Recent statistics released by the United Nations Development Programme (UNDP) revealed that about 80% of businesses operating in economies across the globe fall within the category of small- and medium-scale enterprises (SMEs). Indeed, about 80% of business establishments in Ghana are SMEs. However, access to credit by (SMEs) from lending institutions is a major challenge for such businesses. Some finance experts believe several factors account for the banks’ reluctance to lend to SMEs. For instance, the Bank of Ghana reported non-performing loans of 4.2 billion cedis. This amount increased to 6.2 billion cedis in 2016, representing about 48 percent rise in non-performing loans over the period. The experts noted that the surge in non-performing loans and other extraneous factors account strongly for the banks’ decision to “relax” lending to SMEs.
It must be emphasized that the lending decisions of financial institutions depend on a set of principles, including liquidity, safety, diversity, stability, and profitability. Liquidity is an essential principle of lending in banking. Banks lend money which can be withdrawn at any time by depositors. To this end, they prefer to lend for a short period of time. For processed loans, banks would like to accept as security, assets that are readily marketable and convertible into cash within a short period of time, usually three months.
Debentures and shares of large companies can be easily marketed or converted into cash. However, it is quite challenging to market the debentures and shares of small firms without adjusting their price downward. An important principle underlying a bank’s investment decision is maximising profits and minimising losses. This makes it imperative for banks to invest in securities that would assure them of a fairly stable return on their investments. Factors such as tax, dividend, and interest rates determine the earning capacity of securities and stocks. Generally, government and municipal securities and shares of some new corporations are exempted from taxes. However, it is advisable for banks to invest more in government and municipal securities than in corporate securities because the former are safer than the latter.
Currently, in Ghana, municipal securities are not actively traded in the securities market, although the existing financial regulations allow Metropolitan, Municipal and District Assemblies (MMDAs) to access loans in the financial market, using the District Assembly Common Fund as a guarantee. It is hoped government would adopt proactive measures to enhance the autonomy of MMDAs to ease their active participation in the securities market.
SMEs must strive to adhere to the principles of lending institutions in order to have unfettered access to credit from the financial institutions across the country and beyond. This is the only way they can sustain their activities and continue to contribute to national economic growth.
BY Ebenezer M.Ashley (PhD), Lead Consultant/CEO Eben Consultancy & Fellow Chartered Economist.