high transactional costs involved when covering with SMEs. A spread is created due to this consequence of disregard ; this is referred to as the SME Financial Gap. This paper focuses on banking establishments ‘ place as a major beginning to supplying funding services and merchandises for SMEs in Ghana.

Over the past old ages, Ghana has witnessed dynamic alterations in its fiscal sector. There are 26 major Bankss presently runing in the state as at 2008. Banks serve a outstanding function as corporate entities that provide investing capital in the economic system to back up employment chances, human resources development and contribute towards national and community development programmes. They chiefly furnish loans to persons and companies to finance assorted undertakings, which lead to economic, and private sector development.

In 1994 about 15.5 % of the labour force in Ghana was employed by SMEs

The chief aim of this paper is to place the jobs SMEs face in deriving entree to fiscal merchandises and services in Ghana ; so describes the immense chances being lost due to miss of funding for SME development and what economic contributing factors it impacts on the state.

Datas on SMEs in Ghana is non easy available but there have been legion researches on the development and advancement of SMEs in Ghana by international administrations and other research experts. Secondary informations from such findings will be employed to analyze the fiscal sector and its effects on SME development in Ghana.

1.1 Literature Review

Harmonizing to the World Bank Group, the definition of SME includes three sub-categories:

? Micro-enterprise: up to 10 employees ; entire assets/total one-year gross revenues of up to US $ 100,000 ; turnover must be in surplus of US $ 400,000, and touchable assets in surplus of US $ 200,000 ;

? Small endeavor: between 10 and 50 employees ; entire assets/total one-year gross revenues between US $ 100,000 and US $ 3 million ;

? Medium-sized endeavor: between 50 and 300 employees, entire assets/total one-year gross revenues between US $ 3 million and US $ 15 million.

This definition defers from state to state, there is no individual uniformly acceptable definition of an SME for case in the instance of Ghana SME has no common definition. The NBSSI refers to little endeavors as concerns that have about 6-29 employees or with a fixed plus ( excepting land and edifice ) non transcending ‘780 million ( $ 54,948 ) ; and a medium endeavor is one that employs between 30-99 employees or with fixed assets non more than ‘2.5 billion ( $ 176,118 ) . In add-on, the Ghana Statistical Service has its ain definition, which recognises little endeavors as those with below 10 employees and a medium endeavor as those concerns that employ above 10 employees. The Empretec Ghana foundation, regards all concerns managed by its proprietor as an SME.

2 The Ghanese Financial Sector in Brief

Ghana ‘s banking sector has evolved over the old ages. There are 23 major Bankss ( refer to postpone 7 ) operating in the banking sector in Ghana as at 2006. The Ghanese banking sector is made up of 19 cosmopolitan Bankss, 2 Development Banks, 2 Commercial Bankss including Apex Bank and 121 Rural Banks ( ) . The debut of cosmopolitan banking in Ghana is overpoweringly altering the manner Bankss function in the economic system. Unfortunately, non all Bankss runing in Ghana are eligible to be cosmopolitan Bankss. To be eligible for Bankss to run as cosmopolitan Bankss they are expected to hold at least ’70 billion as stockholders capital ( ) . Harmonizing to the Bank of Ghana, cosmopolitan banking substitutes the celebrated three-pillar banking theoretical account, viz. development, merchandiser and commercial.

The legal and regulative models in which fiscal mediators operate in Ghana are as follows:

‘ Bank of Ghana Act 2002, Act 612

‘ Banking Act, 2004 ( Act 673 )

‘ Financial Institutions ( Non-Bank ) Law 1993, PNDC Law 328

‘ Companies Code Act 179, 1963

‘ Bank of Ghana Notices /Directives / Circulars / Regulations

Figure 1: Growth of the Banking and Non-Banking Financial System

Beginning: Bank of Ghana Annual Report 2008

A study conducted by Bank of Ghana in 2005 on recognition to SMEs found that:

‘The portion of SMEs in entire exposure of Bankss has increased from 0.95 per centum of GDP in 2001 to 1.54 per centum of GDP by 2004 ; whereas entire recognition to the private sector increased from 11.8 per centum to 13.05 per centum of GDP over the same period. This is an indicant that these endeavors are sharing in the general growing in loaning. The swings in loaning in favour of SMEs are more marked in commercialism, less so for agribusiness, services and fabrication, and weakest for the conveyance and other sectors. ‘ This mark shows positive improved entree to fiscal recognition and the engagement of SMEs in bank loans.

2.1 Fiscal Adjustment Program ( FINSAP )

2.2 Evaluation of FINSAP

3 The SME Sector in Ghana

3.1 Making Business in Ghana

There is still a window of chance in many concern countries to set up concerns. The vivacious economic system and stable political status makes Ghana one of the developing states in Africa to pull the involvement of foreign investors. The current find of oil has besides boosted the concern image of Ghana. An chance for new services and concerns has emerged for this new industry.

Registration procedure of a concern in Ghana was reviewed and the procedure is less feverish as compared to before when corrupted functionaries demanded payoffs at every phase of the procedure. The procedure may depend on the type of concern and licence needed to run, in at most the whole procedure takes about two hebdomads if all needed paperss are readily available. Figure 2 shows a ranking of the most debatable factors for making concern in Ghana harmonizing to the African fight study 2009 ; entree to finance tops the chart.

Figure 2. The most debatable factors for making concern

Beginning: The Africa Competitiveness Report 2009: Ghana p. 198

Note: From a list of 15 factors, respondents were asked to choose the five most debatable for making concern in their state and to rank them between 1 ( most debatable ) and 5. The bars in the figure show the responses weighted harmonizing to their rankings.

3.2 Constraints and Challenges

3.3 The Vision

4 Financing SME Development

4.1 Governments Inaugural

The authorities has been able to place the informal private sector and has introduced sponsored concern support services such as the National Board for Small Scale Industries ( NBSSI ) . Their aims include:

‘ To lend to the creative activity of an enabling environment for the development of small-scale endeavors.

‘ To lend to the development of an entrepreneurial civilization in Ghana.

‘ To ease entree to recognition for little endeavors.

‘ To supply non-financial support for sustainable small-scale endeavor development.

‘ To ease the growing of endeavor sector associations.

The authorities of Ghana between the has tried to implement assorted undertakings aimed at making fiscal entree for SMEs in the Private sector. Many of these undertakings failed due to ;

4.1.1 Foreign Aid

4.2 The SME Financial Gap

Appraisal shows that in 1999/2000 the Ghanese informal economic system contributed 38.4 % of GNP as against 42 % norm of 23 African states.

Other the mean underdeveloped state, the informal economic system histories for 41 % of official gross GNI.

Figure 2 depicts the badly forced entree to fiscal services and merchandises in many emerging markets including Ghana. SMEs must be seen as a major participant in occupation creative activity and generating income for low-income people. In consequence, this contributes positively to economic growing, societal stableness, which helps construct a vivacious private sector. Fiscal establishments focus less on the SME section of the market due to assorted factors, more significantly factors that struggle with their policies. SMEs are non able to supply collaterals demanded by Bankss to do contracts for loans and they incur higher cost in functioning smaller minutess. Fiscal establishments make higher borders from functioning big concerns.

Figure 3. The finance SME spread

Beginning: International finance corporation

However, this section of banking is bit by bit shriveling due to the entrants of new private Bankss into the economic system in the instance of Ghana. As

4.3 Agency Theory ( Principal ‘ Agent )

The bureau theory is one of the theories under the New Institution.


Beginning: Self prepared

Agency theory assumes that societal life is a series of contracts. The theoretical background of this paper is based on the chief bureau theory. The premise made is that information dissymmetry exists at all phases of contracts between Bankss and ( chief ) . Assuming that both are rational public-service corporation maximizes and are likely to hold different ends. The principal-agent relationship is governed by a contract stipulating what the agent should make and what the principal must make in return.

Figure: Principal-Agent relationship

Beginning: self-prepared ; adapted from

4.4 Impact of the Global Economic Crisiss

The planetary economic crises has devastated many economic systems but Ghana ‘s fiscal sector seldom felt its impact.