The theoretical background of this paper is the Agency Theory. The premise made is that information dissymmetry exists at all phases of the banking services supply concatenation and that histrions are rational public-service corporation maximizes. 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 the disregard ; this is what the IFC and others refer to as the SME Financial Gap. The construct SME fiscal spread by and large refers to the
Ghana is one of the three strongest economic policy performing artists among low-income African states with a stable political clime to make concern. 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 Ghanai??s 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.
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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.
1.2 Purpose of Study
The paper seeks to place the cause of the job which hinders SMEs from 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 funding SMEs in Ghana by international administrations and other research experts. Secondary informations from such findings will be employed to analyze funding and its effects on SME development in Ghana.
2 Literature Review
Chapter 2 provides an overview of bing literature on SME funding including common definitions of the SME sector, their economic importance and assorted jobs that result in the limited entree to finance.
2.1 Importance of SMEs
SMEs contribute significantly to employment and GDP doing it an of import country of development in emerging markets. Most states have the most occupations generated from SMEs.
The definition of SMEs defers from state to state, there is no individual uniformly acceptable definition of an SME. 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.
2.2 Constraints to SME Access to Financing
Constrained SME development and fight is largely due to entree to finance instead than the cost of finance. In add-on, because of location or sectoral specialisation, many houses within the SME sector are turning beyond the size that informal beginnings of finance can back up and institutional recognition is the lone executable option for upward motion to them
The absence of proper fiscal accounting among many little and even medium-scale houses may be due to assorted grounds, runing from the reluctance to uncover critical information to rivals to non-transparent patterns to minimise the revenue enhancement load. However, it precludes the constitution of long-run bank-client relationships, which are portion of the repute collateral. The handiness of good information on endeavor finance and administration construction is a requirement for the readying of a bankable concern program, which, can be used as a partial replacement for fixed-asset collaterals on the fiscal supply side. Defects in information revelation can hence be viewed as grounds of direction failings and fiscal undiscipline by institutional analysts and loan valuators.
A good concern program is of critical importance for new, immature or little houses because of their typical deficiency of real-asset collateral, equity capital and recognition path record.
Harmonizing to Hallberg 2001, complex legal and regulative environment has frequently combined with opaque discretion to raise significantly the dealing costs on SMEs because of their limited size and resources. He farther says that slow advancement in the development of sustainable fiscal strategies, the structural variegation of fiscal establishments and the outgrowth of a i??non-repayment culturei?? among endeavors, particularly if the resources concerned are regarded as portion and package of poorness decrease attempts from the populace sector
SMEs have to pay a higher rate of involvement and follow to more restrictive demands on institutional recognition obtained by them, compared to those imposed on their large-scale opposite numbers. For illustration, the involvement premium in 33 completed World Bank undertakings on SME funding ( mentioned earlier ) averaged 4.9 points for little endeavors and 4.4 points in the instance of medium-scale houses. In absolute footings, the rates on SME loans are every bit high as 24-33 per cent, reflecting in portion the larger incentive for fiscal establishments to take part in SME loaning
Persistent restraints on SMEs funding, and the restrictive footings and conditions on sanctioned loans, are virtually a cosmopolitan and important job among developing states. In China, for illustration, commercial Bankss can change the involvement rate on annual term loans ( which stood at 5.31 per cent in February 2002 ) up to plus or minus 10 per cent for SOEs. The per centum fluctuation can be up to 30 per cent for SMEs and 50 per cent for rural co-ops. However, many Bankss still see the returns as unequal to counterbalance them for the hazards and costs incurred in loaning to private houses. Most fiscal establishments have non been able to run productively with SMEs as their sole or major debt patronage, despite the involvement premium based on higher hazard and dealing cost. Even in developed states such as the United States, small-business loans are regarded as opaque assets, representing therefore the chief constituent of recognition hazard
Collateral demands by commercial Bankss in developing states have been a combative issue in SME funding. However, 92 per cent of all small-business debt to fiscal establishments in the United States are secured.
Many SMEs avoid utilizing commercial Bankss for paysheet direction and other day-today working histories ( of entrance and surpassing minutess ) , therefore preventing the formation and cementing of bank-client relationships which are an built-in portion of the alleged repute collateral on the SME side. Therefore, most commercial Bankss and DFIs do non hold sufficient information on, among other things, the likely hard currency flows in concern public presentation ( and therefore the capacity for loan refunds internal to the endeavors under consideration ) plus the recognition histories of the concerned SME entrepreneurs themselves, including their personal characters and concern committedness. As a consequence, the paperwork and certification required by Bankss can frequently take 24 working daies to finish, compared to the 14-day gestation clip on recognition applications from big houses and less than two hebdomads in micro loaning. For illustration, merely 10 per cent of start-up houses in Ghana can obtain bank loans but moderate-sized endeavors and older houses ( presumptively with a good recognition history and therefore relationships with Bankss ) are provided with start-up recognition three times more frequently than their smaller opposite numbers.
2.3 Agency Theory
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 ( agents ) and SMEs ( chief ) . Assuming that both are rational public-service corporation maximizes and are likely to hold different ends. Charles Perrow states that i??agency theory assumes that societal life is a series of contracts. Conventionally, one member, the ‘buyer ‘ of goods or services is designated the ‘principal, ‘ and the other, who provides the goods or service is the ‘agent’i??hence the term ‘agency theory. ‘ The principal-agent relationship is governed by a contract stipulating what the agent should make and what the principal must make in returni?? .
The principal-agent theoretical account has two different key elements which exist in both the agents and principals viz. end struggle and information dissymmetry ; these elements bring intending to the theory in its context. To exemplify this relationship farther, an illustration given by Evans, 1980, refers to the market for professional services in economic sciences, between a patient ( chief ) and a doctor ( agent ) ; the premise is that both are rational public-service corporation maximizes. The patient would desire a good intervention at the lowest charge possible. On the other manus, the doctor besides wants to maximise his income, in that instance he may be tempted to supply more medical services than necessary or put a higher monetary value than the normal rates. Clearly, the patient is at a disadvantage in this exchange because there is no manner of measuring the physiciani??s services. Both parties have hidden information that the other does non cognize. This state of affairs shows that information dissymmetry exists with the physician being on the advantageous sided. Associating this illustration to Bankss and SMEs a similar state of affairs can be seen. Banks are gross bring forthing establishments and offer fiscal services and merchandises. SMEs on the other manus need these fiscal services to endeavor their concern
Due to the being of end struggle between agents ( Bankss ) and principals ( SMEs ) , agents have a distinguishable motivation to travel to other market sections therefore pretermiting the SME market section ( see figure 1 ) . Although agents may confront similar challenges in other market sections ( big multinational and corporate big concerns ) ; the inducement to switch to these markets is that fringy returns are high and on the microfinance degree, there is lower hazards in giving loans. Harmonizing to the IFC, a survey on emerging markets revealed that as corporate banking borders continue to shrivel and increasing financial restraint lowers outputs on authorities adoptions, Bankss have begun to measure the chances offered by SMEs. Supplying banking services to this underserved SME market section can increase their entree to fiscal services and bring forth more employment chances and income.
2.4 The SME Finance Gap
The SME finance spread depicts the badly forced entree to fiscal services and merchandises in many developing states. The SME banking market consists of houses whose fiscal demands are excessively big for microfinance, but are excessively little to be efficaciously served by corporate banking theoretical accounts.
Figure 1. The finance SME spread
Beginning: International finance corporation
In add-on, information dissymmetry creates an imbalanced information flow and this imperfect information influences economic decision-making on both sides. Three other jobs can be drawn from the interrelatedness between the agent and the principal, which addresses the result of information dissymmetry ( see diagram 1 )
Diagram 1: Principal-Agent relationship
Beginning: self-prepared ; adapted from assorted literature
Theoretically, in presuming perfect competition, the agent and the principal will move for their ain involvement but at the same clip be witting of the footing for which the other is runing. This will so ensue in a good exchange for both parties and contracts can be made. Even in a instance where there are comparatively similar ends, struggle may be over the exact means to utilize with an agent ‘s desire to obtain loose resources that provide the inducement and the information dissymmetry that provides the chance to fiddle
3 SME Financing in Ghana
Chapter 3 give the definition of SME in Ghana, a brief description of the fiscal system in and assesses the job of SME finance spread and the principal-agent job ; so it goes farther to depict the SME banking services and merchandises available in Ghana.
3.1 Definition of SME in Ghana
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 i??780 million ( $ 54,948 ) ; and a medium endeavor is one that employs between 30-99 employees or with fixed assets non more than i??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.
3.2 The Ghanaian Financial System in Brief
Over the past old ages, Ghana has witnessed dynamic alterations in its fiscal sector. The figure of Bankss has increased from 9 in 1989 to 21 at May 2006 ( www.bog.gov.gh ) . These Bankss 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 ( Aryeetey, E. & A ; Gockel, F. 1990 ) . They chiefly furnish loans to persons and companies to finance assorted undertakings, which lead to economic, and private sector development.
The Africa fight study for 2009 indicates that entree to finance is the most debatable factor for making concern in Ghana as shown in figure 2. 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.
Figure 2. The most debatable factors for making concern
Beginning: The Africa Competitiveness Report 2009: Ghana p. 198
A study conducted by Bank of Ghana in 2005 on recognition to SMEs found that: i??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 favor of SMEs are more marked in commercialism, less so for agribusiness, services and fabrication, and weakest for the conveyance and other sectors.i?? This mark shows positive improved entree to fiscal recognition and the engagement of SMEs in bank loans.
3.3 The Principle-Agent Problem
The principle-agent relation as already explained in chapter 2 addresses the job with fiscal entree to SMEs in Ghana. Financial establishments focus less on the SME section in Ghana 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 loan. Banks incur higher cost in functioning smaller minutess. Fiscal establishments make higher borders from functioning big concerns. Collaterals and recognition evaluations are indispensable elements of the fiscal substructure necessary for SMEs to efficaciously get funding.
Most enterprisers running little concerns in Ghana are improbable to unwrap their concern fiscal position due to likely fear of exposing themselves as they may be hedging revenue enhancements. This has been a major job when Bankss request to see the fiscal viability of a concern, which is demand in acquiring a loan or fiscal recognition. The revenue enhancement establishment in Ghana has been really loath in implementing revenue enhancement policies in the past but until recent times that has changed ; the authorities has taken stairss to rectify this job. Ineffective institutional policies play a portion in determination of Bankss in giving loans. If the establishments are effectual the Bankss can swear to let go of loans for little concern to spread out their concerns.
3.4 The SME Finance Gap
One of the chief aims of this paper is to measure the nature, extent and beginning of the SME fiscal spread. Appraisal shows that in 1999/2000 the Ghanese informal economic system contributed 38.4 per centum of GNP as against 42 percent norm of 23 African states.
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.
However, this section of banking is bit by bit shriveling due to the entrants of new private Bankss in Ghana. As a consequence, competition for merchandises services has set in. Figure 2 shows informations of the fiscal system from 2004-2008. The major Bankss are made up of largely foreign Bankss with Nigeriaian Bankss ruling the market section.
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:
i?? To lend to the creative activity of an enabling environment for the development of small-scale endeavors.
i?? To lend to the development of an entrepreneurial civilization in Ghana.
i?? To ease entree to recognition for little endeavors.
i?? To supply non-financial support for sustainable small-scale endeavor development.
i?? To ease the growing of endeavor sector associations.
3.5 SME Banking
There is good intelligence for SMEs in Ghana, there has been a sudden turn from the traditional focal point of banking establishments in functioning larger concerns to SMEs ; SME banking has emerged strongly in the Ghanaian-banking sector and more attending is being directed at that SME market section. The Ghanese Chronicle on July 10th, 2006, reports that i??i??Commercial and Cosmopolitan Banks in Ghana are switching from one of their traditional beginning of income, puting in authorities exchequer measures but have taken the finance of Small and Medium graduated table Enterprises i??i?? . This is the exact state of affairs that the IFC describes in the old chapter. The displacement is as a consequence of Bankss seeking to maximise their grosss in a keenly competed market. With the figure of Bankss runing in Ghana it is truly noted that the banking market is acquiring saturated. The Chronicle farther provinces that about all the major Bankss in the state have established SME banking sections specially structured to run into the banking demands of SMEs. Competition has played a cardinal function in forcing Bankss to come in this ignored country. Even with gross maximization as their end still the Bankss are careful with their choice procedure for loans and credits. Information dissymmetry still remains a bigger obstruction between Bankss and SMEs in Ghana and can be attributed chiefly to hapless accounting patterns and record maintaining. But the positive facet lies in the chance that at least some attending has been focused on SMEs which forms the footing of bettering their credibleness to be able to derive entree to loans.
This new epoch of banking has come non as a affair of Bankss turn toing the challenges SMEs face with entree to finance but instead they have been forced to travel into SME market section due to competition in fiscal merchandises and services from new Bankss. As the figure of Bankss in the state keeps increasing so does the banking fringy market portion dwindle: coercing Bankss to relook at what the SME market section has to offer. Figure 3 shows the growing of the figure of Bankss from 2004 to 2008.
Figure 3: Growth of the Banking and Non-Banking Financial System
BANKS 2004 2005 2006 2007 2008
Major Banks 20 21 24 24 26
Branchs 360 392 450 595 640
Rural Banks 119 121 125 127 129
Agencies – – – – 486
Non- Banks – – 36 41 45
Beginning: Bank of Ghana Annual Report 2008
The burden is on the authorities to guarantee that fiscal policies are directed at guaranting a vivacious economic system to further the development of SMEs. The outgrowth of SME banking should function as an economic interruption through and perchance turn to the importance of recognition information that SMEs deficiency which has well hampered Bankss in evaluation funding proposals. Furthermore, regular studies of rates of SME funding for rating intents is another manner for Bankss to to the full measure their engagement in SME development and place the niche in fulfilling this market section as competition gets acute.
DFIs- development fiscal establishments
SOEs- State-owned endeavors
IFC- international finance corporation
NBSSI-National Board for Small Scale Industries
UNCTAD- United Nations Conference on Trade and Development