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Improving access to credit for SMEs | Ghana 2014

According to a PwC 2013 bank industry poll, small and medium-sized companies (SMEs) have an important place in Ghana's business world and make up around 90% of all companies. In 2010, a University of Ghana report said that small and medium-sized companies accounted for 70% of the country's gross domestic product (GDP), although PwC said this had fallen to around 49% by 2012, mainly due to the start of crude and natural gas output in terms of trade volumes in the first three months of 2011.

Most Ghanaian SME' are active in commerce and service sectors and to a smaller degree in industrial sectors, making them an important resource for creating jobs. The University of Ghana survey found that small and medium-sized enterprises account for around 85% of jobs in manufactured industries. Loans to small and medium-sized enterprises are a burning issue in most developing countries, and Ghana is no exception. SME loans are a major issue in most developing countries.

While exactly what an SME is can be very different across the different banking groups it is defined by, with a definition ranging from a minimum of $50,000 at one institute to $25 million at another, most of the banking groups PwC consulted stated that the majority of clients they classified as SME in their credit portfolio had sales between $2 and $3 million.

Whilst some banking institutions provide specific credit for small enterprises, business banking as a whole - like so many other continental economies - is reluctant to provide credit to the SME segment. A frequently mentioned cause of this is the credit crunch. All those who grant loans to smaller companies are only prepared to do so at interest levels that are even higher than Ghana's already higher averages.

In 2013, a report by the Association of Ghana Bankers (AGB) found that the SME industry had "significant business and trade potential". The PwC report identifies three major barriers to SME finance: the absence of a structured approach to good company management, the opaqueness of the company's finances and the segment's high failure-rate.

For many reasons, the risk of granting credit to small and medium-sized enterprises is only the oversized example of wider business credit requirements. In Ghana, for example, the overall proportion of non-performing loans fell from 13 to 13. Concerning the sources of NEPs, although credit to public authorities has sometimes become acidic, it is the small and medium-sized enterprises that have in the past had a tendency to have the higher level of defaults.

Ghana adopted the Credit Reporting Act in 2007 as part of a project to lower the ratios of NPLs more aggressively and now has three licenced credit bureaus: XDS Data, Dun and Bradstreet and Hudson Price Data. As of the end of December 2012, all 26 of the country's 26 full-service and non-bank finance institutes (NBFIs) had registered for credit information service, although according to regional media coverage, transposition was insufficient.

In spite of such broad involvement, the effects on small and medium-sized enterprises have so far been moderate. The introduction of credit bureaus had a significant effect on the country's overall credit milieu. Ghana now ranks quite well in access to credit relative to the region's overall credit score and ranks in 28th place in the World Bank's Doing Business Index out of 189 nations in this class - well above Côte d'Ivoire (130th) and sub-Saharan Africa (113th).

Without a portable register of securities enabling the exchange of credit information, and with high interest still above 20%, the barriers for all but the biggest companies are high. By the end of 2012, Ghana's banks had averaged around 25.7% interest rate. In order to encourage the development and diversity of small enterprises in Ghana, a number of new initiative have been launched, among them education programs and a special assistance funds for SME.

Over USD 20 million is anticipated to be available through the Government's SME Investment Facility, which has benefited from funding from the Export and Agricultural Investment Funds (EDAIF) and various lending and grant support from partner developers. Seth Terkper, Secretary of the Treasury, said in November 2013 that the SME funds will be associated with incumbent entities such as the credit guarantee company EximGuaranty and the Venture Capital Trust Funds as well as country based banking and MFI companies.

Terkper argues that while previous attempts to increase access to credit have not been sustained, the new funds will have a number of characteristics to guarantee its soundness. It is supervised, for example, by a Trusteeship and a specialist investment firm - a body designed to enhance the credit assessment procedure and recoveries.

EDAIF, which provides funding and technology support, has itself been an actively supporting SME. During 2012, it allocated approximately USD 190 million in funding to approximately 90 banks, of which approximately one in ten was in the shape of loans. In addition, Terkper said, the SME Investment Facility will work closely with the National Small Business Council to harmonise financing and capacity building schemes for SME.

A number of organisations, such as the Private Enterprise Foundation and several banking organisations, are already offering entrepreneurs trainings on practice that can increase the long-term credibility of small businesses, such as accounting. This type of programme helps to enhance fiscal opacity and good practice in terms of company management, which in turn can increase access to finance from banking and other credit providers.

It could also make a major contribution to encouraging diversity between small and medium-sized enterprises (SMEs), which have historically been predominantly production or retailing enterprises. The Agricultural Development Bank, for example, recorded an almost 40% rise in its SME loans between 2010 and 2011, which represented a fourth of its balance sheet during this period.

Due in part to the sharp rise in SME activities, in 2011 university Bank registered significant credit expansion - SME credit represented over 70% of its entire credit portfolios this year. The recent merger and acquisition activities could also increase the credit allocation capability of the industry. In September 2014, Fidelity Bank, the country's 7th-biggest bank in terms of asset value, published a transaction in which it will take over ProCredit Savings and Loans Company.

At the beginning of 2012, Ecobank, the country's biggest asset manager, purchased Trust Bank Ghana (TTB) as part of a shareholder swapping transaction. Ghana's four-level finance industry - consisting of commercial enterprises, saving and credit associations, local municipal enterprises and MFIs - means that by acquiring non-bank businesses, Ghanaian MFIs can expand and expand their portfolio.

With 140 local and regional MFIs, 57 NBFIs and more than 200 MFIs, the markets are ready for further consolidations.

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