CHALLENGES FACED BY SMEs WHEN ACCESSING FUND FROM FINANCIAL INSTITUTIONS IN GHANA (Case Country: Ghana)

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ABSTRACT

Small and Medium Enterprises (SMEs) are regarded by many as the backbone of every country’s economy. Most of the large corporations of today were developed from SMEs. Small and Medium Enterprises do not only serve as the backbone of a country's economy but also support the larger corporations in a form of sub-contractors, suppliers of manufacturing materials or customers. In Ghana, Small and Medium Enterprises have played a major role the reduction of poverty from 51.7% in 1993 to 39.5% in 1999 and also reducing extreme poverty from 36.4% to 27% over the same period (UNDP Action plan, 2010). In spite of the tremendous contributions to the economy, SMEs in Ghana have a lot of difficulties when accessing funds from financial institutions.

The objective of this thesis is to find out the various challenges faced by SMEs in getting funds from financial institutions. The research will also make recommendations based on the findings in both theory and empirical parts of the research in order to help increase the chances of SMEs having access to finance from the formal financial institutions in Ghana.

The theoretical framework of the study explained the various definitions of SMEs and how Ghana as a country classifies SMEs. It also explains the various challenges that hinders the development of SMEs in Ghana, the contributions made to the economy of Ghana by the small and medium enterprises (SMEs) and the available sources of finance to the SME sector.


The results of the research shows that small and medium enterprises do face a lot of challenges when accessing funds from the formal financial institutions in Ghana. The study also find out that financial institutions consider the SME sector as a risky industry thereby offering them credit facilities at a high interest rate as compared to the larger corporations.


TABLE OF CONTENTS
ABSTRACT
1. INTRODUCTION
1.1 Background of Study
            1.2 Importance of the Research
            1.3 Research Problem
            1.4 Research objectives
            1.5 Research questions
            1.6 Research Limitations
            1.7 Structure of the study

2. LITERATURE REVIEW
            2.1 Definition of SME
            2.1.1 Criticism of the Bolton Committee definition “economics”
            2.2 Other definitions
            2.3 SME in Ghana
            2.3.1 SME Definition in Ghana
            2.3.2 Importance of SMEs to Ghana economy
            2.3.3 Constraints to SMEs development in Ghana
            2.3.4 Sources of finance for SMEs in Ghana
            2.4 SME financing from financial institutions
            2.5 Existing literature

3. RESEARCH METHODOLOGY
            3.1 Definition of Research
            3.2 Population
            3.3 Sample size
3.4 Sample techniques
3.5 Sources of data
3.5.1 Primary data
3.5.2 Secondary data
3.6 Research methods
3.6.1 Qualitative methods
3.6.2 Quantitative methods
3.6.3 Mixed method
3.7 Reliability and Validity

4. EMPERICAL FRAMEWORK
4.1 Data analysis
4.1.1 Data from financial institutions
4.1.2 Data analysis from SMEs

5. Summary, Recommendation and Conclusion
5.1 Summary of study
5.2 Recommendations
5.2.1 Research into business area of interest
5.2.2 Other sources of finance
5.2.3 Well-structured management team
5.2.4 Proper bookkeeping and bank account
5.2.5 SME managerial education/training
5.2.6 Flexible terms of payment/Alternative ways of giving credit
5.2.7 Government intervention
5.3 Conclusion
REFERENCES
APPENDICES

1. INTRODUCTION

This research is divided into five chapters; the introduction, the theoretical framework, the research methodology, the empirical study and the conclusion. The first part includes the background of the research topic, research problems and objectives, limitations and the importance of the research topic. The research outline is also included in this section.

1.1                              Background of Study

Small and medium-scale enterprises (SMEs) come from very diverse industries or group of businesses. They mostly operate in the service, agricultural/agribusiness, trade and the manufacturing sector. They include a wide range of firms such as village handicraft makers, small machine shops, and computer software firms that possess a variety of skills. Some of these companies are very innovative and have a vision of growth and expanding in the future while others seem to be satisfied with their size and only work to maintain both revenue and market size. It is usually the size of the employees and the value of a company’s assets determines its classification as an SME. The topic is very broad and many researchers, as well as firms, tackle it from a different perspective. The objective of the research is to find out challenges faced by SMEs when accessing funds from financial institutions and provide possible solution to reduce them in order to improve the rate at which SMEs have access to credit facilities from the formal financial institutions in Ghana.

The size classification varies within regions and across countries depending on the size of the economy and its endowments (Edit Lukacs, 2005). In Ghana, the various institutions also define or classify SMEs differently. Ghana Statistical Service, the Ministry of Trade and the National Board for Small Scale Industries all have a different classification of SMEs with regards to their employee size, assets, and turnover.


According to Andah (2005), the support for SMEs was intensified in the 1990s following the establishment of the National Board for Small Scale Industries (NBSSI). The major financial scheme operated by the NBSSI was a credit line financed by the World Bank’s small and medium enterprises project. The fund gave credit to enterprises in the Small and Medium sector excluding large businesses of the economy except agriculture sector, real estate, and trading. The government also established a credit assistance scheme under the Program of Action to Mitigate the Social Cost of Adjustment (PAMSCAD), which was intended to cushion the effects on small-scale businesses of the Structural Adjustment Program (SAP). Structural Adjustment Program (SAP) is a special program/policy promoted by the World Bank and International monetary fund to provide loans to developing countries that have experienced financial crisis. The credit facility which was managed by the NBSSI was intended to assist entrepreneurs in procuring scarce but essential raw materials.

The contribution of the SMEs to the economy cannot be over-looked, they serve as major source of income to most households in Ghana and thereby reducing poverty. In 2006, the Action Plan of United Nation Development Project (UNDP) indicated that the overall poverty in Ghana was reduced from an incidence rate of 51.7% in 1993 to 39.5% in 1999 because of SMEs existence. Extreme poverty also fell from 36.4 % to 27% over the same period. (UNDP Action Plan 2010). The SME sector has also contributed tremendously to the export earnings of the country from the non-traditional export sector and creates more jobs at a lower cost. SMEs played a major role in the attainment of Ghana’s middle-income status.

The government, being aware of the tremendous contributions of the SMEs to the economy, has put in various efforts to improve the sector and help reduce the various challenges that face them and be able to tap into its numerous potentials.

1.2               Importance of the Research

The impact of SMEs on the economy and the human capital of Ghana over the past decades cannot be overlooked. SMEs played a major role in various area of the economy including but not limited to:

Poverty reduction

Tax revenue to the state

Improvement in infrastructure Gross Domestic product (GDP)...
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