ABSTRACT
The
development of SMEs is seen as accelerating the achievement of wider economic and
socio-economic objectives, including poverty alleviation. Considering the
importance of SMEs in promoting growth and dynamism in transition economies, it
is critical to analyze the willingness of the banking sector to lend money to
SMEs and the degree to which financial intermediaries have facilitated their
development.The main objective of the study is to evaluate the extent of
financing of SMEs within the Brong-Ahafo Region of Ghana, taking cognizance of
the role and contributions of Stanbic Bank Ghana Limited. This study was a
non-experimental, one which determined the perceived level of involvement of
Stanbic Bank in the financing of SMEs in Brong Ahafo Region. The researcher
gathered extensive data from the owners and managers of SMEs who does business
with Stanbic Bank, and also staffs of the Stanbic Bank (Business Banking/SME
Banking Unit) Sunyani. The sources of materials for the study were both primary
and secondary, with a sample size 50. Primary data were collected by the use of
structured questionnaires.The study identified five main financial services
rendered to SMEs, as in Overdraft, Trade Credit, SME Banking, Cash Management,
and Business Advice. It was discovered that the financial services mostly
offered to SME managers and owners by Stanbic Bank, Sunyani Branch, were
Business Advice and SME Banking are offered.The research indicated that the
relationship between the bankers and their respective SMEs is generally very
good. Such relationships should be carried on to promote an excellent free flow
of transactions between commercial banks and SME’s. It was recommended that
banks should create a separate department for the SMEs; the establishment of a
common fund by the government for SMEs; there should be a national policy on
SMEs by the government in respect of funding.
INTRODUCTION
Cook and Nixson (2000) stressed that the development
of SMEs is seen as accelerating the achievement of wider economic and
socio-economic objectives, including poverty alleviation. In accordance with an
OECD (1997) report, SMEs produce about 25% of OECD exports and 35% of Asia’s
exports. SMEs represent over 90% of private business and contribute to more
than 50% of employment and of GDP in most African countries (UNIDO, 1999).
Small enterprises in Ghana are said to be a characteristic feature of the production
landscape and have been noted to provide about 85% of manufacturing employment
of Ghana (Steel and Webster, 1991; Aryeetey, 2001). SMEs are also believed to
contribute about 70% to Ghana’s GDP and account for about 92% of businesses in
Ghana. SMEs therefore have a crucial role to play in stimulating growth,
generating employment and contributing to poverty alleviation, given their
economic weight in developing countries.
Small – Scale Enterprise in Ghana have always found
it difficult to mobilize adequate financial resources both in terms of initial
capital investment and funds needed for the running of the enterprises. Since Ghana’s economy is not very buoyant,
capacity for capital formation is quite limited. Capital investment mainly comes from personal
savings from salaries and wages earned by working for government or private
companies; gifts from wealthy relatives and savings made with thrift societies
and the ever–popular “susu” collectors, it is very rare to find these
entrepreneurs getting their capital from Development Banks, Commercial Bank and
other private financial institutions. Previously, the practice of funding
economic activity in transition economies had been mostly directed by the
central authorities. It is only after
the liberalization process that the banking sector has been able to choose its
borrowers and channel a larger share of its funding to companies of different
types. In order to make market based loans, commercial banks were required to
measure default risk, which includes firm-level measures of profitability,
growth opportunities, and available collateral, as well as country-level risk,
such as the efficacy of bankruptcy laws and enforcement (Thomi&Yankson,
1985).
Considering the importance of SMEs in promoting
growth and dynamism in transition economies, it is critical to analyze the
willingness of the banking sector to lend money to SMEs and the degree to which
financial intermediaries have facilitated their development. Nonetheless,
small-scale industries do play an important role in the economy of Ghana. Small-scale enterprises are a good source of
private employment. They provide a
useful income supplement as a second job (Dawkwa, 2012).
It is generally accepted that the broad goal of SME
policy is to accelerate economic growth and in so doing alleviate poverty.
While there are many developmental constraints on the SME sector, bridging the
financing gap between SMEs and larger enterprises is considered critical to
economic growth. To assess the effectiveness of schemes for promoting SME
finance, an effective SME financing scheme should provide opportunities for
SMEs to meet their financing needs and must maintain the profitability of the
enterprise, or on the eventual sale of investments or collection of loans that
would provide cash for later investments (NBSSI, 1994).
When SME sector does not have access to external
funds for investment, the capacity to raise investment per worker, and thereby
improve productivity and wages, is seriously impaired. The difficulties that SMEs
experience can stem from several sources. The domestic financial market may
contain an incomplete range of financial products and services. The lack of
appropriate financing mechanisms could stem from a variety of reasons, such as
regulatory rigidities or gaps in the legal framework. Moreover, development
economists increasingly accept the proposition that, due to monitoring
difficulties such as Principal/agent problems (e.g. related to the
shareholder-manager relationship) and asymmetric information, suppliers of
finance may rationally choose to offer an array of financial services that
leaves significant numbers of potential borrowers without access to credit.
Such credit rationing is said to occur if: i) among loan applicants who appear
to be identical, some receive credit while others do not; or ii) there are
identifiable groups in the population that are unable to obtain credit at any
price (OECD, 2006).
To evaluate the efficiency of schemes for promoting
SME finance, an effectual SME financing scheme should provide opportunities for
SMEs to meet their financing needs and must maintain the profitability of the
enterprise, or on the eventual sale of investments or collection of loans that
would provide cash for later investments. It is worth noting that among the
resources needed for the production of goods and services, there are many
things that set capital (finance) apart from the other inputs. Fixed Assets
such as machinery and equipment’s, land and buildings, just to mention a few,
provide benefits that derive from their physical characteristics.
Unfortunately, the same thing cannot be said about the financial resources used
to run a business. The acquisition of financial resources leads to contractual
obligations. Small enterprises in developing countries typically, lack access
to finance as an important constraint on their operations. This lack of access
is often associated with financial policies and bank practices that make it
hard for banks to cover the high costs and risks involved in lending to small
firms. The study therefore looks at the challenges of financing SMEs in Brong
Ahafo Region (Abaka, 1992).
In most jurisdictions, commercial banks as a group
are the main source of external finance for SMEs. Therefore, it is essential
that the banking system be prepared to extend credit to the SMEs sector.
However, there are number of rigidities of a macroeconomic, institutional and
regulatory nature that may bias the entire banking system against lending to
SMEs (OECD, 2006). According to Boapeah
(1993) “Developing Small-Scale Industries in Rural Regions: business behavior
and appropriate promotion strategies with reference to Ahanta West District of
Ghana”, SMEs are entangled with myriad problems mitigating their growth in
Ghana; notable among them are, lack of access to credit, competition from
large-scale industries, the over liberalization of the economy and difficulty
in accessing advisory services and research findings.
Parker et al. (1995) indicated that credit
constraints pertaining to working capital and raw materials as a major concern
in the industry. Aryeetey et al. (1994) reported that 38% of the SMEs surveyed
mention credit as a constraint. This
stems from the fact that SMEs have limited access to capital markets, locally
and internationally, in part because of the perception of higher risk,
informational barriers, and the higher costs of intermediation for smaller
firms. As a result, SMEs often cannot
obtain long-term finance in the form of debt and equity mostly from the formal
financial institutions, particularly the commercial banks. Banks are
unwillingly to support operations of SMEs due to varied problems. A common problem is the unwillingness of
banks to increase loan funding without an increase in the security given; which
the SME owners who most of the time are entrepreneurs and sole proprietors may
be unable to provide. A particular problem of uncertainty relates to businesses
with a low asset base. These are companies without substantial tangible assets
which cannot be used as security for lenders. About 90% of small firms are
refused loans when applied for from the formal financial intermediaries, due to
inability to fulfill conditions such as collateral requirement (Bigsten et al.,
1999).
The statement of the problem is that due to banks
unwillingness to increase loan funding without an increase in the security
given; which the SME owners who most of the time are entrepreneurs and sole
proprietors may be unable to provide; thereby leading to stagnation of growth
and certain instances unable to expand to enjoy economies of scale necessary to
serve their potential of being an engine of national growth and are thus
collapsing. Hence, Osei et al (1993) wrote in their journal that most SMEs are
resorting to sources of finance such as retained earnings, personal savings,
borrowing from friends and relatives, supplier credit, borrowing from
moneylenders at very high rates. It is therefore opportune to assess the
financing challenges being faced by SMEs in the Brong Ahafo Region.
1.3 Objectives of the Study
The main purpose of the
study is to evaluate the challenges and the extent of financing of SMEs within
the Brong Ahafo Region (Sunyani), taking cognizance of the role and
contributions of Stanbic BankGhana Limited.
The reasons for
the study are:
To determine the
contributions of Stanbic Bank in the financing of SME’s in the Brong Ahafo
Region.
To identify the
factors that influences the financing of SMEs by Stanbic Bank Ghana Limited.
To identify the
barriers that Stanbic Bank Ghana Limited face in the financing of SMEs.
To provide
policy recommended to minimizes this constraints faced by SMEs.
1.4 Research questions
In a means to attain the above stated objectives the
study seek to answer the following questions:
What contribution does Stanbic Bank play in
financing SME’s in Brong – Ahafo Region?
What factors influence the financing of SMEs by
Stanbic Bank?
What barriers do banks (Stanbic Bank) face in the
financing of SMEs?
What are the various ways by which the existing
financial structures can extend credit facilities to small-scale enterprises
Brong Ahafo Region?
1.5 Significance of the Study
The study is expected to impact on formal financial
intermediaries to SMEs, especially the commercial banks, management of the SME
industry, academia and the general public.The outcome of this study is to
augment the existing store of knowledge on the subject and serve as a catalyst
for further research on innovative ways of financing SME to gain the requisite
competitive advantage for the overall academic well-being of the nation. It is
useful as a source of reference to researchers, academics, students, policy makers,
marketing professionals and other stakeholders interested in the financing
challenges been faced by SME’s.
The study would help management and workers of
Stanbic and other similar organizations in the banking industry to identify the
current financing challenges of SMEs so as to meet their needs and
expectations. The findings and results also provides a more
reliable
scientific measure and
perspective for describing and
evaluating the level
of efficiency of the new system
and its effects on corporate performance as well as customer satisfaction. It
also serves as a source of information that brings to the fore the switching
intentions of Stanbic’s current and potential SME customers. Therefore
providing the empirical support for management
strategic decisions in several critical areas of their operations, and
above all, provide a justifiably valid and reliable guide to designing workable
service delivery improvement strategies for creating and
delivering customer value,
achieving customer satisfaction
and loyalty, building
long-term mutually beneficial
relationship with profitable
SME customers to achieve
sustainable business growth in Ghana (Dawkwa, 2012).
To policy makers
like government agencies such as
the Ministry of Trade and Industry, Venture Capital Fund
and the Bank of Ghana, the findings
and results of the study provides insights
and a more
reliable guide for
monitoring the financing challenges of SMEs. It serves as
a benchmark for
measuring partly their
respective policy goals and
objectives. It serves as a tool
for the Bank of Ghana and the Venture Capital Fund among other things to
facilitate the availability of the needed finances for banks to provide
quality service to SME consumers and to ensure that their
systems achieve the
highest level of
efficiency in the provision
of financing; ensuring
that the bank are
responsive to SMEs, and ensure
that their interest are protected ( Teal, 2002).
This research is to bring to bear modern trends of
SME financing for cost effectiveness in the chain and supply management industry;
ensuring that the SME customer satisfaction is attained. It would also help SME
managers/owners to implement the necessary structures to curtail the high
incidence of bad costs through obsolesce and deterioration of stocks. To stakeholders
like investors,
shareholders, employees, pressure
groups, etc., the
study provides information
for suggesting improvement in
service delivery of the respective banks in Ghana.
1.6 Scope of the Study
The study shall cover the SMEs of the Ghanaian economy,
included food processing, bakery, wood products, furniture works, metal works,
and auto and machinery works. The study was conducted within the framework of
evaluating challenges of SME financing banks within the Brong Ahafo Region,
specifically looking at Stanbic Bank, Sunyani Branch. It is a case study
approach of one particular bank (Stanbic Bank) and did not cover other formal
financial intermediaries (commercial banks) to reflect the entire industry
approach to financing SMEs. Hence, the result was not generalized but its
findings would be placed in the relevant context of the
individual company studied.
1.7 Organization of the Study
This study is in five chapters. Chapter one is the
general introduction. It looks at the background to the study, the objectives
of the study and the statement of the problem. It also briefly looks at the
research questions, scope and limitations and organization of the study.
Chapter two is the literature review. Literature will reviewed according to the
research questions used in the study. The conceptual framework for the study is
also outlined. Chapter three is the
methodology. It explains the research design. It also gives details about the population,
sample and sampling procedures used in the study. It explains the research
instruments, methods of data collection, data analysis plan. Chapter four is
the data presentation, analysis and discussion. Chapter five presents the
summary, conclusions and recommendations for the study.
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