CHALLENGES SMES FACE IN ACQUIRING LOANS FROM BANKS (A Comparative Study between Finland and Ghana)

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ABTSRACT

Small and Medium-sized Enterprises make significant contribution to the socio-economic and political infrastructure of developed and developing countries. The ability of SMEs to develop, grow, sustain and strengthen themselves is heavily dependent on their capacity to access and manage finance. The ability to access finance is a major factor affecting the growth and success of SMEs. Many businesses face a lot of challenges acquiring loans from banks and SMEs are the most affected. This thesis reviews the debt options available to SMEs, the determining factors banks consider before granting loans to SMEs and make comparative analysis of the challenges SMEs face in accessing bank loans between Finland and Ghana, and recommend solutions in averting the challenges.

The findings of the thesis shows that banks in general perceive SMEs to have high credit risk as compared to big corporations. Banks consider managerial character, capacity, environ-mental condition and collateral guarantee before making loan decisions. Banks in Ghana are strict on the collateral guarantee due to the high risk of loan default by their SME customers. Poor business proposal/plan, unprofitable investment decisions, unfavorable governmental economic policies and insufficient collateral are some of the challenges SMEs face in access-ing bank loans. Information asymmetry and high interest rate are unique loan challenges for SMEs accessing loans from Ghana. Low interest which makes loans unprofitable to banks in Euro Area is also specific challenge to Finnish SMEs.

Recommendations such as managerial skills workshops for SMEs, favorable economic and monetary policies and governmental support are suggested to avert some of the challenges the SMEs face in accessing loans.

Key words
Corporate finance, collateral, credit risk, equity, financial market, loan, information asym-metry, small and medium-sized enterprises.

TABLE OF CONTENTS

ABSTRACT

1. INTRODUCTION

2. CORPORATE FINANCE
            2.1       SMEs
            2.2       Capital Structure
                        2.2.1. Equity Financing
                        2.2.2 Debt Financing
            2.3       Debt Options

3.         FINANCIAL MARKETS
            3.1       Developed Markets
            3.2       Developing Markets
            3.3       Credit Risk
            3.4       Determinants of Loan Decisions

4  RESEARCH ON THE FINANCIAL INSTITUTIONS
            4.1       The Financial Institutions
                        4.1.1 Osuuspankki (Cooperative Bank)
                        4.1.2 Global Access Savings and Loans Limited (GASL)
            4.2       Results
                        4.2.1 Finnish Bank Findings
                        4.2.1.1 Loan Trend
                        4.2.1.2 Determining factors for making Loan Decisions
                        4.2.1.3 Difficulties SMEs face in Accessing Loans
                        4.2.2 Ghanaian Bank Findings
                        4.2.2.1 Loan Trend
                        4.2.2.2 Determining factors for making Loan Decisions
                        4.2.2.3 Difficulties SMEs face in Accessing Loans

5. ANALYSIS OF RESULTS
            5.1       Comparative Analysis of the Determinants of Loan Decisions
                        Comparative Analysis of SMEs Challenges in Accessing Bank
            5.2       Loans
            5.3       Economic Impact of the Analysis

6          CONCLUSION
            6.1       Recommendations
            6.2       Limitations
REFERENCES
APPENDIX


1.  INTRODUCTION

Small and Medium-sized Enterprises make significant contribution to the socio-eco-nomic and political infrastructure of developed and developing countries. Vibrant and expanding SMEs sector is very important for continual competitive advantage and economic growth for nations. (Berger and Udell 2006.)


In the current corporate environment, every organization with the goal of maximizing profit and minimizing losses require some kind of financing to enable it to increase the value of the owners’ investment. Financing in this context is the funds or capital raised by investors or lenders into a business to effectively conduct its activities to achieve its goal (Farlex 2003). Berger and Udell (2006) suggested that transactional returns of SMEs do not adequately meet their financial needs. The ability of SMEs to develop, grow, sustain and strengthen themselves is heavily dependent on their capacity to access and manage finance. One of the most reliable means for businesses especially Small and Medium-sized Enterprises to raise capital to achieve their goals is through bank loans. (Moro, Fink, and Kautonen 2014).


The ability to access finance is a major factor affecting the growth and success of SMEs. Thus, the availability of sufficient access to finance ensures the ability of SMEs contribution to the economic growth of a country. Many businesses face a lot of chal-lenges acquiring loans from banks and SMEs are the most affected (Moro et al. 2014). This is not just because banks are not ready to grant loans to SMEs, there are a lot of factors that limit the readiness of banks to grant loans to SMEs to help them grow their businesses (Abor and Biekpe 2005).



Earlier studies suggest that Banks and other financial institutions find it difficult to ac-quire information from SMEs to assist them in assessing their businesses before granting loans to them (McMahon and Holmes 1991; Mason and Stark 2004). SMEs in different economies (developed and developing markets) confront varying chal-lenges in acquiring loans from lending institutions.

The purpose of this research is to study the factors that make it difficult for SMEs obtain loans from Banks. What do banks expect from the SMEs before granting loans to them? What risk do banks consider in the markets before granting loans? Make the comparison and contrast the mechanisms banks use in the different markets (devel-oped and developing markets) in granting loans to SMEs. Also, the study will base on its findings gathered to recommend possible solutions that will reduce or eliminate the challenges SMEs and Banks in transacting loan facilities. This thesis will focus on studying the challenges SMEs face in obtaining loans from banks in different markets and what banks in different markets consider in granting loans to SMEs.



The research is conducted basically on interviews. The choice of qualitative research method is because of the nature of this research topic. The interviews provide the researcher the opportunity to ask to follow up questions based on the topic to get clarity of the responses given by the respondents. The purpose of this research is not to accept or reject a hypothesis but to understand the research subject from the per-ceptive of the respondents. The theories and concepts that are reviewed are the bases on which the main research is conducted. Corporate Finance is a topic and research on a branch of the topic needs theoretical conceptualization through literature review on concepts, theories related to the studies to form the framework of the research. The second part of the research is the interviews on which the two selected banks from the different markets is examined to evaluate the challenges confronting the SMEs in ac-cessing loans from banks. The interview method is used for this research because it gives an accurate data from the sources on which the research is conducted. It will reduce speculations on the research topic and draw more precise conclusions and recommendations of the topic.


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