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SMU
THE ROLE OF FINANCIAL INSTITUTIONS IN FINANCING SMALL AND
MEDIUM ENTERPRISE
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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Banks financing to small and medium enterprises in Ghana relates to the current
developments in the Ghanaian banking sector. A number of commercial banks
have been noted to enter into the microloan industry offering financial services
to petty traders, farmers, artisans, bakers, tailors and dressmakers, and other
low-income earners of the Ghanaian economy. A practice which until recently
was the relentless efforts by government and Non-governmental organisations
(NGOs) to reduce poverty in the economy with the support from foreign
partners and donors. Given their nature of businesses, micro entrepreneurs tend
to operate in the margins of the formal economy without permanent addresses or
formal records of their business in terms of documentation, and usually lacking
fixed assets that could qualify them for loans from the formal financial
sectors. In addition these enterprises do not keep formal records of their
incomes and expenses. This may be due to the fact that their incomes are generally
very low and most often living from hand to mouth. Other characteristics of
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these enterprises are that they most likely have one employee who is usually the
owner and in most cases do not employ more than five people.
Notwithstanding their peculiar situation, the contribution of this sector to the
economy cannot be underestimated. It is believed that the micro sector contributes
not less than 70 - 80% to the Ghanaian economy. Indeed , much of the private
sector activities take place informally or semi-informally (ISSER, 2006; cited
by Alabi et al., 2007). However in spite of these to the economy, the sector
has mostly been served by the informal financial institutions operating outside
the scope of the banking laws and regulations in Ghana. These include
moneylenders, rotating savings and credits associations, cooperative unions,
and savings collectors some of whom charge interest rates as high as 25-50% a
month.
The use of microfinance as a poverty reduction strategy was applauded when the
concept was popularized by the Grameen bank of Bangladesh in the 1970s.
However, in Ghana, (just like many other developing countries), the idea had
been the preserve of NGOs most of whom have been assisted by international
donors and charitable organisations whose capital is constrained by the size of
the market. They had operated microfinance as a non-profit venture by providing
financial assistance to women groups to help cater for themselves and their
families. However, to help sustain their programmes, innovative ideas were
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introduced by these NGOs by offering group loans without the traditional
collateral known in the banking sector. All these achievements and successes
of these organisations were without the
involvement of the traditional commercial banks because banks by the
nature of their business are reluctant to do business with the poor due to
the perceived risk of the poors inability to repay their loans.
1.2 PROBLEM STATMENT
The existence of the informal sector for the provision of credit to
individuals and micro enterprises is believed to be the result of limited access to
deposits and credit facilities from the formal financial sector. In Ghana, only
about 5 - 6% is reported to have access to the formal banking facilities
(Basu et al., 2004). The traditional commercial banks have been reluctant to
offer credit and savings facilities to the micro sector of the economy and
low income earners notwithstanding their tremendous potential in terms of
skills, capital and branch networks to service the microfinance market
profitably and the fact that about two thirds of the money in circulation in
Ghana is believed to be in the informal sector; in the hands of market
traders, artisans and micro-entrepreneurs, because of the perceived risk
associated with transacting business with the poor. The perception generally is
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that, small clients do not have stable and viable businesses for which to
borrow and from which to generate repayment (Baydas et al., 1997). In
short, the poor have been regarded as not bankable. Banks have been cautious with
lending to these groups of the economy because; on the one hand, they cannot
provide the necessary collateral securities demanded by these financial
institutions to guarantee their loans, and on the other hand, the high cost of lending
to these groups as well as the perceived high default rates, make it unprofitable to
service the micro sector. In this respect, the study seeks to identify the impact
(NOTE: WHAT SPECIFIC PROBLEM DO YOU WANT TO ADDRESSS:
PLEASE BE SPECIFICIF CAN PUT IT IN BULLETS POINTS)
.
1.3 RESEARCH OBJECTIVES
The objective of the study is generally to find out the role financial institutions
play in financing small and medium enterprises in Ghana with focus on Unibank
Ghana Ltd.
Specifically the study hopes to achieve the following specific objectives
To find out the various program put in place by Unibank Ghana Ltd in
support of small and medium enterprises in Ghana
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To find out whether small and medium enterprises have benefited from the
bank in terms of financing
To find out the challenges small and medium enterprises face in assessing
finance
To find out the factors which propel the bank to support small and medium
enterprises
1.4 RESEARCH QUESTIONS
The study seeks to provide answers to the following research questions at the end
of the study.
What are the various programs put in place by Unibank Ghana Ltd in
support of small and medium enterprise?
Have small and medium enterprises benefited from the bank in terms of
financing?
What are some of the challenges small and medium enterprises face in
assessing finance?
What factors propel the bank to enter into small and medium enterprise
financing?
1.5 SIGNIFICANCE OF THE STUDY
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The state of knowledge regarding the practice of small and medium enterprises by
banks in Ghana is mixed especially in the academic circles. However, with the
liberalization of the financial sector in Ghana, and as more and more banks enter
into the market, and also new banks enter the banking sector, it is important to
document the practice and actual experience of small and medium enterprise
financing by these institutions that have opted to take the bull by the horn and
enter into providing credit to the small and medium enterprise. According to
Young et al, (2005), it is generally perceived that commercial banks enter into
SMEs market for social reasons, either as corporate citizens or under pressure
from governments and have stayed because they find the market profitable. This
study therefore will seek to evaluate the situation in the case of Ghanaian
banks. .
1.6 ORGANISATION OF THE STUDY
The rest of the study will be structured in four chapters as follows:
Chapter two Literature review: This deals with the various issues related to
the topic of small and medium enterprise financing and banks participation in
the small and medium enterprise. This is will be compiled from textbooks,
journals, the internet and various articles written by different writers. Chapter
three Theoretical framework and research methodology: This will describe
the detailed methodology that will be used including the research design, data
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collection, and analysis and presentation procedure. Chapter four An analysis
of the data and interpretation of results: This will present the analyzed data
from the field for ease of understanding. Chapter five conclusion,
recommendation and suggestions for further research: This final chapter will
state the conclusions reached by the researcher and recommendations provided
for further research.
CHAPTER TWO
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LITERATURE REVIEW
2.0. What is an SME?
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;
It is independent, in the sense of not forming part of a large enterprise.
Under the statistical definition, the Committee proposed the following criteria:
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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;
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.
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 terms of the number of
employees as follows:
firms with 0 to 9 employees - micro enterprises;
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10 to 99 employees - small enterprises;
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).
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.
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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. Michaelas et 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 (see Elaian,
1996). The definition for industrialized countries is given as follows:
Large - firms with 500 or more workers;
Medium - firms with 100-499 workers;
Small - firms with 99 or less workers.
The classification given for developing countries is as follows:
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Large - firms with 100 or more workers;
Medium - firms with 20-99 workers;
Small - firms with 5-19 workers;
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 and South Africa.
2.1. The Ghanaian Situation
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 arbitrariness and 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).
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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. The Ghana Enterprise Development Commission (GEDC),
on the other hand, uses a 10 million Ghanaian cedis upper limit definition for plant
and machinery. It is important to caution that the process of valuing fixed assets
poses a problem. Secondly, the continuous depreciation of the local currency as
against major trading currencies often makes such definitions outdated (Kayanula
and Quartey, 2000).
In defining small-scale enterprises in Ghana, Steel and Webster (1991), and Osei et
al(1993) used an employment cut-off point of 30 employees. Osei et al(1993),
however, classified small-scale enterprises into three categories. These are: (i)
micro - employing less than 6 people; (ii) very small - employing 6-9 people; (iii)
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. The survey report classified firms into: (i) micro enterprise, less than 5
employees; (ii) small enterprise, 5 - 29 employees; (iii) medium enterprise, 30 99
employees; (iv) large enterprise, 100 and more employees (see Teal, 2002)
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2.2 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 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 centres. However, the extent of involvement
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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.
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 (Kayanula and Quartey, 2000). 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. 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 (Osei et al.,
1993; Kayanula and Quartey, 2000).
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
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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
(Aryeeteyet al, 1994; Abor and Biekpe, 2006).
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
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often takes time, and larger firms may have more resources to adopt and
implement them (Acs et al., 1999).
2.3 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 low-income 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.
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Since SMEs are labour intensive, they are more likely to succeed in smaller urban
centres 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 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).
From an economic perspective, however, enterprises are not just suppliers, but also
consumers; this plays an important role if they are able to position themselves in a
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market with purchasing power: their demand for industrial or consumer goods will
stimulate the activity of their suppliers, just as their own activity is stimulated by
the demands of their clients. Demand in the form of investment plays a dual role,
both from a demand-side (with regard to the suppliers of industrial goods) and on
the supply side (through the potential for new production arising from upgraded
equipment). In addition, demand is important to the income-generation potential of
SMEs and their ability to stimulate the demand for both consumer and capital
goods (Berry et al., 2002).
2.4 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; Aryeetey et al, 1994; Gockel and Akoena, 2002). The lack of managerial
know - how places significant constraints on SME development. Even 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
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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 (Aryeetey et 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
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there are 16 procedures involved in licensing a business in Ghana. It takes longer
(176 days) in South Africa and there were 18 procedures involved in dealing with
licensing issues. 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).
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
standardisation, and little access to international partners, continue to impede
SMEs expansion into international markets (Aryeetey et 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 SME
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
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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 corporates.
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 Ghana (see Sowa et
al., 1992; Aryeetey, 1998; Bigsten et 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
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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; Aryeetey et 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).
2.5 WHY COMMERCIAL BANKS ENTER MICROFINANCE
Studies show that in the last couple of years, a number of commercial banks
have engaged themselves in the niche which was once ignored. According to a
data recently gathered by Marulanda and Otero (2005); cited by Westley (2006)
on 120 micro lending institutions in Latin America, at the end of year 2004
banks were serving nearly one million microloan clients and providing over
US$1 billion in credit to these microenterprises. They also revealed that, the
banks share of the micro lending market was 26 percent to total microloan clients
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and providing 35 percent of microcredit. Again by the end of 2005, 30
downscaling banks in Latin America and the Caribbean were serving over one
million microenterprise clients with US$1.8 billion in loans; accounting for 21
percent of microenterprise borrowers in the region and 33 percent of microcredit
market with a substantial growth rate (Westley, 2007).
Many reasons have been given for this current trend which have been
categorised into internal and external factors.
2.6.1 Internal factors
Banks are drawn into micro lending business for many reasons but mostly for the
profit that they expect to generate from the business. According to Westley (2007:
1) Micro Rate report that in December 2004, the average return on asset (ROA)
and return on equity (ROE) values of the 30 leading MFIs they tracked in
Latin America was 4.4% and 17.7% respectively while the maximum was
17.5% and 48.7% for ROA and ROE respectively. Other internal factors
include risk diversification; excess liquidity; enhance public image; make use
of underutilized capacity such as branches in rural and peri-urban areas;
social responsibility; cross marketing opportunities; bank leadership interest
and commitment to serve the microenterprise and low income market
(Young and Drake, 2005). For example, the Financial Bank of Benin (FBB)
group entered into micro lending business in the 1990s because of the CEOs
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vision to develop the entire financial system for clients who have been neglected
by the traditional commercial banks hence the establishment of Finadev in Benin
(Harper and Arora, 2005: 169). Also the Bank of Khyber (BoK) of Pakistan
decision to enter the micro and small business segment and to scale down the
commercial banking operations was primarily from the top management, some of
whom had rich experience and orientation in agriculture and development
financing prior to joining BoK (Harper and Arora, 2005).
Still other reasons include corporate policies, inheritance due to mergers or
acquisitions and so on. According to Harper and Arora, (2005) one of the
reasons for ICICI Bank of India, the second largest bank in India, to enter
into microfinance was its merger with the Bank of Madura, a private sector
commercial bank in the southern state of Tamil Nadu in 2001. The Bank of
Madura had a corporate policy to promote and serve the poor women of India. The
bank therefore trained its staff to assist in the promotion of self-help group (SHG)
in terms of formation of groups and identification of income generating
activities and monitoring. The bank was able to promote, nurture and finance
the groups activities and managed it so much well to maintain a very good
repayment rate. So when ICICI bank acquired the Bank of Madura it also
inherited its vast SHG network and portfolio and was compelled to learn this new
business.
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2.6.2 External factors
Externally, commercial banks have chosen to enter the micro business
because of stiff competition facing the large commercial banks in their traditional
deposit taking and lending to the traditional clients. For example, Producers
Rural Banking Corporation in Philippines was established in 1995 in San Jos City
(Nueva Ecija). Among other reasons, the founder and management realised that
one way for the bank to survive and prosper was to expand to the clients who
have been ignored by the formal financial institutions (Harper and Arora,
2005). In addition to the above, other reasons that have contributed to banks
entering into micro lending business are government regulations directing
commercial banks to allocate a
percentage of their lending to microenterprises to help eradicate poverty
levels in an economy; donor initiatives and programmes; and realisation of
opportunities in the large unserved market. Harper and Arora (2005) also cited the
reason for the State Bank of India
(SBI) to enter into microfinance was as a result of social lending responsibility
prescribed by the government of India. This responsibility obliges all public
sector banks to commit a percentage of their total lending to a priority
sector which includes agriculture, small industries, small transport, small
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businesses, professionals and self employed and other similar groups. Other
commercial banks also downscale because of the general legal and
regulatory environment whiles others join the trend or fad in the banking sector.
2.7 DIFFERENT MODELS OF MICROFINANCE DELIVERY BY
COMMERCIAL BANKS
Different strategic models exist for commercial banks that are entering into the
microfinance business. The choice however could depend on the business
strategic goal and/or the competitive and regulatory environment the new
entrants might be operating. According to Jennifer Isern and David Porteous,
(CGAP Focus Note, no. 28 June, 2005) the chosen
approach that fits both the bank and the circumstances even at the outset is
an important factor for the future success of the microfinance business. This is
because each approach has its own peculiar rationale, risk profile, success factors
and costs. Jennifer Isern and David Porteous (2005) are of the view that the
current structural models can be divided in two main categories, i.e. direct and
indirect approaches based on how the bank makes contact with the clients. The
direct approach is basically an expansion of the banks operations to reach the
micro clients by creating an internal unit, or the setting up of a separate specialised
financial company (MFI), or the creation of a service company. On the other
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hand, the indirect approach is whereby the bank works with an existing
microfinance provider by outsourcing retail operations of the banks
microfinance business, or providing commercial loans to the MFI, or providing
infrastructure or systems for the MFI.
Although Westley (2006 and 2007), and Young and Drake (2005) have similar
opinions to Isern and Porteous, they nevertheless suggested that the two
models of downscaling should be categorised into internal units and external
organisations (explained below). This paper agree more with these later
opinions because choosing an external organisation through which to do
micro lending business could take any form from creating a MFI or service
company to outsourcing retail operations and / or providing wholesaling funds to
MFIs. These also embrace the approaches suggested by Isern and Porteous. In
addition, the choice of an external provider can be an informal institution such as
womens self-help groups (WSHG) as the delivery channel to retail funds to
microfinance clients. However, the paper is of divergent opinion from Westley,
Young and Drake by limiting the external provider to only four. This is because
the use of an external provider can take more than four approaches
including informal institutions as stated above.
2.7.1 Internal unit
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The use of an internal unit to provide microfinance means that the bank
operates micro lending within the existing institutional structure of the bank as a
division, department, unit or a new product line. The unit may be integrated
with the other bank systems but would be responsible for all microloan
processes and other microfinance related operations. This approach is
considered to be the lowest cost and fastest way to start microfinance operations
because no separate organization or structures need to be established outside
the bank premises with separate overhead costs.
2.7.2 External organizations
Unlike the internal unit, an external organization is where the bank uses a
stand-alone company in the form of a separate legal entity or informal
organisation to undertake microfinance activities. These may include the
creation of a specialised MFI whose shareholders include the bank which
may or may not include outside investors such as international NGOs,
donors, and local private investors or in collaboration with existing MFI and / or
organisations. The external organisation has its own board of directors,
management and staff that are focus on offering microloans and other
products for microenterprises (Westley, 2007).
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Chapter 3
3.0 Methodology of study
3.1 Introduction
The focus of my research is on understanding the various ways in which the
financing activities of Unibank Ghana is impacting on small and medium
enterprises. In line with this, this chapter of the research deals with the
methodology of the research under the following sub-headings: Research Design,
Data Collection, Population and Sample Size, Sample Distribution, Data
Collection Method, Data Handling and Analysis.
3.1.1 Research Design
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To be able to measure and achieve the above stated objectives, this study adopted
suitable method. The emphasis of the research is on both qualitative and
quantitative design. The study focused on case study methodology as this provides
an in-depth understanding on the multiple evidences that supports the research
problem. The method utilized was able to identify through interviews and
observation, empirical findings based on companys historical performance. By the
use of this approach, the method has provided valuable insight for problem
solving, evaluation and strategy which allows evidence to be verified and avoid
bias.
3.1.2 Data Collection
The study focused on both qualitative and quantitative data. In the process of
collecting data, the researcher employed tools such as field notes as well as
interview devices that would enhance the collection process. In terms of the
interview, the researcher collected data on the unit of analysis which typically
entails looking at collecting both primary and secondary information on the
variables under study. Typically, the researcher collected data from the companys
records such as company manuals, documents as well as interviewing participants
through the administration of questionnaires. In ensuring the quality of the
research, the researcher needs to be able to gain significant access to the data. In
this respect, permission was sought from those in authority to ensure that
permission is granted for access. Moreover, other participants in the process may
want to gain confidentiality and anonymity in the research. In this respect, the
researcher designed the questionnaire in a way to keep the anonymity of the
participants.
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3.1.3 Population and sample Size
The population of study was focused on staff participants of Unibank .
Specifically, the study focused on the on clients and middle level personnel
including management members, as well as Company Journals, annual reports and
trade patterns of the Companys brand. Out of the population of study, the study
selected a sample size of 50 workers of GRA and 80 people from the list of
businesses selected to be part of the study.
3.1.4 Sampling Techniques
In collecting data on the field, the study used purposive sampling method
(Creswell, 2007), that deliberately identifies a case, events or processes from the
site. The study therefore using non-probability sampling technique chose the
company in question as well as which journal or articles that will fit the research
context and expected outcome. In terms of the primary data, the study used the
simple random sampling method..
3.1.5 Sample distribution
In terms of the sampling distribution, the researcher focused on key members of
the company with specific emphasis on middle level managers and staff of the
company as well as clients. Moreover, in terms of the secondary data, the research
focused on specific journals and companys annual report to be able to comfortably
elicit responses that are relevant to the outcome of the research problem in
question.
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3.1.6 Data Collection Method
As a case base, the researcher focused on collecting secondary sources of data from
respondents by recording all the findings from the organizational manual, journals
and annual reports. Moreover, in collecting the primary data, the researcher
employed questionnaire in eliciting responses from participants.
3.1.7 Data Handling and Analysis
Data collected from the field was edited so as to identify incomplete statements,
mistakes and all other errors which could distort the research outcome. Information
collected from the field was categorized through the assistance of field notes and
computer aided database system. The statistical tool used in the data analysis was
excel. The use of the SPSS software was justified on the basis of its ability to use
current software packages that could generate reliable data to suit the objective of
the study.
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4.0 Data analysis and Presentation
4.1 Introduction
This chapter is used to represent the data of the researcher as well as its analysis.
This research interviewed 100 participants from Unibank, to find out the role of
their financing activities on small and medium scale enterprises. The analysis and
interpretation was done with the help of Microsoft Office Package; Excel to
analyze the responses collected.
4.1.1 Analysis of the Primary Data
PERSONAL INFORMATION
Table 4.1: How old are you?
AGE FREQUENCY PERCENTAGE
15-25 8 8%
25-35 32 32%35-45 50 50%
45+ 10 10%
Figure 4. 1: Age distribution of respondent
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Based on the data analyzed 50% of respondents are within the age bracket of 35-45
years, 32% falls within the area 25-35, 8% between 15-25 years and 10% within 45
years and above. The indication of this is that, significant number of participant
who were part of the entire survey process fell within the age bracket of 35-45
years.
Table 4. 2: Sex of Respondents
Sex FREQUENCY PERCENTAGE
Male 21 21%
Female 79 79%
Figure 4.2: Sex of Respondents
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From this responses provided, 21% of respondents were men and 79% of
respondents who participated in the survey were women. This shows that more
women engaged in the survey than men.
Table 4.3: Civil Status of Respondents
Civil Status FREQUENCY PERCENTAGE
Single 11 11%
Married 49 49%
Separated 38 38%
Widowed 2 2%
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Figure 4.3: Civil Status of Respondents
Based on the responses provided above, 49% of respondents indicated that they
were married, 11% indicated single, 38% indicated that they were separated and
2% indicate that they were widowed.
Table 4..4 : Religious Status of respondents
Religious FREQUENCY PERCENTAGE
Christian 39 39%
Moslem 54 54%
Others 7 7%
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With respect to the issue of religion, 39% of respondents indicated that they were
christians, 54% indicated that they were Moslems and 7% indicated other religion.
Therefore more Moslems participated in the survey than any other religion. The
raeson for the disparity may tehrefore be attributed to the sample collected in the
process.
Part B: To find out whether small and medium enterprises have benefited
from the bank
Table 4.5 What Business are you involved in?
Business Type FREQUENCY PERCENTAGE
Trading 65 65%
Manufacturing 8 8%
Services 23 23%Others 4 4%
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On the question of the type of business the respondent is involved in, 65% of
reposndents indicated trading, 8% inicated manufacturing, 23% indicated services
and 4% indicated other businesses. The implicationof tyhis is that, majority of
Ghanaians are into trading of goods and services and therefore the rseponses
provided have shown a similar trend. These persons might therefore be so
interested in the dealing with the banks, as ushered and shown by the responses
provided.
Table 4.6.How long have been in the business?
Length of time FREQUENCY PERCENTAGE
1-3 years 8 8%
3-5 years 24 24%
5-10 years 38 38%
10 years and above 30 30%
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Based on the question above, 8% of respondents indicated that they have been in
the business in between one and three years, 24% indicated that between three and
five years, 38% indicated between five and ten years, and 30% indicated 10 years
and above. The implication of the question is that, when naccess to loans are
available, it tends to support these small and medium scale enterprises in the quest
to offer products to the market.
Table 4.7 Total Number of Employees
Number of employees FREQUENCY PERCENTAGE
1-5 68 68%
5-10 19 19%
10-15 12 12%
15 and above 1 1%
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With respect to the question of number of employees, 68% of respondents
indicated that they have employed up to 5 workers, 19% indicated up to 10
workers, 12% indicated up to 15% and 1% indicated having employees above 15
workers. In relation to this question, the number of workers employed has an
implicationfor the definition of a smalla nd medium scale enterprise. In relationto
this, it could be seen that most of the respondents indicated positively that they
have relatively few number of workers, which goes on to show that, micro-
enterpries often employ minimum num of employees ranging between 2 and 50.
Table 4.8. How was your Business Financed?
Profitability FREQUENCY PERCENTAGE
Personal Savings 30 30%
Loan from friends and
Family
6 6%
Loan from the bank
Institution
57 57%
Loan from Commercial
Banks
7 7%
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Figure 4.8 How was your Business Financed
With respect to how the business was financed, 30% of respondents indiated
Personal savings, 6% indicated loan from friends and family, 57% indicated loan
from micro-finance Institution and 7% indicated loan from Commercial Banks. In
relation to the question, the responbdents have indicated that they deal with banks
more often in the financiong activities of their business. This goes on to confirm
that, the small scale enterpries and the banks are complematray and supporting
industries in the grwoth process of small and medium scale enterprises.
Table 4.9 What was the amount of Starting Capital? Please choose the any of the
ranges given.
Starting Capital GHC FREQUENCY PERCENTAGE
Less than Ghc1000 29 29%
Between 1000 and 2000 24 24%Between 2000 and 3000 32 32%
Between 3000 and 4000 9 9%
Between 4000 and 5000 2 2%
5000 and above 4 4%
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Figure 4.9: What was the amount of Starting Capital? Please choose the any of the
ranges given.
In terms of the starting capital, 29% had a start-up capital of less than Ghc1000,
24% up to 2000, 32% up to 3000, 9% up to 4000, 2% up to 5000 and 4% at 5000
and over. Based on the responses provided, it could be seen that small and micro-
enterpries are ussually constrained in terms of raising capital to finance thei
business. The implication of this is that, they ussuallyt start the business with
minimal funding requirement.
Table 4.10. Apart from your start up capital, have you raised any loan from your
finance Institution?
FREQUENCY PERCENTAGE
Yes 75 75%No 15 15%
Figure 4.10: Apart from your start up capital, have you raised any loan from
your finance Institution?
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From the question, 42% of respondents indicated that the loans as raised for
business expansion, 55% indicated that for working capital and 3% indicated as
personal loans. The working capital requirement of the firm is usually the amount
raised to acquire the various components of the current asset like stocks, debtors
and cash. The implication is that, it provides an opportunity for the institution to
run smoothly as availability of funds for working capital needs are very crucial in
the process.
13. What were the bases for determining the amount to borrow?
FREQUENCY PERCENTAGE
The extent of Business
Expansion
41 41%
The amount Working
Capital
54 54%
Extent of Personal
expenses
4 4%
Interest rate 1 1%
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On the issue of the bases for determining the amount of loan, 41% indicated
that due to the extent of business expansion, 54% indicated amount of
working capital, 4% indicated the extent of personal expenses and 1%
indicated interest rate.
How often do you take a loan from the Finance Institution?
FREQUENCY PERCENTAGE
Very often 4 4%
Often 49 49%
Not often 46 46%
Not at al 1 1%
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On how often a perso takes a loan, 4% indicate very often, 49% indicated often,
46% indicated not often and 1% indicatednot all. In rsepect to this question, it has
been able to comnfirm the frequency with which the enterpries deals with the bank.
8.What can you say about the Peformance of your business in terms of
Profitability?
Profitability FREQUENCY PERCENTAGE
Very Profitable 1 1%
Profitable 46 46%
Break Even 48 22%
Making losses 5 31%
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On the issue of the profitability of the Micro-enterprise, 46% of respondents
indicated that the Enterprise is profitable, 1% indicated very profitable, 22%
indicated break-even and 31% indicated that they were making losses.
4.1.2: To find out the challenges small and medium enterprises face in
assessing finance
9. What are the problems you encounter in running the Enterprise?
Problems FREQUENCY PERCENTAGE
Lack of capital 18 18%
Access to loans 12 12%
Weak demand for product 5 5%
Lack of Management
Capacity
8 8%
Lack of Basic Book-
keeping
12 12%
Combination of all 45 45%
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Under this particular question, 18% of respondents indicated that the problem they
are facing is lack of capital, 12% indicated access to loans, 5% indicated weak
demand for the product, 8% indicated lack of management capacity, 12% indicated
lack of basic bookkeeping and 45% indicated a combination of all the problems.
This question tend to look into the various challenges faced by micro-enterprises in
general.
16. How easy is it to access a loan facility from a Finance Institution?
FREQUENCY PERCENTAGE
Very easy 16 16%
Easy 79 79%
Not easy 5 5%
Not at al 0 0%
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On this question, 16% indicated that it is very easy to assess, 79% indicated
easy, 5% indicated not easy. In this case, it could be seen that respondents
have it easy in assessing the loans facilities from UT. The implication of thisis that, once they area able to assess these facilities with ease, it builds the
relationship between the banks and the enterprise and tends to satisfy the
objective of the firm in terms of raising capital to finance its operation.
17. What is the extent of interest rate charged at the micro-finance
Institutions?
FREQUENCY PERCENTAGE
Very High 42 42%High 57 57%
not high 1 1%
Not vey high 0 0%
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On this question, 42% indicated that the interest rate is very high, 57% indicated
that it is and 1% indicated otherwise. Whilst assessing the loan facilities from
Unibank seems to be easy, the intesret charge on the se facilities seems to be
expensive for the customers. This high trend in interest rates have been confirmed
to be as a result of the high default rate associateed with these micro-enterprises.
19. What are the major Challenges you face in assessing credit?
(i) Collateral
Big
challenge
Medium
Challenge
Small
Challenge
No
Challenge
Collateral 75% 20% 4% 1%
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With regards to collateral ,75% of respondent said it was a big challenge when
required to provide collateral for the loans,20% said it is not a big challenge,4%
said it was a small challenge and 1% said it is no challenge. The degree and
amount of collateral determined by the bank is as as a result of the the default rate
exhibited. Whilst this may pose a sense of security to the banks, it may play a key
role in hampering the liquidity needs of the enterprise.
(ii) Delays in Processing
Big
challenge
Medium
Challenge
Small
Challenge
No
ChallengeDelays in
Processing
60% 30% 8% 2%
Delays in processing is one issue raised by the clients.60% said it is a big
challenge,30% said it is a medium challenge, 8% said it is a small challenge and
2%said it is no challenge .
(iii) Documentation
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Big
challenge
Medium
Challenge
Small
Challenge
No
Challenge
Documentation 35% 50% 5% 10%
50 % of the respondent said documentation is a big challenge,35% said it is a
medium challenge, 10% said it is a small challenge and 5% said it is no challenge
to them.
iv) Customer Service
Big
challenge
Medium
Challenge
Small
Challenge
No
Challenge
Customer
service
8% 20% 32% 40%
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Customer service was another challenge respondents raised. 40% said it is a big
challenge, 32% said is it a medium challenge, 20% said it is a small challenge and
8% said it is no challenge.
4.1.2 Analysis of the Secondary Data
Part D: To find out the various program put in place by Unibank Ghana Ltd
in support of small and medium enterprises in Ghana
The Banks commitment to the SME industry remains paramount, with a focus on
identifying visionary entrepreneurs to nurture into business giants. A premium is
placed on ensuring the customers total satisfaction with a variety of credit
facilities for their different needs, which include the following
(www.unibankghana.com, 2012). In line with this, the bank has offered a number
of facilities to meet the expectation of the Small and Medium scale enterprises.The bank has also designed an SME loan facility system. It is basically a facility
for small and medium enterprises that need funding to replenish stocks, payment of
customs duties, supply goods in normal course of business preferably against local
purchase order (LPO).
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Purpose
- Loan for business expansion
- Trade Finance
- Working Capital Finance
- To replenish stock
- Payment of custom duties
b) Financing Working capital:
Working capital credit facilities may also be used to
Purchase of raw material, components, stores, spares and maintenance of
stock of these items at minimum level and stock in process and finished
goods.
Finance against receivables including receipted invoices.
Meeting marketing expenses where the units have to incur large-scale
expenditure towards marketing of their products.
Bills Purchase / Discounting under L/C or outside L/C
Export Credit Facilities
Letter of Credit on sight basis for purchase of raw material/capital goods
Bank Guarantees for Performance, Advance Payment, Tender Security
Deposit, Guarantees for getting orders, for procurement of raw materials etc.
UniBank offers the above and other tailor-made products to SMEs at competitive
interest rates that are commensurate with the clients credit rating. UniBank Ghana
Limited's SME loan policy is framed to provide hassle-free credit for working
capital needs as well as long-term requirements, taking into account the nature of
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business, cyclical trends, cash flow projections, peak time requirements and any
eventuality of unforeseen spurt in the SME business (www.unibankghana.com,
2012).
In order to provide better customer service and ensure that loan applications are
dealt with expeditiously, uniBank has put in place an efficient structure of loan
processing, appraisal and approval to give the clients quality, timely service.
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Chapter 5:
5.1 Conclusion and Recommendation
The Small and Medium Enterprise (SME) Sector in Ghana includes Micro
Enterprises, Small Enterprises, Artisans & Village Industries, Medium Enterprises,
Service Sector units & individual sub-sector units. SME is fast-growing sector in
the local economy, with an increasing number of universal banks creating
innovative products to give highest importance to financing SMEs as part of their
strategic growth plan. Growth resulting from globalization and liberalization is
most visible and profound in the SME segment, making SMEs growth engines for
economic development in Ghana. Thus, the relationship between the banker and
the SME customer has also become most crucial and competitive. This chapter
consists of recommendations to assist solve problems that were discovered in the
findings and conclusion regarding the study. Assisting small and medium- scale
enterprises owned and run by women have a fundamental impact on the
development and growth of the economy.
In developing Nations delivery of microcredit to operators of small and micro
enterprises (SMEs) is increasingly being viewed as a strategic means of assisting
the so-called "working poor" (ILO, 1973). Small enterprises, new or existing, often
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face certain problems when they approach finance providers for both enterprise
fixed capital investment and working capital. This insufficient supply of
microloans is a major issue, particularly where business creators are not having the
requisite collateral. Supporting the supply of microloans is therefore not only an
issue of entrepreneurship and economic growth, but also of social inclusion
(Burritt, 2003). In recognition of this, the traditional banks such as Unibank have
recognized the role played by these micro-enterprises in national development, by
providing small scale enterprise with loan facilities to suit their working capital
requirement needs as well as other project financing. Moreover, the degree of
competition in the market has therefore made the banks to make their loan facilities
more accessible to ensure that micro-enterprises are able to gain access. Whilst this
is the case, the demand for collateral and the high borrowing cost associated is
putting significant pressure on the capability of small and medium enterprises to be
able to assess the loan facilities to assist the companys operations.
Recommendation
The banks should learn to understand the characteristic of the small and micro
enterprise in order to review their current loan portfolio that will be more in tuned
with the small enterprises especially those within the informal sector of the society
mainly those which are micro, small and medium enterprises as they are faced with
the inaccessibility to loans. Additionally, banks should have portfolios specifically
for these entrepreneurs within the micro, small and medium scale enterprises in
order to increase access to credit as well as have a certain amount of interest
charged on their loans. For example, to have special interest rates targeted towards
different levels of entrepreneurs within SMEs. Likewise, they should provide
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specific information to borrowers regarding loans and the specific requirements
needed in obtaining the loan.
Secondly, the interest cost associated with the loan facilities should be relaxed to
make it easier for these micro and medium enterprises to be able to borrow since
they depend significantly on the bank to support their working capital requirement.
Also, it is important for these banks to provide support services to these small
enterprises to ensure their growth and sustainability in the long term.
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