Small And Medium-Sized Enterprises’ (SMEs’) Access To Credit In Ghana: Determinants And Challenges

ABSTRACT

The motivation for this study is the persistent lack of access to credit facing all firms in general and SMEs in particular. The study examined factors that determine access to finance as well as challenges facing SMEs in their access to finance in Ghana. The specific objective is to find the factors that influence SMEs’ demand for and access to credit in Ghana. The study focused on characteristics of the owners/managers of SMEs and features of those SMEs that influence their demand and access to credit in Ghana.

The study used a firm-level survey of 720 firms which was conducted by the World Bank in Ghana in 2013. The study employed Heckman Probit regression with sample selection model to estimate the factors that influence firm’s demand and access to credit. This is because of the hypothesis that firms may be self-selected in their decision to apply for credit, which can lead to sample selection bias. The standard probit regression of access to credit was also estimated since there was no evidence of selection bias.

The study finds evidence to support the case that all Ghanaian firms in general, and SMEs in particular, face credit constraints. Even though firms rank access to finance as the biggest obstacle of the business environment, most of the firms that applied for credit had access. However, majority of firms did not apply for credit because they had no need for a loan and for others firms features of the loan such as complex application process; unfavourable interest rates, high collateral requirement and short loan maturity period were major obstacles preventing them from applying for credit. The study also finds that there is no evidence of self-selection among

firms in Ghana regarding their decision of seeking for external funding or their participation in the credit market.

Also, the study finds that access to credit is influenced mostly by specific characteristics of the firm such as firm innovation, registration, location, possession of bank account and having audited financial statements. In addition, demand for credit is influenced by firm characteristics such as firm’s innovation, location, ownership of land, having audited financial statements and future expansion plans.

In the light of this, the study recommends that both demand- and supply-side barriers need to be identified and tackled through regulatory reforms and policy initiatives. Specifically, providing training to owner and managers of SMEs in such areas as preparation of financial accounts would not only promote their demand for credit but also increase their access to credit. Moreover, SMEs should be encouraged to register their businesses and become formal. Owners of SMEs should also be encouraged to adopt new technologies and innovations as this increases their chances of having access to credit.