GHANA TECHNOLOGY UNIVERSITY COLLEGE

FACULTY OF IT BUSINESS

EVALUATING THE CHALLENGES OF FINANCING SMALL AND

MEDIUM SCALE ENTERPRISES (SMEs) IN THE GREATER ACCRA
REGION
[A CASE STUDY OF AGRICULTURAL DEVELOPMENT BANK]
BY
DANKYI LINDA
(B050112078)
OKYERE AFUA AGYAKWA
(B050112077)
YIRENKYI FLORENCE YEBOAA
(B050112085)

A DISSERTATION PRESENTED TO GHANA TECHNOLOGY

UNIVERSITY COLLEGE IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE AWARD OF A BACHELOR OF BUSINESS
ADMINISTRATION
(BANKING AND FINANCE OPTION)
JUNE 2015
DECLARATION
This dissertation is submitted as part fulfilment for the award of a BBA degree in Banking
and Finance. The work is the result of my own investigations. All sections of the text and
results which have been obtained from other works/sources are fully referenced. I understand

that cheating and plagiarism constitute a breach of Ghana Technology University College regulations
and will be dealt with accordingly.

DANKYI LINDA
Signed: ..
Date:
OKYERE AFUA AGYAKWA
Signed: .
Date:

YIRENKYI FLORENCE YEBOAA

Signed: .
Date:

CERTIFICATION
I hereby certify that this dissertation has been supervised and assessed with the laid down guidelines by Ghana
Technology University College

SUPERVISORS NAME: MR. FIIFI AMANNING OKYERE

SUPERVISORS SIGNATURE
DATE

DEDICATION
We dedicate this work to our families for their love, support, prayers and encouragement throughout
our studies and in all our endeavors. God bless you all.

ACKNOWLEDGEMENT
We are grateful to God for seeing us through our stay in University education. We dedicate
this work to God Almighty, He has been our guidance and supporter through our life and the
wind beneath our wings to enable us to fly with flying colours. His grace and mercies has
brought us this far and we will forever be thankful to him and may His name be Glorified
Also, our deepest appreciation and thanks go to our supervisor, Mr.Fiifi Amaning Okyere for
his invaluable comments and guidance at every stage leading to the successful completion of
this study..
Furthermore, we are grateful to staff of ADB Bank Ghana Limited for their kind assistance in
my search for the relevant materials for this study and all staff that assisted me in gathering
the data needed for this thesis.
Finally, we thank our parent for supporting us financially toward our study.

Table of Content

Page

CHAPTER ONE: INTRODUCTION..........................................................................................5

1.1 Background of the study..................................................................................................
1.2 Statement of the Problem...............................................................................................
1.3 Main Objective.................................................................................................................
1.4 Specific Objectives..........................................................................................................

1.5 Research Questions........................................................................................................

1.6 Significance of the Study...............................................................................................
1.7 Scope and Limitation of the Study................................................................................
1.8 Organization of the Study.............................................................................................

CHAPTER TWO: LITERATURE REVIEW...........................................................................11

2.1 Introduction....................................................................................................................
2.2 The Definition and concept of SMEs.........................................................................
2.3 SME definition in the Ghanaian context...................................................................
2.4 Characteristics of SMEs in Developing Countries ..................................................
2.5 Contributions of SMEs to Economic Development................................................
2.6 Challenges of SMEs in Obtaining Credit....................................................................

CHAPTER THREE: RESEARCH METHODOLOGY..........................................................31

3.1 Introduction....................................................................................................................
3.2 Research Design............................................................................................................
3.3 Sources of Data.............................................................................................................
3.4

Population and Sample Size......................................................................................

3.5 Sampling Technique......................................................................................................

CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA .....................................33

4.1 Introduction......................................................................................................................
4.2 Demographic Coverage of Respondents....................................................................
4.4.1 SME Banking Period.....................................................................................................
4.5 Main Financial Services offered to SME customers..................................................
4.4 Relationship Ratings with SME.....................................................................................
4.4.4 Conditions for extending credit facilities................................................................
4.4.5 Major challenges of SME Banking............................................................................
4.4.6 Reasons SME's Seek Credit........................................................................................
4.5.7 Documentation-Application process........................................................................

CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSIONS AND

RECOMMENDATIONS.............................................................................................................41
5.1 Introduction......................................................................................................................

5.2 Summary of Findings......................................................................................................

5.3 Conclusion.........................................................................................................................
5.4 Recommendation............................................................................................................
5.5 Suggestion for Further Research..................................................................................

REFERENCES............................................................................................................................45

List of Tables

Table 4.1 What is your position with ADB?

33

Table 4.2 How long have you been in SME banking?

34

Table 4.4 How is your relationship status with your SMEs?

35

Table 4.5 What Conditions Do You Consider Most Important

36

Table 4.6 Major Challenges of SME Banking

37

Table 4.7 What are the most likely reasons for ADB Ghana to grant loans to SMEs

38
Table 4.8One-Sample Test

38

Table 4.9 What are the likely causes of default in loans that are granted?

39

List of Figures
Figure 4.1 Position with ADB..............................................................................................33
Figure 4.2 How long have you been in SME banking ....................................................34
Figure 4.3 which financial services do you offer your SME customers? ...................35
Figure 4.4 Relationship ratings with SME........................................................................36
Figure 4.5 What has been the major challenge for your SMEs banking unit? ........37
Figure 4.6 What are the most likely reasons for ADB Ghana to grant loans to
SMEs?......................................................................................................................................38
Figure 4.7 What are the likely causes of default in loans that are granted? ...........40

ABSTRACT
The main objective of the study is to evaluate the challenges and the extent of financing of
SMEs within the Greater Accra region of Ghana, taking cognizance of the role and
contributions of ADB Bank Ghana Limited. In most jurisdictions, commercial banks as a
group are the main source of external finance for SMEs. However, there are number of
rigidities of a macroeconomic, institutional and regulatory nature that may bias the entire
banking system against lending to SMEs. The statement of the problem is that these
commercial banks are most often unwilling to increase loan funding without an increase in
the security given 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.
The sources of materials for the study were both primary and secondary. Primary data were
collected by the use of structured questionnaires which were designed and administered
employees of the company. Stakeholders like management executives and staff of ADB Bank
were interviewed for input on this study.
Secondary materials were extracted from relevant textbooks, newspapers, reports/articles,
journals, bulletins and documents presented by corporate financial analysts and policy
planners.
The study showed that all the staff respondents have been on the SME Banking between the
period of (3) years and (5) years; majority having been with the Unit for three (3) years
period. In view of the findings, 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 among
others in other to educate SMEs in the efficient and effective financial management of their
businesses in order to sustain the SMEs to grow into much bigger industries in the near
future.
The study consist of five chapters; chapter one highlight on the background of the study,
statement of problem, research objectives, research questions, limitation of the study, Scope
of the study and organisation of chapters, chapter two deal with the review of relevant
literature to the study, chapter three deal with the methodology of the study, Chapter four
discusses findings and analysis and chapter five deals with the summary, conclusion and
recommendation.
7

CHAPTER ONE: INTRODUCTION

1.1 Background of the study
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 Asias 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 Ghanas 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.
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. 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
8

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
equipments, 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 Greater Accra Region.

1.2Statement of the Problem

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
SME 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) in the article entitled Developing Small-Scale Industries in
Rural Regions: Business Behaviour 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 largescale 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 use as security
for lenders. About 90% of small firms are refused loans when applied for from the formal

10

financial intermediaries, due to inability to fulfil 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, 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
Greater Accra Region with specific reference to on the role and contributions of ADB and to
find appropriate and workable means of financing in the industry.

1.3 Main Objective

The main objective of the study is to evaluate the challenges and the extent of financing of
SMEs within the Greater Accra Region, taking cognizance of the role and contributions of
Agricultural Development Bank.

1.4 Specific Objectives

i.

To identify and evaluate the factors that influences the financing of SMEs by ADB.

ii.

To identifythe barriers that financial institutions (ADB) face in the financing of

SMEs.

iii.

To determine the effects of financing by ADB on the business development of SMEs

11

1.5 Research Questions

In order to attain the above stated objectives the study seeks to answer the following
questions:
i.

What factors influence the financing of SMEs by ADB?

ii.

What barriers do banks (ADB) face in the financing of SMEs?

1.6 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

1.7 Scope andLimitation of the Study

The study is limited to the operations of SME customers of ADB in the Greater Accra
Region, Tema branch. This location is chosen due to cost and time considerations and
also because it is acknowledged that most SMEs are concentrated in the regional
capital. This research have identified among others the following limitations were
encountered:

The unwillingness of management of both SMEs and ADB to release information

which should have enriched the study and also established a strong validity and
reliability.

1.8 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 is reviewed according to the research
questions used in the study. The conceptual framework for the study is also outlined.

12

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.

13

CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction
This chapter is devoted to the review of literature. Literature has been reviewed on the
definition of SMEs, the financial development and role of SMEs in the economic
development of Ghana.

2.2 The Definition and concept of SMEs

Abor and Quartey (2010) indicated that the issue of what constitutes a small or medium
enterprise is a major concern in the literature. Different authors have usually given different
definitions to this category of business. SMEs have indeed not been spared with the definition
problem that is usually associated with concepts which have many components. The
definition of firms by size varies among researchers. Some attempt to use the capital assets
while others use skill of labour and turnover level. Others define SMEs in terms of their legal
status and method of production. Storey (1994) tries to sum up the danger of using size to
define the status of a firm by stating that in some sectors all firms may be regarded as small,
whilst in other sectors there are possibly no firms which are small. The Bolton Committee
(1971) first formulated an economic and statistical definition of a small firm. Under the
economic definition, a firm is said to be small if it meets the following three criteria: it has
a relatively small share of their market place; it is managed by owners or part owners in a
personalized way, and not through the medium of a formalized management structure; and it
is independent, in the sense of not forming part of a large enterprise.
Under the statistical definition, the Committee proposed the following criteria the size of
the small firm sector and its contribution to GDP, employment, exports, etc.; the extent to
which the small firm sectors economic contribution has changed over time; and applying the
statistical definition in a cross-country comparison of the small firms economic contribution.
The Bolton Committee applied different definitions of the small firm to different sectors.

14

Whereas firms in manufacturing, construction and mining were defined in terms of number of
employees (in which case, 200 or less qualified the firm to be a small firm), those in the
retail, services, wholesale, etc. were defined in terms of monetary turnover (in which case the
range is 50,000-200,000 British Pounds to be classified as small firm). Firms in the road
transport industry are classified as small if they have 5 or fewer vehicles. There have been
criticisms of the Bolton definitions. These centre mainly on the apparent inconsistencies
between defining characteristics based on number of employees and those based on
managerial approach.
The European Commission (EC) defined SMEs largely in term of the number of employees
are firms with 0 to 9 employees - micro enterprises; 10 to 99 employees - small enterprises;
and 100 to 499 employees - medium enterprises. Thus, the SME sector is comprised of
enterprises (except agriculture, hunting, forestry and fishing) which employ less than 500
workers. In effect, the EC definitions are based solely on employment rather than a
multiplicity of criteria. Secondly, the use of 100 employees as the small firms upper limit is
more appropriate, given the increase in productivity over the last two decades (Storey, 1994).
Finally, the EC definition did not assume the SME group is homogenous; that is, the
definition makes a distinction between micro, small, and medium-sized enterprises. However,
the EC definition is too all-embracing to be applied to a number of countries. Researchers
would have to use definitions for small firms which are more appropriate to their particular
target group (an operational definition). It must be emphasized that debates on definitions
turn out to be sterile, unless size is a factor which influences performance. For instance, the
relationship between size and performance matters when assessing the impact of a credit
programme on a target group (Storey, 1994).

15

Weston and Copeland (1998) hold that definitions of size of enterprises suffer from a lack of
universal applicability. In their view, this is because enterprises may be conceived of in
varying terms. Size has been defined in different contexts, in terms of the number of
employees, annual turnover, industry of enterprise, ownership of enterprise, and value of
fixed assets.
Van der Wijst (1989) considers small and medium businesses as privately held firms with 1
9 and 10 99 people employed, respectively. Jordan et al (1998) define SMEs as firms with
fewer than 100 employees and less than 15 million turnover. Michaelaset al (1999) consider
small independent private limited companies with fewer than 200 employees and Lpez and
Aybar (2000) considered companies with sales below 15 million as small. According to the
British Department of Trade and Industry, the best description of a small firm remains that
used by the Bolton Committee in its 1971 Report on Small Firms. This stated that a small
firm is an independent business, managed by its owner or part-owners and having a small
market share (Department of Trade and Industry, 2001).
The UNIDO also defines SMEs in terms of number of employees by giving different
classifications for industrialized and developing countries (Elaian, 1996). The definition for
industrialized countries is given as follows: Large - firms with 500 or more workers; Medium
- firms with 100-499 workers; and Small - firms with 99 or less workers.
The classification given for developing countries is as follows: Large - firms with 100 or
more workers; Medium - firms with 20-99 workers; Small - firms with 5-19 workers; and
Micro - firms with less than 5 workers.
It is clear from the various definitions that there is not a general consensus over what
constitutes an SME. Definitions vary across industries and also across countries. It is
important now to examine definitions of SMEs given in the context of Ghana.
16

2.3 SME definition in the Ghanaian context

There have been various definitions given for small-scale enterprises in Ghana but the most
commonly used criterion is the number of employees of the enterprise (Kayanula and
Quartey, 2000). In applying this definition, confusion often arises in respect of the cut off
points used by the various official sources. In its Industrial Statistics, the Ghana Statistical
Service (GSS) considers firms with fewer than 10 employees as small-scale enterprises and
their counterparts with more than 10 employees as medium and large-sized enterprises.
Ironically, the GSS in its national accounts considered companies with up to 9 employees as
SMEs (Kayanula and Quartey, 2000). The value of fixed assets in the firm has also been used
as an alternative criterion for defining SMEs. However, the National Board for Small Scale
Industries (NBSSI) in Ghana applies both the fixed asset and number of employees criteria.
It defines a small-scale enterprise as a firm with not more than 9 workers, and has plant and
machinery (excluding land, buildings and vehicles) not exceeding 10 million Ghanaian cedis.
In Ghana, Steel and Webster (1991) and Oseiet al (1993) used an employment cut-off point of
30 employees in the definition of small-scale enterprises in Ghana. Nevertheless, Oseiet al
(1993), classified small-scale enterprises into three categories, namely: micro - employing
less than 6 people; very small - employing 6-9 people; and small - between 10 and 29
employees.
A more recent definition is the one given by the Regional Project on Enterprise Development
Ghana manufacturing survey paper classified firms into: micro enterprise, less than 5
employees; small enterprise, 5 - 29 employees; medium enterprise, 30 99 employees; large
enterprise, 100 and more employees (Teal, 2002).

2.4 Characteristics of SMEs in Developing Countries

Fisher and Reuber (2000) enumerate a number of characteristics of SMEs in developing
countries under the broad headings: labour characteristics, sectors of activity, gender of

17

owner and efficiency. Given that most SMEs are one-person businesses, the largest
employment category is working proprietors. This group makes up more than half the SME
workforce in most developing countries; their families, who tend to be unpaid but active in
the enterprise, make up roughly another quarter. The remaining portion of the workforce is
split between hired workers and trainees or apprentices. SMEs are more labour intensive than
larger firms and therefore have lower capital costs associated with job creation (Anheier and
Seibel, 1987; Liedholm and Mead, 1987; Schmitz, 1995).
In terms of activity, they are mostly engaged in retailing, trading, or manufacturing (Fisher
and Reuber, 2000). While it is a common perception that the majority of SMEs will fall into
the first category, the proportion of SME activity that takes place in the retail sector varies
considerably between countries, and between rural and urban regions within countries.
Retailing is mostly found in urban regions, while manufacturing can be found in either rural
or urban centers. However, the extent of involvement of a country in manufacturing will
depend on a number of factors, including, availability of raw materials, taste and
consumption patterns of domestic consumers, and the level of development of the export
markets.
According to Kayanula and Quartey (2000), in Ghana, SMEs can be categorized into urban
and rural enterprises. The former can be subdivided into organized and unorganized
enterprises. The organized ones mostly have paid employees with a registered office, whereas
the unorganized category is mainly made up of artisans who work in open spaces, temporary
wooden structures, or at home, and employ few or in some cases no salaried workers They
rely mostly on family members or apprentices. Rural enterprises are largely made up of
family groups, individual artisans, women engaged in food production from local crops.

18

The major activities within this sector include:- soap and detergents, fabrics, clothing and
tailoring, textile and leather, village blacksmiths, tin-smithing, ceramics, timber and mining,
bricks and cement, beverages, food processing, bakeries, wood furniture, electronic assembly,
agro processing, chemical-based products and mechanics (Oseiet al., 1993; Kayanula and
Quartey, 2000).
Abor and Biekpe (2006) indicated that majority of SMEs are female-owned businesses,
which more often than not are home-based compared to those owned by males; they are
operated from home and are mostly not considered in official statistics. This clearly affects
their chances of gaining access to financing schemes, since such programmes are designed
without sufficient consideration of the needs of businesses owned by females. These female
entrepreneurs often get the impression that they are not capable of taking advantage of these
credit schemes, because the administrative costs associated with the schemes often outweigh
the benefits. Prior empirical studies in Ghana have shown that female-owned SMEs often
have difficulty accessing finance. Females are mostly involved in sole-proprietorship
businesses which are mainly microenterprises and as such may lack the necessary collateral
to qualify for loans.
Measures of enterprise efficiency (e.g. labour productivity or total factor productivity) vary
greatly both within and across industries. Firm size may be associated with some other
factors that are correlated with efficiency, such as managerial skill and technology, and the
effects of the policy environment. Most studies in developing countries indicate that the
smallest firms are the least efficient, and there is some evidence that both small and large
firms are relatively inefficient compared to medium-scale enterprises (Little et al., 1987). It is
often argued that SMEs are more innovative than larger firms. Many small firms bring
innovations to the market place, but the contribution of innovations to productivity often

19

takes time, and larger firms may have more resources to adopt and implement them (Acset
al., 1999).

2.5 Contributions of SMEs to Economic Development

There is a general consensus that the performance of SMEs is important for both economic
and social development of developing countries. From the economic perspective, SMEs
provide a number of benefits (Advani, 1997). SMEs have been noted to be one of the major
areas of concern to many policy makers in an attempt to accelerate the rate of growth in lowincome countries. These enterprises have been recognized as the engines through which the
growth objectives of developing countries can be achieved. They are potential sources of
employment and income in many developing countries.
SMEs seem to have advantages over their large-scale competitors in that they are able to
adapt more easily to market conditions, given their broadly skilled technologies. They are
able to withstand adverse economic conditions because of their flexible nature (Kayanula and
Quartey, 2000). SMEs are more labour intensive than larger firms and therefore have lower
capital costs associated with job creation (Anheier and Seibel, 1987; Liedholm and Mead,
1987; Schmitz, 1995). They perform useful roles in ensuring income stability, growth and
employment. Since SMEs are labour intensive, they are more likely to succeed in smaller
urban centers and rural areas, where they can contribute to a more even distribution of
economic activity in a region and can help to slow the flow of migration to large cities. Due
to their regional dispersion and their labour intensity, it is argued, small-scale production
units can promote a more equitable distribution of income than large firms. They also
improve the efficiency of domestic markets and make productive use of scarce resources,
thus facilitating long-term economic growth (Kayanula and Quartey, 2000).
SMEs contribute to a countrys national product by either manufacturing goods of value, or
through the provision of services to both consumers and/or other enterprises. This
20

encompasses the provision of products and, to a lesser extent, services to foreign clients,
thereby contributing to overall export performance. In Ghana and South Africa, SMEs
represent a vast portion of businesses. They represent about 92% of Ghanaian businesses and
contribute about 70% to Ghanas GDP and over 80% to employment. SMEs also account for
about 91% of the formal business entities in South Africa, contributing between 52% and
57% of GDP and providing about 61% of employment (CSS, 1998; Ntsika, 1999; Gumede,
2000; Berry et al., 2002).

2.6 Challenges of SMEs in Obtaining Credit

Financetheoristsview of access to credit (credit rationing) as due to adverse selection, moral
hazard and contract enforcement problems.The adverse selection theory of credit markets
originates with the paper by Stiglitz and Weiss (1981) in which they explained why the
interest rate could not equate the supply and demand in the credit market. As discussed by
Stiglitz and Weiss (1981), borrowers have inside information about the nature of the project
they want financed and may reap substantial rewards from talking up their projects.
Moreover, while the lender gains if the loan is repaid with interest, it is not a beneficiary of
any upside gain in the firms performance; it is, however, a victim of any downside losses in
the case of default. Lenders like banks therefore face difficulties in discriminating between
good and bad credit risks and simply increasing the price of credit to all potential borrowers
can lead to adverse selection; rather than driving potential non payers out of the market, there
may be systematic reasons why some of the highest risk firms are those willing to pay high
interest rates (Pollard, 2003).
The other problem, moral hazard can arise when lenders are unable to discern borrowers
actions that would affect the distribution of returns from an investment. This means, after a
lender has extended finance to a firm they are exposed to moral hazard, the risk that the firm
will not perform in a manner sufficient to meet the contract. For example, once a loan has
21

been secured, a borrower could use the proceeds of the loan for a higher risk purpose or a
non-income generating activity, necessitating costly ex post monitoring of the financial
contract.
The third reason to cause credit rationing is the contract enforcement problems. Mushinski
(1999) argued that credit market imperfections in developing countries derive not only from
moral hazard and adverse selection problems but also from costly monitoring and contract
enforcement. In contrast, countries characterised by well-functioning legal systems, the
problems are not as pronounced as in those where the mechanisms for enforcement of
contracts, property verification and ownership are weak. Hence, the main reason for the
contract enforcement problem is the poor development of property rights. Although this
argument is not specifically drawn at SMEs, these problems are more associated with SMEs
than large companies.
The above literature review demonstrates that information and enforcement problems
inherent in credit transactions can lead to imperfect credit markets. It is also clear from the
above arguments that the small firms access to financing may either come from supply side
market failure (rejection from the banks side for reasons not connected with the viability of
the proposal or high risk and costs associated with such loans) or demand side market failure
(insufficient information in the project proposal, high cost of bank credit etc).

2.7 Empirical Framework

It is also noted that small businesses have very poor working capital management traditions.
A study of small businesses in Northern America, show that they have no formal techniques
of determining the level of cash balances (Anvari and Gopal, 1983). This would mean that
there are chances of SMEs keeping more cash than they actually required or otherwise. Also,
Grablowsky and Rowell (1980) in a survey found that small businesses have poor credit
management. In fact, they explained that they see accounts receivable as something that is
22

exogenously controlled. Only few small businesses among those who are included in the
survey employed credit officer. In the same way that small businesses do not view accounts
payable as a source of finances for their businesses. They only accept cash discounts when it
is available and do not make effort to compare the cost taking advantage of cash discount
with the cash discount itself with regards to their cost of capital. Grablowsky (1984) further
concludes that small businesses rarely use formal techniques for inventory management. For
instance, they have poor habit of using quantitative techniques like economic order quantity.
The fact is that most SMEs accounting systems were not able to provide information on
inventory turnover, reorder points, ordering costs or carrying costs. The capital budgeting
practices of small businesses is also very low. Grablowsky and Burn (1980) found that the
level of understanding and use of more advanced capital budgeting policies and techniques
were low. Richard et al (1991) explained that approval for capital budgeting in SMEs are
simply based on necessity, this is contrary to large firms who have yearly annual capital
budgets. Generally empirical evidences available in literature from advance countries reveal
that SMEs use of accounting information is very poor. However, due to improved accounting
systems owing to the increase in the use of computers and software applications, the quality
of accounting information has improved tremendously

2.8 General Constraints to SME Development

Despite the potential role of SMEs to accelerated growth and job creation in developing
countries, a number of bottlenecks affect their ability to realize their full potential. SME
development is hampered by a number of factors, including finance, lack of managerial skills,
equipment and technology, regulatory issues, and access to international markets (Anheier
and Seibel, 1987; Steel and Webster, 1991; Aryeeteyet al, 1994; Gockel and Akoena, 2002).
The lack of managerial know-how places significant constraints on SME development. Even
23

though SMEs tend to attract motivated managers, they can hardly compete with larger firms.
The scarcity of management talent, prevalent in most countries in the region, has a magnified
impact on SMEs. The lack of support services or their relatively higher unit cost can hamper
SMEs efforts to improve their management, because consulting firms are often not equipped
with appropriate cost-effective management solutions for SMEs. Besides, despite the
numerous institutions providing training and advisory services, there is still a skills gap in the
SME sector as a whole (Kayanula and Quartey, 2000). This is because entrepreneurs cannot
afford the high cost of training and advisory services while others do not see the need to
upgrade their skills due to complacency. In terms of technology, SMEs often have difficulties
in gaining access to appropriate technologies and information on available techniques
(Aryeeteyet al., 1994). In most cases, SMEs utilize foreign technology with a scarce
percentage of shared ownership or leasing. They usually acquire foreign licenses, because
local patents are difficult to obtain.
Regulatory constraints also pose serious challenges to SME development and although wide
ranging structural reforms have led to some improvements, prospects for enterprise
development remain to be addressed at the firm-level. The high start-up costs for firms,
including licensing and registration requirements, can impose excessive and unnecessary
burdens on SMEs. The high cost of settling legal claims, and excessive delays in court
proceedings adversely affect SME operations. In the case of Ghana, the cumbersome
procedure for registering and commencing business are key issues often cited. The World
Bank Doing Business Report (2006) indicated that it takes 127 days to deal with licensing
issues and there are 16 procedures involved in licensing a business in Ghana. Meanwhile, the
absence of antitrust legislation favours larger firms, while the lack of protection for property
rights limits SMEs access to foreign technologies (Kayanula and Quartey, 2000).

24

Previously insulated from international competition, many SMEs are now faced with greater
external competition and the need to expand market share. However, their limited
international marketing experience, poor quality control and product standardization, and
little access to international partners, continue to impede SMEs expansion into international
markets (Aryeeteyet al., 1994). They also lack the necessary information about foreign
markets. One important problem that SMEs often face is access to capital (Lader, 1996). Lack
of adequate financial resources places significant constraints on SMEs development. Cook
and Nixson (2000) observe that, notwithstanding the recognition of the role of SMEs in the
development process in many developing countries, SMEs development is always
constrained by the limited availability of financial resources to meet a variety of operational
and investment needs. A World Bank study found that about 90% of small enterprises
surveyed stated that credit was a major constraint to new investment (Parker et al., 1995).
Levy (1993) also found that there is limited access to financial resources available to smaller
enterprises compared to larger organisations and the consequences for their growth and
development. The role of finance has been viewed as a critical element for the development
of SMEs (Cook and Nixson, 2000). A large portion of the SME sector does not have access to
adequate and appropriate forms of credit and equity, or indeed to financial services more
generally (Parker et al., 1995). In competing for the corporate market, formal financial
institutions have structured their products to serve the needs of large corporate.
A cursory analysis of survey and research results of SMEs in South Africa, for instance,
reveals common reactions from SME owners interviewed. When asked what they perceive as
constraints in their businesses and especially in establishing or expanding their businesses,
they answered that access to funds is a major constraint. This is reflected in perception
questions answered by SME owners in many surveys (see BEES, 1995; Graham and
Quattara, 1996; Rwingema and Karungu, 1999). This situation is not different in the case of

25

Ghana (see Sowa et al., 1992; Aryeetey, 1998; Bigstenet al., 2000, Abor and Biekpe 2006,
2007; Quartey, 2002). A priori, it might seem surprising that finance should be so important.
Requirements such as identifying a product and a market, acquiring any necessary property
rights or licenses, and keeping proper records are all in some sense more fundamental to
running a small enterprise than is finance (Green et al., 2002). Some studies have
consequently shown that a large number of small enterprises fail because of non-financial
reasons. Other constraints SMEs face include: lack of access to appropriate technology; the
existence of laws, regulations and rules that impede the development of the sector; weak
institutional capacity and lack of management skills and training (see Sowa et al., 1992;
Aryeeteyet al., 1994; Parker et al., 1995; Kayanula and Quartey, 2000). However, potential
providers of finance, whether formal or informal, are unlikely to commit funds to a business
which they view as not being on a sound footing, irrespective of the exact nature of the
unsoundness. Lack of funds may be the immediate reason for a business failing to start or to
progress, even when the more fundamental reason lies elsewhere. Finance is said to be the
glue that holds together all the diverse aspects involved in small business start-up and
development (Green et al., 2002).

2.9 The Distinctive challenges of SME Finance

Any potential provider of external debt or equity finance will want to monitor the company to
determine whether it is acting in accord with the initial contract, to follow the progression of
the firm and to have the means to oblige the user of funds to respect the interests of the
provider of funds. There are numerous reasons why doing this effectively is more
problematic for SMEs than for larger firms. Hence, banks are more likely to engage in credit
rationing (i.e. not extending the full amount of credit demanded, even when the borrower is
willing to pay higher rates) to SMEs than to larger companies (Stiglitz and Weiss, 1981; Hoff
and Stiglitz, 1999).

26

In the first place, the SME sector is characterized by wider variance of profitability and
growth than larger enterprises. SMEs also exhibit greater year-to-year volatility in earnings.
The survival rate of SMEs is considerably lower than that of larger firms. Thus, one analyst
found that manufacturing firms with fewer than 20 employees were five times more likely to
fail in a given year than larger firms (Storey, 1995).
In the case of SMEs, it is very difficult to distinguish the financial situation of the firm from
that of its owners. The use of company cars and home accommodations for both private and
business purposes are clear cases in point. Furthermore, estate tax and intergenerational
succession are important issues in SMEs but usually unimportant for larger companies.
Relations between the firm and its stakeholders are likely to reflect personal relationships to a
much higher degree than in larger firms where such relationships are formalized. Whereas
large firms are expected to observe recognized standards of corporate governance in which
actors such as executives, auditors, and boards of directors are expected to conform to
transparent norms, SMEs tend to reflect much more closely the personalities of their owners
(Storey, 1995).
The linkage between SMEs and financial markets is looser than in the case of larger
companies. SMEs often obtain funds from informal sources and, thus, may be less linked to
trends in the formal fixed-income or equity markets. SMEs often use internally generated
funds or loans from family and friends in quasi-equity form. Funds from close
acquaintances may be obtained at sub-market rates while borrowing from formal markets
may be at rates higher than those available to larger companies.
Trade credit, i.e. credit supplied by non-financial entities, has always been an important
component of SME finance and many analysts argue that the development of trade credit is
an important element in assuring adequate finance for SMEs in emerging markets. There are
also potential principal/agent problems. The provider of credit will seek to require the
27

borrower to act so as to maximize the probability that the loan is repaid, while the borrower
may seek higher risk/higher return solutions. Once financing is received, the entrepreneur
may be motivated to undertake excessively risky projects, since all of the upside of the
project belongs to the entrepreneur, while the lender prefers a less risky project that increases
the probability that the loan will be repaid. This problem, which is potentially present in all
lending, is more serious for smaller firms than for larger firms because of the blurring of the
line between the firm and the entrepreneur, and due to information asymmetries (Storey,
1995).
Asymmetric information is a more serious problem in SMEs than in larger firms. The
entrepreneur has access to better information concerning the operation of the business and
has considerable leeway in sharing such information with outsiders. However, the
entrepreneur is also likely to have less training/experience in business than those in a larger
company, although more adapted to operating in an uncertain environment. Hence, it may be
difficult for the outside provider of financing to determine whether the entrepreneur is
making erroneous decisions or for the outsider to understand the business adequately. In
addition, the entrepreneur may have incentives to remain opaque, not only in dealings with
financiers, but also with other outsiders such as regulators and tax authorities. The analysis of
credit rationing is believed to provide special insights into problems of finance in developing
and emerging markets. Thus, this argument has become part of the analysis generally applied
to problems of finance in emerging markets (Storey, 1995).

2.10The Financing Gap

According to Stiglitz and Weiss (1981) on a theoretical level, there is some controversy as to
whether it is meaningful to speak of a financing gap. Clearly, there can be such a gap if the
authorities intervene in the market and maintain interest rates below the equilibrium rate,
which would inevitably lead to excess demand for loanable funds. In the past, some analysts
28

argued that it was not meaningful to speak of a funding gap unless the authorities actually
kept interest rates below market clearing levels. It was held that as risks rise, providers of
financial resources would sufficiently increase interest rates charged to all borrowers to bring
the supply and demand for credit into balance. Due to problems of asymmetric information
and agency problems, banks have difficulties distinguishing good risks from bad risks and in
monitoring borrowers once funds have been advanced. Moreover, banks will hesitate to use
interest rate changes to compensate for risk in the belief that by driving out lower-risk
borrowers, high interest rates may lead to a riskier loan portfolio, thus setting in motion a
process of adverse credit selection.
Banks could maximize their return by setting an interest rate that left large numbers of
potential borrowers without credit. In the Stiglitz-Weiss formulation, 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.

2.10 Structural Rigidities and Distortions Will Worsen The Funding Gap
Storey (1995) argued in the preceding section that even in financial markets that have no
distortion stemming from official intervention and major private monopolies, SMEs will
often be more difficult to assess than established companies. Therefore, the possibility that
large numbers of small firms will be excluded from the credit market, already present to some
extent in a fully competitive and transparent market, becomes greater as market imperfections
grow. This initial disadvantage of SMEs can worsen if the business environment and the
financial system have certain characteristics.
i.

The domestic savings investment balance.

Storey (1995) further showed that national savings may be at low levels and may result in a
chronic insufficiency of domestic savings with re
29

spect to domestic investment or lead to excess demand for available domestic savings. In
addition, government policy may favour industrialization and/or import substitutions, which
effectively give large domestic firms, privileged access to finance. The hesitancy to lend to SMEs
and the resulting credit rationing will become more acute in times of monetary stringency and
disinflation.
ii.

Legal, institutional and regulatory framework.

Storey (1995) revealed that Banks will only seek to develop the SME market as a source of profit
if the economic and business framework is calibrated to transmit reliable economic signals and
the legal regulatory institutional setting enables banks to lend with confidence. The legal system
should have a strong regime to protect property rights, including creditor rights and be relatively
efficient in resolving cases of delinquent payments and bankruptcy. Additionally, the tax and
regulatory framework should encourage firms to operate in a transparent manner. If these
conditions are absent, the tendency to exclude SMEs from lending will be more pronounced.
iii.

Structure of the financial system.

On a global level, a model of market-based bank governance has gained acceptance. Under this
model, supervisors are expected to hold bank managers accountable for adequacy of earnings and
for the prudential quality of their institutions while bank management and boards act to produce
high returns to shareholders and maintain high prudential standards. This model has proven to
produce significant efficiency gains. As this model is applied and as the business environment
becomes more competitive, banks have strong incentives to find means to overcome the
difficulties in SME lending. However some countries have been comparatively slow in

implementing this model.

2.11 Role of Capital in Development of SMEs

The role of finance has been viewed as a critical element for the development of small and
medium-sized enterprises. Previous studies have highlighted the limited access to financial
resources available to smaller enterprises compared to larger organizations and the
30

consequences for their growth and development (Levy, 1993). Typically, smaller enterprises
face higher transaction costs than larger enterprises in obtaining credit (Saito & Villanueva,
1981). Insufficient funding has been made available to finance working capital (Peel &
Wilson, 1996). Poor management and accounting practices have hampered the ability of
smaller enterprises to raise finances. Information asymmetries associated with lending to
small scale borrowers have restricted the flow of finance to smaller enterprises. In spite of
these claims however, some studies show a large number of small enterprises fail because of
non-financial reasons (Liedholm, MacPherson &Chuta, 1994).
The case of Ghana shows that despite financial sector reform, the strengthening of banking
capabilities and the introduction of numerous financial instruments, such as the stock
exchange, a venture capital company and business assistance funds, access to institutional
credit for working capital and equipment continued to be a major constraint to small
enterprise development (Steel & Webster, 1992). Even where demand for small scale
enterprise products appeared strong, a lack of credit meant that many small enterprises did
not have the capacity to respond and expand production. Interest rates of 30% or more, high
transactions costs and an administration and culture unfriendly to small scale enterprises
contributed to the problem (Boeh&Ocansey, 1995). The Ghana study by Osei, et al., (1993)
cites similar evidence; 95 per cent of the respondents depended solely on personal resources
and loans from relatives and friends. Dawson's (1993) work in Ghana and Tanzania also
confirms these findings; of the 672 small scale enterprises in the Ghana study, only two had
received a bank loan. In Tanzania, the formal banking system was seen to be out of reach for
almost all small enterprises. The World Bank reported that around 90 per cent of small
enterprises surveyed indicated that access to credit was a major constraint to new investment
(World Bank, 1994).

31

Small and medium enterprises (SMEs) make up the largest portion of the employment base in
many developing countries and, indeed, are often the foundation of the local private sector.
The entrepreneurs behind them couldand shouldplay a much larger role in development,
but too often are held back by a lack of ready access to financing from local formal sector
financial institutions.
From the above findings, it can be said that smaller firms as costly, high-risk credit units
which, many commercial banks avoid lending to and concentrate instead on "safer" options
such as financing larger local or multinational corporations, or holding high-yield
government bonds. While understandable given current realities at many banks, this approach
unfortunately dims the prospects for sustainable development by ignoring the necessity of a
bottom-up capital formation a key factor in the job creation necessary for reduction of
poverty and income inequalities. Proven models of profitable small business banking do exist
that can be transferred from country to country, scaled up over time, and then replicated more
widely for considerable development impact (Rosen, 2008).
Almost all banks in the country have now established SME banking departments. Most
notable ones are Barclays Bank, Merchant Bank, Standard Chartered Bank, Commercial
Bank, Metropolitan Allied Bank, Unibank, Trust Bank, Agriculture Development Bank,
Ecobank, SG-SSB and National Investment Bank among other. Banks have been defined as
financial establishment that uses money deposited by customers for investment, pays it out
when required, make loans at interest and exchange currency. (Pandula 2011). The Small and
Medium Scale Enterprises (SME) Departments are specially structured to meet the banking
needs of Small and Medium Scale businesses (Ghanaian Chronicle, 2006).
However, many non-financial constraints inhibit the success of such enterprises. SME owners
are reluctant to be transparent or open up their businesses to outsiders. They seem to be
unaware of their obligations and responsibilities they have toward capital providers, and the
32

need to acquire or seek support for technical services like accounting, management,
marketing, strategy development and establishment of business linkages. Management and
support services are perceived to be cost prohibitive and non-value adding (Mensah, 2004).

33

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Introduction
This chapter presents the methodology used for the study. It explains the research design. It
also gives details about the population, sample and sampling techniques and the research
instruments used in collecting data for the study. It also discusses the data collection methods
and data analysis plan.

3.2 Research Design

The research design of this project was a non-experimental one which determined the level of
involvement of ADB in the financing of SMEs in Greater Accra Region.
The researcher gathered extensive data from the staff of ADB.
The study used a cross-sectional design to collect data on relevant variables from a variety of
people. To this end, questionnaire covering the objectives of the research was prepared and
used to collect data from the staff of ADB.

3.3 Sources of Data

Data collection means gathering information to address the critical questions that had been
identified earlier in the study. Many methods available to gather information, and a wide
variety of information sources were identified. The most important issue related to data
collection is selecting the most appropriate information or evidence to answer questions
raised in the study (Brinkerhoff et al., 1983; Archer, 1988; Leeds, 1992).
Primary data is data observed or collected directly from first-hand experience. This type of
data is more accommodating as it shows latest information. Secondary data is data published
and collected in the past. This type of data is available effortlessly, rapidly and inexpensively.
Data was collected from both primary and secondary sources. Primary data were captured
through the use of questionnaires and personal interviews. Secondary data was collected
34

using journals, textbooks, handbooks and manuals, review articles and editorials, literature
review.

3.4 Population and Sample Size

Before the main fieldwork, a pre-test of the questionnaire and the interview schedule was
conducted in some of the selected SMEs by the researcher. The main reason for this activity
was to ensure that the questionnaire and interview schedules are meaningful, easily
understood and appropriate for the main fieldwork. It also enabled the researcher and the
field assistants to become familiar with the interview schedules and the questionnaire and to
prepare them for the main fieldwork. The population is the complete set of individuals
(subjects), objects or events having common observable characteristics in which the
researcher is interested (Agyedu et al., 1999). The targeted population of the study consisted
of staff of ADB the estimated population is 30 with a sample of 15 Staff.

3.5 Sampling Technique

In order to get very accurate result for this study, people who were directly involved in the
activities of the SMEs as far as financing and management of the businesses were concerned
were thus selected. The purposive sampling method was used to select the sample from the
population. This method is a non-random sampling where the researcher establishes a
criterion devoid of randomness for selecting the sample. In the purposive sampling, the
sample is chosen to suit the purposes of the study. This method was chosen because the
sample was able to answer the questions and respond to the interviews as objectively as was
possible.

35

CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA

4.1 Introduction
The chapter presents the data gathered from the field. The data were represented by graphs,
charts and tables. Data were also presented in relation to the literature review and compared
to the data collected from the field.

4.2 Demographic Coverage of Respondents

The study selected the sample based on targeted units using the non-probability sampling
method of random sampling, specifically the purposive sampling technique. This method
ensured that representative samples of all the known elements of the population were covered
in the sample.
Table 4.1 What is your position with ADB?
Frequency Percent
Valid

Credit officer
Custom service officer
Relations manager
Total
Source: Field data (2015)

3
5
7
15

20
33.3
46.7
100

Valid Percent

Cumulative Percent

20
33.3
46.7
100

20
53.3
100

Figure 4.1 Position with ADB.

What is your position with ADB?

8
6
4
2
0

Credit officer

Custom service officer

Source: Field data (2015)

36

Relations manager

4.4.1 SME Banking Period

The study showed that all the staff respondents have been on the SME Banking between the
period of less than 3 years and four 5years with the three (3) years class attaining the highest
response of 66.7percent. Nevertheless, the 4 years class was the next on the echelon,
recording 20 percent; and 5 years and attained 13.3 percent. It could be deduced that ADB
probably by policy does not permit an official stay on one schedule for that four years
Table 4.2 How long have you been in SME banking?
Frequency Percent
Valid Percent Cumulative Percent
Valid

10

66.7

66.7

66.7

years
4
3

20

20

86.7

years
5
2

13.3

13.3

100

years
Total 15

100

100

Figure 4.2 How long have you been in SME banking

3 years
4 years
5 years

37

4.3Main Financial Services offered to SME customers

The study identified five main financial services rendered to SMEs; include Overdraft, Trade
Credit, SME Banking, Cash Management, and Business Advice. It was discovered that cash
management and overdraft are the most offered financial services to SME managers and
owners by ADB Bank, Tema Branch, this is evidenced by having the highest frequency as 6
and 4 out of 15 respectively in the representation recorded below.
Figure 4.3 which financial services do you offer your SME customers?
Which financial services do you offer your SME customers
Frequ
ency

Perc
ent

Valid

overdra
ft
trade
credit
sme
banking
cash
manage
ment
busines
advice
Total

Cumulati
ve
Percent

26.7

Vali
d
Perc
ent
26.7

13.3

13.3

40

13.3

13.3

53.3

40

40

93.3

6.7

6.7

100

15

100

100

26.7

4.4 Relationship Ratings with SME

The research indicated that the relationship between the bankers and their respective SMEs is
generally very good, supported by the 46.7 percent showings; followed closely by 53.3
percent believed it was excellent. Details are shown in Table 4.4 below.

Table 4.4 How is your relationship status with your SMEs?

Frequency Percent
Valid Percent Cumulative Percent
Valid

Very

46.7

46.7

46.7

good
Excellen

53.3

53.3

100

t
38

Total

15

100

100

Figure 4.4 Relationship ratings with SME

How is your relationship status with your SMEs?

Excellent

Very good

6.4 6.6 6.8

7.2 7.4 7.6 7.8

8.2

4.4.4 Conditions for extending credit facilities

The study identified six major conditions or criteria considered when the bank is extending
credit to SME customers. These conditions are years of existence, past and projected cash
flow, credit history, lines of business, collateral and business location.
Table 4.5 What Conditions Do You Consider Most Important
Frequenc

Mean

Std

Percentage

Rankin

Level Of Importance

Year In Existence
Past And Projected Cash Flow
Credit History
Line Of Business
Collateral
Business Location

y
2
6
3
1
3
0

2.5
4.67
4.4
4.75
6
7.5

2.07
5.45
6.06
6.95
7.94
10.6

13.3
40
20
6.6
20
0

g
4th
1st
2nd
5th
2nd
6th

medium
high
high
medium
high
low

Total

15

Out of all the afore mentioned criteria ADB, Tema branch uses as benchmark for assessing
the credibility of SMEs, past and projected cash flow stood tall among the rest with 40
percent; followed by collateral which registered 20 percent.

39

4.4.5 Major challenges of SME Banking

The study recognized three (3) major challenges (management, high default rate and
monitoring) that militate against the SME Banking Unit of ADB Bank, Tema branch. As
indicated in Table 4.4.5 and picturesquely represented by Figure 4.4.5, Management rate on
the part of SMEs has been that bane for the SME Banking Unit of the selected branch.
Table 4.6 Major Challenges of SME Banking
What has been the major challenge for your SMEs banking unit?
Frequency Percent
Valid Percent Cumulative Percent
Valid

Management 11
High default 2

73.3
13.3

73.3
13.3

73.3
86.7

rate
Monitoring
Total

13.3
100

13.3
100

100

2
15

Figure 4.5 What has been the major challenge for your SMEs banking unit?
12
10
8
6
4
2
0
Management

High default rate

Monitoring

4.4.6 Reasons SME's Seek Credit

The study identified four major reasons why SMEs request for loans or credit from ADB,
they were to purchase fixed assets, for working capital, research and development and debt
consolidation. Out of these reasons the study exhibited that SMEs uses the requested financial
40

facilities for working/operating capital (66.7 percent) and Debt consolidation (6.7 percent);
26.7 percent for fixed assets purchased. The details are tabulated and graphically represented.
Table 4.7 What are the most likely reasons for ADB Ghana to grant loans to SMEs
Frequenc Percent Valid Percent
Cumulative Percent
Valid

To

purchase

y
fixed 4

assets
Working

26.7

26.7

26.7

10

66.7

66.7

93.3

1
15

6.7
100

6.7
100

100

capital/operating
capital
Debt consolidation
Total

Figure 4.6 What are the most likely reasons for ADB Ghana to grant loans to SMEs?
12
10
8
6
4
2
0

4.5.7 Documentation-Application process

As part of the application process the study showed that certain documentations are requested
by the bank. These are: Formal application for financing, Business certificates of registration,
Business financial statements, Business plan, Appraisals of assets to be financed and Cash
flow projection.
Table 4.8One-Sample Test
Test Value = 0

41

Mean
t

df

Sig. (2-tailed) Difference

7.000

14

.000

2.333

financial 7.643

14

.000

2.933

poor credit experience or history 7.278

14

.000

2.067

inexperienced management team 8.702

14

.000

3.200

lack of collateral/guarantees
inadequate

complied

records and accounts

or lack of professionalism
inadequate technologies

8.919

14

.000

3.333

low rate of return on capital

5.850

14

.000

1.933

limited knowledge of business 7.513

14

.000

3.333

opportunities

Furthermore, it was detected that 73 percent of respondents have had their loan application
rejected before and the remaining 27 percent had theirs accepted. The reasons assigned to the
rejection of the loan applications or in other words major problems faced by SMEs in
securing funds are: Lack of collateral/guarantees, inadequate compiled financial records and
accounts, Poor credit experience or history; inexperienced management team or lack of
professionalism; inadequate technologies; and limited knowledge of business opportunities.
Moreover, low rate of return of rate of return on capital being the highest problem banks face.

Table 4.9 What are the likely causes of default in loans that are granted?
Frequency
Percent Valid
Cumulative
Valid

High

monthly 2

repayment amount
High interest rate
Low turnover
Total

3
10
15

42

13.3

Percent
13.3

Percent
13.3

20
66.7
100

20
66.7
100

33.3
100

Figure 4.7 What are the likely causes of default in loans that are granted?
12
10
8
6
4
2
0

CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSIONS AND

RECOMMENDATIONS

43

5.1 Introduction
It is generally held that accessibility to credit is one of the important ingredients of successful
developing SMEs. Access to adequate finance is a major component of successful SMEs in
Ghana. The availability and good management therefore of finance is critical for the survival
of any business. Thus financial needs of SMEs are urgent and inadequately served to require
special financing programs especially from the financial sectors which grants credit to a large
scale enterprises easily than small and medium enterprises. Considering the importance and
the benefits to be derived by a well-developed SME industries in Ghana, one would have
thought that every effort must be made to achieving maximum performance of its sector but
unfortunately numerous problems hinder the achievement of these roles, hence, the need for
improvement on the short falls in financing SMEs, though difficult as it is considering the
Ghanaian circumstances is paramount.
The main objective of the study is to evaluate the challenges and the extent of financing of
SMEs within the Greater Accra Region of Ghana, taking cognizance of the role and
contributions of ADB Bank Ghana Limited; specifically looking at how to identify the main
sources of finance for SMEs and assess their effectiveness on business in their respective
industry; to determine the positive impact of financing on the business development of SMEs
in Ashanti Region; and to verify the characteristics that influences the financing of SMEs by
ADB Bank among others.
Adopting the non-probability sampling method of random sampling, specifically the
purposive sampling technique a sample size of fifteen (15), comprising ten (15) staff

5.2 Summary of Findings

SME Banking Period

44

The study showed that all the staff respondents have been on the SME Banking between the
period of 3years and (5) years; majority having been with the Unit for three (3) years period.

Financial Services offered to SME customers

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 all the
above financial services were mostly offered to SME managers and owners by ADB Bank.

Relationship ratings with SME

The research indicated that the relationship between the bankers and their respective SMEs is
generally very good.

Conditions for extending credit facilities

The study identified six major conditions or criteria considered when the bank is extending
credit to SME customers; which are years of existence, past and projected cash flow,
credit history, lines of business, collateral and business location. Out of all the
mentioned criteria ADB Bank, Tema branch uses past and projected cash flow and collateral
as the mostly used conditions for extending credit

Major challenges of SME Banking

Three (3) major challenges (management, high default rate and monitoring) that militate
against the SME Banking Unit of ADB Bank, Tema branch were identified.

Types of financing

45

As many as five (5) types of financing were noticed as products requested by SMEs from
ADB Bank. They wereoverdraft, business installment loans, express trade, trade finance and
working capital facility. it was discovered that all of these were being most offered.

Use of financing

The SMEs uses the requested financial facilities for working/operating capital and Research
and Development. Several SME s have had their loan application rejected before and the
reasons assigned to the rejection of the loan applications or in other words major problems
faced by SMEs in securing funds are: Lack of collateral/guarantees, Inadequate compiled
financial records and accounts, Poor credit experience or history; Inexperienced management
team or lack of professionalism; Inadequate technologies; and Limited knowledge of business
opportunities. SMEs were not satisfied with the reasons and explanation put forward for the
rejection of loans; and that SMEs were not required to provide personal assets as collateral by
the bank to guarantee of loans.

5.3 Conclusion
In conclusion it could be deduced that ADB probably by policy does not permit an official
stay on one schedule for more than four years. The overall quality of the SME Banking of
ADB Bank exhibited an overwhelming satisfaction by the business owners;. They were
satisfied with the convenience and accessibility of SME financing and there was satisfaction
with the relationship between SME account manager and the SME owners.

5.4 Recommendation
In view of the findings of the research the following recommendations are made in order to
sustain the SME to grow into much bigger industries in the near future.

SME Banks

46

It is not enough to have an SME Banking Unit but to ensure that management of the bank
identifies the constraints of the SMEs on one-on-one basis and put in strategies to surmount
not only financial challenges but technical as well. Banks are advised to educate SMEs to
become shareholders of the banks so as to push for the course of SMEs.

Common Fund

It is also recommended that a special common fund should be constituted for the SMEs by
government. The entrepreneurs of the enterprise are expected to contribute into the fund to be
managed by an independent body. Such fund could be a revolving source of flexible credit
facility for them.

Financial Management Education

Educational workshops and training should be organized by the bank for the SME operators
to ensure efficient and effective management of financial resources. Again lack of knowledge
bymost industrialists on the activities and requirements of the established institution set up to
help finance SME can be eliminated through such education.

5.5 Suggestion for Further Research

The study is a case study of one particular bank, however, every aspect of SME financing
could not be studied let alone taking some of the core variables of the SME industry and
subjecting them to a more analytical study to determine the extent to which they can
withstand competition using quantitative methods. As a result this other appropriate variables
such as profit of the SMEs and viability should be taken into consideration to determine the
exact effect of the challenges they face. A further study on this regard would be appropriate.

47

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