An Empirical Assessment of SMEs’ Financing Risks in Ghana

Safia Wemah ,Mathias Akamba ,Luu Yin

doi:10.7176/rjfa/11-22-02

Abstract

As complex challenges continue to hamper the rapid development of Small and Medium sized Enterprises (SME), it is important that these challenges are identified and mitigated. The major issue identified is shortage of debt financing. The difficulties that SMEs experience stem from several sources. The financial institutions hardly provide any financial products and services for SMEs. The lack of appropriate financing mechanisms emanates from a variety of reasons, such as regulatory rigidities, gaps in the legal framework, cost of credit and lack of trust between financial institutions and SMEs’. The difficulty in obtaining debt financing by SMEs’ is compounded by the lack of transparency in the socio-economic and business environment. This paper presents the findings of an empirical assessment on SMEs, it investigated on how risk associated with access to finance, inflation, customer services, rain failure, fertilizer and veterinary services affect the Agro processing, Agriculture, Trade and Textile industries and the perceptions of financial institutions on providing financing to SMEs. The results indicated that access to finance and inflation are the most critical risks and cut across all industries. A greater proportion of the financial institutions (68.75%) attributed default in loan repayment and misapplications of loans by SMEs as reasons for the SMEs not attracting loans from banks. The rest (31.25%) said mismanagement and lack of managerial skills by SMEs. These findings provide an important baseline data for further research and industry collaborations exploring education with debt financing potentials for SMEs by financial institutions. Keywords: Small and medium sized enterprises (SMEs), Financing, financial institution and Risk. DOI: 10.7176/RJFA/11-22-02 Publication date: November 30 th 2020

Highlights

Small and medium scale enterprises (SMEs) play an important role in the economy of every nation, in terms of employment and their contribution to national wealth (Turner, Ledwith and Kelly, 2009)
One major problem faced by businesses in Ghana is insufficient financing of which SMEs are not left out and this brings about reasons to empirically assess the degree of prevalence of such other risks and the reasons and perceptions on the supply side by the banks
The presentation directly addresses the research objectives of the study and flows as follows: (a) Identify the various risks SMEs are exposed to; (b) Evaluate the risks associated with SMEs financing and a comparative analysis of these risks. (c) Assess the Banks perceptions on providing financing to SMEs

Summary

Introduction

Small and medium scale enterprises (SMEs) play an important role in the economy of every nation, in terms of employment and their contribution to national wealth (Turner, Ledwith and Kelly, 2009). Historical facts show that prior to the late 19th century, cottage industries, mostly small and medium scale businesses controlled the economy of Europe. The industrial revolution changed the status quo and introduced mass production. SMEs are the engine for future growth in every developing economy (Ayyagari, Demirgüç-Kunt, and Maksimovic, 2014). One major problem faced by businesses in Ghana is insufficient financing of which SMEs are not left out and this brings about reasons to empirically assess the degree of prevalence of such other risks and the reasons and perceptions on the supply side by the banks

Objectives

Results

Discussion

Conclusion