Gariba Fuseini - Small and Medium-Sized Enterprises' (Smes') Access To Credit in Ghana Determinants and Challenges - 2015

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gh

UNIVERSITY OF GHANA

SMALL AND MEDIUM-SIZED ENTERPRISES (SMEs) ACCESS TO

CREDIT IN GHANA: DETERMINANTS AND CHALLENGES

BY

GARIBA FUSEINI

(10226179)

THIS THESIS IS SUBMITTED TO THE UNIVERSITY OF GHANA,

LEGON IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE

AWARD OF MPHIL ECONOMICS DEGREE

JULY, 2015

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DECLARATION

This is to certify that this thesis is the result of research undertaken by Gariba Fuseini towards

the award of Master of Philosophy degree in Economics in the Department of Economics,

University of Ghana and has not been presented by anyone for any academic award in this or any

other university. I hereby declare that this thesis is entirely my own work, done under the

guidance of my supervisors. All references used in this work have been fully acknowledged. I

bear sole responsibility for any shortcomings.

.................................................................... ......

GARIBA FUSEINI DATE

(10226179)

. ..........

PROF. AMOAH BAAH-NUAKOH DATE

(SUPERVISOR)

. ......

DR. E. NKETIAH-AMPONSAH DATE

(SUPERVISOR)

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ABSTRACT

The motivation for this study is the persistent lack of access to credit facing all firms in general

and SMEs in particular. The study examined factors that determine access to finance as well as

challenges facing SMEs in their access to finance in Ghana. The specific objective is to find the

factors that influence SMEs demand for and access to credit in Ghana. The study focused on

characteristics of the owners/managers of SMEs and features of those SMEs that influence their

demand and access to credit in Ghana.

The study used a firm-level survey of 720 firms which was conducted by the World Bank in

Ghana in 2013. The study employed Heckman Probit regression with sample selection model to

estimate the factors that influence firms demand and access to credit. This is because of the

hypothesis that firms may be self-selected in their decision to apply for credit, which can lead to

sample selection bias. The standard probit regression of access to credit was also estimated since

there was no evidence of selection bias.

The study finds evidence to support the case that all Ghanaian firms in general, and SMEs in

particular, face credit constraints. Even though firms rank access to finance as the biggest

obstacle of the business environment, most of the firms that applied for credit had access.

However, majority of firms did not apply for credit because they had no need for a loan and for

others firms features of the loan such as complex application process; unfavourable interest rates,

high collateral requirement and short loan maturity period were major obstacles preventing them

from applying for credit. The study also finds that there is no evidence of self-selection among

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firms in Ghana regarding their decision of seeking for external funding or their participation in

the credit market.

Also, the study finds that access to credit is influenced mostly by specific characteristics of the

firm such as firm innovation, registration, location, possession of bank account and having

audited financial statements. In addition, demand for credit is influenced by firm characteristics

such as firms innovation, location, ownership of land, having audited financial statements and

future expansion plans.

In the light of this, the study recommends that both demand- and supply-side barriers need to be

identified and tackled through regulatory reforms and policy initiatives. Specifically, providing

training to owner and managers of SMEs in such areas as preparation of financial accounts

would not only promote their demand for credit but also increase their access to credit.

Moreover, SMEs should be encouraged to register their businesses and become formal. Owners

of SMEs should also be encouraged to adopt new technologies and innovations as this increases

their chances of having access to credit.

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DEDICATION

I dedicate this work to my dear mother, Zenabu Adamu.

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ACKNOWLEDGEMENT

I wish to thank my supervisors Prof. A. Baah-Nuakoh and Dr. E. Nketiah-Amponsah for their

encouragement and guidance in producing this thesis. I also wish to thank the World Bank

Enterprise Analysis Unit for assisting me in getting the data I needed for this research.

I also wish to thank Mr. and Mrs. Afenyo-Katsi and their entire family for their kind support and

encouragement.

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TABLE OF CONTENTS

Page
DECLARATION ............................................................................................................................ ii
ABSTRACT ................................................................................................................................... iii
DEDICATION ................................................................................................................................ v
ACKNOWLEDGEMENT ............................................................................................................. vi
LIST OF TABLES .......................................................................................................................... x
LIST OF ABBREVIATIONS ........................................................................................................ xi

CHAPTER ONE ............................................................................................................................. 1


INTRODUCTION .......................................................................................................................... 1
1.0 Background of the Study ....................................................................................................... 1
1.1 Problem Statement ................................................................................................................ 5
1.2 Research Questions ............................................................................................................... 6
1.3 Objectives of the Study ......................................................................................................... 7
1.4 Justification and Significance of Study ................................................................................. 7
1.5 Organization of the Study ..................................................................................................... 8

CHAPTER TWO .......................................................................................................................... 10


OVERVIEW OF SMALL AND MEDIUM-SIZED ENTERPRISES SECTOR ......................... 10
2.0 Introduction ......................................................................................................................... 10
2.1.0 Definition of Small and Medium-sized Enterprises (SMEs) ........................................... 10
2.1.1 SME Definition in Ghana........................................................................................................... 12
2.2 General Overview of the SME Sector in Ghana ................................................................. 13
2.3 Contributions of SMEs to Economic Growth and Development ........................................ 15
2.4 Problems Facing SMEs ....................................................................................................... 17
2.5 Government Financial Support to SMEs ............................................................................ 23
2.6 Conclusion........................................................................................................................... 25

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CHAPTER THREE ...................................................................................................................... 26


LITERATURE REVIEW ............................................................................................................. 26
3.0 Introduction ......................................................................................................................... 26
3.1.0 Definition of Access to Finance ....................................................................................... 26
3.1.1 Measurement of Firms Access to Finance and Financial constraint ................................... 27
3.2 Theoretical Framework: Stiglitz and Weiss (1981) Credit Rationing Hypothesis ............ 29
3.3 Empirical Literature on Reasons for Lack of Access to Credit among SMEs .................... 32
3.4.0 Supply of Credit to SMEs ................................................................................................ 38
3.4.1 Sources of Credit to SMEs ......................................................................................................... 39
3.4.2 Determinants of Access to Credit among SMEs ..................................................................... 44
3.5.0 SMEs Demand for Credit................................................................................................ 55
3.5.1 Empirical Literature on Determinants of SMEs Demand for Credit .................................. 56
3.6 Conclusion........................................................................................................................... 58

CHAPTER FOUR ......................................................................................................................... 59


RESEARCH METHODOLOGY AND FINDINGS .................................................................... 59
4.0 Introduction ......................................................................................................................... 59
4.1 Conceptual Framework ....................................................................................................... 59
4.2 Method of Data Analysis .................................................................................................... 60
4.3 Model Specification ............................................................................................................ 62
4.4 Definition and Measurement of Variables .......................................................................... 64
4.5 Research Findings and Discussion of Results ..................................................................... 73
4.6 Descriptive Statistics of Dependent Variables ........................................................................... 74
4.6.1 Descriptive Statistics of Explanatory Variables ...................................................................... 82
4.6.2 Heckman Probit Estimation of Determinants of Access to Credit ....................................... 84
4.7 Conclusion........................................................................................................................... 91

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CHAPTER FIVE .......................................................................................................................... 93


SUMMARY, CONCLUSIONS AND RECOMMENDATIONS................................................. 93
5.0 Introduction ......................................................................................................................... 93
5.1 Summary of Study Findings ................................................................................................ 93
5.2 Conclusions of the Study..................................................................................................... 95
5.3 Recommendations ............................................................................................................... 97
5.4 Limitations of the Study ...................................................................................................... 98

REFERENCES ............................................................................................................................. 99

APPENDIX ................................................................................................................................. 108

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LIST OF TABLES

Page

Table 1: Description and Measurement of Variables and Expected signs........ 69

Table 2: Distribution of Firms by Size and Sector of Activity......... 74

Table 3: Descriptive Statistics of Dependent Variables....... 75

Table 4: Demand for and Access to credit by Firm Size.. 76

Table 5: Main Reason for Not Applying for Credit .... 77

Table 6: Sources of Credit ... 78

Table 7: Request for Collateral Security.. 79

Table 8: Assets Required as Collateral. 80

Table 9: Biggest Obstacle Affecting the Operations of the Establishment.. 81

Table 10: Descriptive Statistics of Explanatory Variables .. 83

Table 11: Standard Probit Estimation of Determinants of Access to Credit... 86

Table 12: Heckman Probit Estimation of Access to Credit.108

Table 13: Multinomial Logit Estimation of Access to Credit.... 109

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LIST OF ABBREVIATIONS

BAF Business Assistance Funds

CGS Credit Guarantee Schemes

EMPRETEC Empresas Technologicas Ghana Foundation

FUSMED Fund for Small and Medium Enterprises Development

GDP Gross Domestic Product

GNI Gross National Income

GSS Ghana Statistical Service

IFC International Finance Corporation

MASLOC Microfinance and Small Loans Centre

MFIs Micro Finance Institutions

MSME Micro, Small and Medium-sized Enterprises

NBFI Non-Bank Financial Institutions

NBSSI National Board for Small Scale Industries

NPL Non-Performing Loans

OLS Ordinary Least Square

RCBs Rural and Community Banks

ROSCA Rotating Savings and Credit Associations

SMEs Small and Mediumsized Enterprises

SSA Sub-Saharan Africa

UNCTAD United Nations Conference on Trade and Development

UNIDO United Nations Industrial Development Organisation

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WBES World Bank Enterprise Survey

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CHAPTER ONE

INTRODUCTION

1.0 Background of the Study

A number of studies have emphasized the growing importance of credit to the growth and

productivity of every business entity especially Small and Mediumsized Enterprises (SMEs)

(Aryeetey et al., 1994; Osei-Assibey, 2013). Finance serves as a catalyst that promotes the

survival and growth of firms, both in developing and developed countries. Whereas new firms

require credit as a start-up capital, credit is also a source of working capital and investment for

existing firms. Indeed, credit is the life-blood of every business enterprise. Businesses require

capital for their operations in purchasing assets, paying employees remuneration, as well as

covering operational expenses. Improved access to credit helps SMEs to build their productive

capacity and also makes them competitive in both the local and the global market (UNCTAD,

2002).

SMEs have been identified to play an important role in the growth and development of many

economies, of which Ghana is no exception (Kayanula and Quartey, 2000). It is empirically

found that SMEs promote entrepreneurship because they are more labour intensive and thus, help

in the creation of employment (Gambold, 2008). According to UNIDO (1999), SMEs make up

over 90% of enterprises in the world and account for 50 to 60 per cent of employment. In Ghana,

according to the Registrar-General, about 90 % of registered companies are SMEs, accounting

for about 80% of the private sector and 92% of businesses in Ghana (Abor and Beikpe, 2006).

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Even though SMEs generally face a number of obstacles to their growth, several empirical

studies have identified lack of access to credit as a major setback facing many SMEs, both in

developed and developing countries especially Sub-Saharan African countries (Aryeetey et al.,

1994; Baah-Nuakoh, 2003; Beck and Demirg-Kunt, 2005; Beck and Cull, 2014). For

instance, using firm-level survey of over 10,000 firms conducted by the World Bank in 1999

and 2000 in more than 80 countries, Beck and Demirg-Kunt (2005), find that small firms are

39% likely to mention financing as a severe obstacle to growth relative to medium-sized firms

(36%) and large firms (32%).

Similarly, Aryeetey et al. (1994, p. 79), in a study of 133 manufacturing firms in Ghana, finds

that, an overwhelming 60 per cent of the SMEs surveyed complained that credit was a major

constraint to expansion. The study also indicates that medium firms have 69.1% chance of

success in accessing credit, compared to 45% for small enterprises and 33.7% for

microenterprises.

The major challenges the SMEs face in accessing credit externally includes requirements such as

conditions such as interest rate, maturity, collateral and lending procedures (Stephanou and

Rodriguez, 2008). In a field survey of SMEs in Tamale in the Northern Region of Ghana,

Alhassan and Sakara (2014) find that SMEs are constrained in their ability to present collateral,

business plans and personal guarantors demanded by the bank, in addition to cumbersome loan

application process and unfavourable repayment period. As a result, some SMEs tend to rely on

informal sources of credit such as owners family, friends and susu lenders to finance their

operations (Beck and Demirg-Kunt, 2005; Nkuah et al., 2013).

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This perennial problem of lack of access to credit among SMEs has been a subject that has

attracted the attention of many researchers, policy makers and governments (Kayanula and

Quartey, 2000). However, despite a number of policy initiatives that has been implemented in

this regard to ameliorate credit constraints facing SMEs, both in the urban and rural areas in

Ghana, lack of access to credit still remains a major obstacle for many firms, especially SMEs

(Baah-Nuakoh, 2003; Osei-Assibey, 2014). Most of these support programmes are in the form of

Credit Guarantee Schemes (CGS) to assist firm owners with inadequate collateral security to

have access to credit from financial institutions (Kayanula and Quartey, 2000).

Moreover, institutional support in the form of training in financial reporting and providing credit

to these business enterprises has been provided with the objective of helping to develop SMEs in

Ghana (Baah-Nuakoh, 2003). These institutions include the National Board for Small Scale

Industries (NBSSI) which was established in 1985; and Microfinance and Small Loans Centre

(MASLOC) which was established in 2006 to provide, manage and regulate approved funds for

microfinance and small scale credit, loan schemes and programmes and also to provide business

advisory services, training and capacity building for small and medium scale enterprises

(SMEs) Microfinance and Small Loans Centre (MASLOC, 2006).

Theoretically, lack of access to credit has been explained through the credit rationing hypothesis

propounded by Stiglitz and Weiss (1981), which posits that, it is the result of information

asymmetries resulting in financial market inefficiencies. The problems of adverse selection and

moral hazards in loan contracts coupled with weak enforcement of those contracts and

agreements result in imperfections of the financial market. Thus, credit is provided with

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uncertainty due to information asymmetry. Financial institutions are not able to get all

information about the potential borrower in order to determine their credit worthiness or the

profitability of the purpose for which the credit is required. On the other hand, SMEs who seeks

financial assistance are not able to signal to these financial institutions that they possess the

desired characteristics that improve their probability of fulfilling their loan obligations.

The amount of credit financial institutions are able to provide SMEs depends, to a large extent,

on their ability to assess the probability that these loans would be repaid (Stiglitz and Weiss,

1981). In addition, market failures, regulatory constraints, supervisory weaknesses, financial

infrastructure deficiencies and financial institution capacity affect the supply of credit to the

SME sector (Malhotra et al., 2007). Studies show that limited use of lending technologies such as

scoring and financial modelling, in loan evaluation and decision making by commercial banks,

also constrain the supply of credit to small scale entrepreneurs seeking external finance

(Malhotra et al., 2007; Deakins et al., 2010).

However, financial institutions are able to estimate the creditworthiness of SMEs based on

availability of information, due to low development of these modern technologies into the

financial system of most developing countries like Ghana. These include information about the

characteristics of the owners of the enterprise such as level of education, business experience and

competency and affiliation to business associations (Pandula, 2011; Kumah, 2011). Moreover,

features of the firm such as size, age, the value and tangibility of their assets and possession of

audited financial statements enable financial institutions to assess the ability of SMEs to repay

loans (Deakins et al., 2010; Kumah, 2011).

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According to Berger and Udell (1995), both formal and informal lending institutions adopt

higher interest rates and the demand for collateral security in order to reduce the risk of default

resulting from adverse selection and moral hazard. This is because providing credit to SMEs

involves higher risk due to the lack of financial information about their operations. These

requirements pose a serious impediment to access to credit by SMEs in Ghana. The requirements

of providing documented financial statements in order to determine the eligibility for the loan

also constitute a significant challenge to SMEs in accessing credit.

1.1 Problem Statement

Several empirical studies indicate that SMEs are severely constrained in their access to finance

[Aryeetey et al., (1994), Baah-Nuakoh, 2003]. For instance, a study by Abor and Beikpe (2006)

indicates that SMEs lack of access to credit results from their low participation in the capital

markets partly due to the perception of higher risk, informational barriers and higher costs of

intermediation for smaller firms. Without finance, SMEs cannot acquire new technologies,

compete in the global market or establish linkages with larger firms (UNCTAD, 2002).

However, several policy initiatives have been implemented by government and the private sector

to assist SMEs such as rural finance project and the credit guarantee scheme. As observed by

Gockel (2003), there has been establishment of new banks and Non-Bank Financial Institutions

(NBFIs), which serve the financing needs of SMEs. Additionally, there has also been significant

support from international donor institutions such as United Nations Conference on Trade and

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Development (UNCTAD) and United Nations Industrial Development organisation (UNIDO).

For Abor and Beipke (2006, p. 68), SMEs financing constraints are due to the low awareness

and usage levels of the financing initiatives among SMEs and the perceived difficulty in access

these financing schemes. It is in this view that, Aryeetey et al. (1994) assert that lack of access to

credit may have been over exaggerated, because most entrepreneurs tend to overlook their

internal management problems and that many SMEs recorded high growth rates despite lack of

access to finance. Moreover, the SME market lacks saturation because most banks have not yet

developed niche strategies to target SMEs (Stephanou and Rodriguez, 2008). It is in view of this

that this study would be relevant in discovering the factors that influence the SMEs access to

credit.

1.2 Research Questions

This study seeks to answer the following questions:

1.) What factors influence SMEs demand for credit in Ghana?

2.) What factors determine SMEs success in accessing credit from financial institutions in

Ghana?

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1.3 Objectives of the Study

The purpose of this study is to identify the determinants of access to credit among SMEs in

Ghana as well as the challenges faced by SMEs and lending financial institutions. Specifically

the study seeks to examine:

1.) The factors that determine SMEs demand for credit.

2.) The factors that determine SMEs likelihood of having access to credit in Ghana.

1.4 Justification and Significance of Study

This study is relevant in view of the significant contribution of SMEs to the socio-economic

development in Ghana. The problem of access to credit has long been the main attention of many

researchers. However, study of the literature on SME financing indicates that there is a

significant gap in knowledge of the determinants of access to finance among SMEs in Ghana.

Even though previous studies have been conducted on the determinants of supply of credit to

SMEs in Ghana, there are only a few studies on determinants of demand for credit. However,

these previous studies (Kumah, 2011; Osei-Assibey, 2014) may suffer from selection bias

because analysis of the determinants of access to credit is based only on a sample of firms that

have applied for credit. In contrast, this current study corrects for this bias by modelling the

determinants of access to credit using heckman probit regression with sample selection method.

This method includes not only firms that have applied for credit but also those that have been

discouraged from doing so for various reasons.

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Firstly, the findings of this study can inform government policies that aim at eliminating the

SMEs financing obstacles, especially, with regard to access to credit. Understanding how these

factors affect access to credit would be important in prioritizing the efforts of government and

relevant stakeholders in promoting SMEs access to credit and, hence, the financial inclusion of

SMEs in Ghana. The findings of the study will also serve as a guide to lending institutions on

ways of meeting the financial needs of SMEs in Ghana, with the minimum risks. It will also

guide SMEs as to factors that would promote their success in accessing external funding from

financial institutions. Lastly, this study will contribute to the existing literatures on SMEs

financing.

1.5 Organization of the Study

The study is organized into five chapters. The present chapter provides a general description of

the study, which entails the introduction and background of the study, the problem statement,

research questions and objectives, as well as justification for this study.

Chapter two gives a general overview of the SME sector, particularly, the theoretical definition

of SMEs, both in advanced and developing countries, the importance of SMEs in economic

development, general problems facing them and financial support from government to overcome

these financing obstacles.

In chapter three, the relevant theoretical and empirical literatures on demand and supply sides

determinants of access to credit among SMEs are reviewed. This Chapter also discusses the

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definition of access to credit and theoretical framework of credit rationing hypothesis as well as

past and current studies on the determinants of demand and access to credit, both in Ghana and in

the other countries.

Chapter four describes the study methodology as well as findings from the study, which

encompasses the sources of data, specification of the research model used. Chapter four also

analyses the research data using appropriate statistical tools such as both descriptive statistics

and probit regression with sample selection method.

Lastly, the research ends with chapter five, which provides a summary of the research findings

and relevant conclusions, and offers appropriate policy recommendations.

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CHAPTER TWO

OVERVIEW OF SMALL AND MEDIUM-SIZED ENTERPRISES SECTOR

2.0 Introduction

This chapter gives an overview of the SMEs sector, both in developed and developing

economies, with particular focus on Ghana. It begins with theoretical definition of SMEs and a

general overview of the SME sector in Ghana. Further, the study examines the important roles

that SMEs play in economic growth and development, especially in developing countries such as

Ghana. This chapter also discusses general problems facing SMEs sector, particularly lack of

access to credit. Finally, governments financial supports aimed at alleviating SMEs financing

constraints in Ghana are also discussed.

2.1.0 Definition of Small and Medium-sized Enterprises (SMEs)

A number of studies have tried to come up with a working definition of what kind of businesses

can be classified as SMEs (Kayanula and Quartey, 2000). As noted by Gockel (2003), the

challenges faced by SMEs, especially with regard to access to credit is partly because they lack

an operational definition and partly due to lack of understanding of their heterogeneous nature by

lending institutions. According to Kayanula and Quartey (2000), there is no single, universal, or

uniformly acceptable definition of small scale enterprises. As a result, several measures have

been used to define SMEs.

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A survey of the literature on the definitions of SMEs is based on different criteria such as

number of workers employed, annual rate of turnover and value of fixed assets. However, the

commonest criterion used across countries is the number of employees, but this definition varies

across countries and even within the same country there are divergent views on the exact number

of workers and the cut-off point to be used (Ayyagari et al., 2003).

The European Union considers a Micro, Small and Medium-sized Enterprise (MSME) as one

with up to 250 employees and with either a turnover of no more than 50 million or a total

balance sheet value of no more than 43 million. Specifically, micro enterprises are those firms

that employ less than 10 workers and also have either turnover or balance sheet value of not

more than 2 million; small enterprises employ less than 50 employees and have turnover or

balance sheet value of not more than 10 million; and medium-sized enterprises less than 250

workers and have either turnover of 50 million or balance sheet value of not more than 43

million.

Similarly, the World Bank (2013) classifies an enterprise as MSME when it meets any two of the

following criteria namely, number of employees, size of assets, or annual sales as follows:

microenterprises employ up to 10 employees, with total assets and annual sales of up to $10,000;

small enterprises employ up to 50 employees with total assets and annual sales of up to $3

million; and medium-sized enterprise employ up to 300 employees, with total assets and annual

sales of up to $15 million.

As noted by Kushnir (2010), the choice of SMEs definition depends on many factors among

which include business culture; the size of the countrys population; industry; and the level of

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international economic integration or even less personal reasons such as businesses lobbying for

a particular definition, which would qualify their enterprises for a support programme by

government. She cites lack of data on SMEs as major challenge due to the fact that a large

number of the SMEs operate in the informal sector, especially in developing countries.

Furthermore, the lack of a uniform definition of SMEs is because countries have different

structural, cultural and political reasons to adopt different definitions of SMEs.

From the foregoing, there is no universal definition of SMEs, which applies to all countries. This

is due to the fact that SMEs are not homogeneous; they differ from one country to the other and

from one industry to the other. However, SMEs are generally privately-owned firms which have

relatively a small number of personnel and low volume of sales and fixed assets (Nkuah et al.,

2013).

2.1.1 SME Definition in Ghana

In Ghana, various institutions such as the Ghana Statistical Service (GSS) and National Board

for Small Scale Industries (NBSSI) define SMEs using different criteria (Ackah and Vuvor,

2011). For instance, the industrial census conducted by GSS in 1987 defined micro- and small-

scale enterprises as those employing up to 9 employees, medium-scale enterprises as those

employing between 10 and 29 workers, and large-scale enterprises as those employing 30 or

more employees (Gockel, 2003). Similarly, the NBSSI uses the number of employees and value

of fixed assets as two criteria in defining Micro and Small Enterprises (MSE); micro enterprises

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are those that employ up to 5 people with fixed assets not exceeding $10,000 excluding land and

buildings whereas small enterprises employ between 6 and 29 with fixed assets not exceeding

$100,000, excluding land and buildings. Thus, SMEs are those enterprises employing 29 or

fewer workers.

Empirical studies by Aryeetey et al. (1994), based on a field survey of 133 enterprises classifies

SMEs into four groups namely (i) microenterprises-less than 6 people; (ii) very small

enterprises- between 6 and 9 workers; (iii) small enterprises-between 10 and 29 workers (iv)

medium-sized enterprises- between 30-140 workers. In summary, the number of employees and

value of fixed assets are the two common criteria used in defining SMEs in Ghana. The

definition based on the number of employees used in most developing countries is less than that

used in advanced countries due to the nature of their industry.

2.2 General Overview of the SME Sector in Ghana

As noted by Mensah (2004), there is no available data on the exact number of SMEs in Ghana,

but statistics from the Registrar Generals department shows that about 90 percent of registered

companies are SMEs. This is partly because many of these SMEs are in the informal sector, with

many of them unregistered (Mensah, 2004). The statistics on SMEs are poor for a number of

reasons: lack of a uniform definition, high cost of conducting industrial census, and the fact that

many SMEs do not register and remain outside the formal economy (UNCTAD, 2005).

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A peculiar characteristic of SMEs in Ghana, which is often cited as the reason for their

inadequate access to finance, is their low participation in the international and local capital

markets as compared to larger firms and this exclusion is due to the higher cost of intermediation

of smaller projects (Ackah and Vuvor, 2011). This phenomenon is attributed to the nature of the

financial system.

Another feature of SMEs in Ghana is that, their products or services are provided for the local

market. It is only a few numbers of these SMEs who have the capacity to market their products

abroad. This is largely due to the huge capital requirement for engaging in export trade and the

low level of education, training and awareness of some small business owners. Most of these

SMEs are labour intensive and operate with low technological know-how and innovation. They

are mostly family-owned businesses, often with little separation of the business finances from

that of the owners of the business (Ackah and Vuvor, 2011). According to Mensah (2004), SMEs

in Ghana are generally owned by a single person, who takes all major decisions and who often

has limited formal education, and lacks information in the use of new technologies and the credit

market. They are also characterized by weak management skills, lack of technical know-how and

extreme working capital volatility (Mensah, 2004).

In Ghana, the SMEs are made up of varied number of businesses such as provision and retailing

shops and supermarkets, restaurants and food vendors, hair dressing and barbering saloons,

clothing and tailoring shops, carpentry and furniture making shops as well as small scale

manufacturers of assorted items such as fruit drinks, sachet water, etc. (Kayanula and Quartey,

2000; Ackah and Vuvor, 2011). Those SMEs in rural areas are largely made up of family

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groups, individual artisans, women engaged in food production of local crops, textiles and

leather, agro processing, timber and mining, etc. (Kayanula and Quartey, 2000). Urban and rural

SMEs in the informal sector as well as those in the industrial sector are very heterogeneous in

terms of productivity, entrepreneurial talents, and profits, level of technology, capital assets, and

development prospects (Seibel, 1996).

2.3 Contributions of SMEs to Economic Growth and Development

The significant contributions of SMEs to the economic growth and development of national

economies especially developing countries have been emphasized by a number of empirical

studies. Utilizing firm-level data from for 76 countries, Ayyagari et al. (2007) find that on

average SMEs account for 55% of employment in manufacturing. SMEs usually comprise about

99 per cent of all enterprises, and account for from 44% to 70% of employment and 50% of

manufacturing output. In developing countries, SMEs account for 98% of enterprises, 50% to

80% of industrial employment, and 50% of manufacturing output (UNCTAD, 2005).

According to Seibel (1996), small businesses usually operate in market niches, which are

unattractive for large enterprises due to low level of profits. Small firms can strengthen domestic

economic cycles and inter-sectoral relations, which is a necessary precondition for successful

industrialization strategies. Moreover, in countries with a large proportion of agriculturalists and

underdeveloped industrial relations, SMEs can utilize cheap, labour intensive and appropriate

technologies (Seibel, 1996).

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In Ghana, SMEs employs a large part of the labour force and the growth of employment in the

SME sector is about 5% higher than in micro and large scale enterprises and the sectors

contribution to GDP was 6% percent in 1998 (Kayanula and Quartey, 2000). According to Abor

and Quartey (2010), SMEs contribute about 85% of manufacturing employment and 70% of

GDP in Ghana. In addition, SMEs are also believed to make up about 92% of businesses in

Ghana (Abor and Quartey, 2010). Moreover, SMEs also provide potential market for industrial

and consumer goods manufacture by other large enterprises through their demand for these

goods and services (Abor and Quartey, 2010).

However, a major weakness of these studies is that they fail to offer a clear mechanism through

which SMEs contribute to growth. For example, Beck et al. (2003), utilizing cross-country data

from the manufacturing sector of 76 countries, find that there is a robust, positive relationship

between the relative size of the SME sector and economic growth. However, their cross-country

analyses do not support the view that SMEs exert a causal impact on long-run growth and that

there is not a significant relationship between SMEs and poverty alleviation and further that

SME size is not linked with the growth rate of the incomes of society. This is because small

businesses are not necessarily more labour-intensive than large enterprises. Moreover, there is

not clear link between growth, poverty reduction and the promotion of small firms.

However, in view of these significant contributions made by SMEs, the development of SME

sector is important since most large enterprises usually start as small ones; hence, SMEs need to

be promoted to become the backbone of the economy (De la Torre et al., 2008).

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2.4 Problems Facing SMEs

SMEs in both developing and developed countries face a number of problems, which are caused

by complex and multi-dimensional factors (Stephanou and Rodriguez, 2008). Generally, the

constraints faced by SMEs, especially those in developing counties are lack of access to credit

for start-up and working capital, increasing competition, sluggish demand, insufficient supply of

business inputs such equipment, machines, raw materials, electricity and fuel and problems

relating to business environment (Seibel, 1996).

In Ghana, empirical studies show that major constraints to SMEs expansion include the

following: lack of access to finance, low demand for output, technology, raw materials, labour

and management, infrastructure, marketing and business environment problems [(Aryeetey et al.,

(1994); Baah- Nuakoh (2003); Kayanula and Quartey (2010)].

Lack of Access to Credit

The existence of financing gap for SMEs is well documented in the literature on SMEs finance

(Stephanou and Rodriguez, 2008). A number of empirical studies have found evidence that there

is SME financing gap, both in developed and developing countries (Aryeetey et al., 1994; Baah-

Nuakoh, 2003; Beck and Cull, 2014). According to the World Bank Enterprise Surveys (2013)

access to finance is the number one constraint facing SMEs.

Utilizing cross-country firm-level data on SME finance in Sub-Saharan Africa (SSA) and other

developing countries, Beck and Cull (2014) find that more than 25% of firms in Africa rate

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availability and cost of finance as the most important obstacles to their operation and growth.

They also observe a lower use of financial services by firms in Africa compared to other regions

of the world and this is particularly common among smaller and younger firms.

In Ghana, empirical studies by Aryeetey et al. (1994), using a sample of 133 firms, find that

access to finance is the most significant obstacle to firms future expansion and growth; about

60% viewed finance as their most serious problem. They also find that smaller and older firms

emphasize lack of finance more than larger and newer ones. Similarly, in a study of obstacles to

growth and expansion among 200 manufacturing firms, Baah-Nuakoh (2003) finds that, access

to capital is the most frequently cited problem facing all firms and sectors in Ghana. Specifically,

finance was cited as a major constraint by micro firms (55 %), small firms (57%), medium-sized

firms (29%) and large firms (32%). On a scale of 1 (not important) to 5 (very important) to

measure the extent of severity, lack of access to finance is the most severe constraint (3.80)

among all firms, with micro firms (3.71), small firms (4.08), medium-sized firms (3.49) and

large firms (3.21).

Similarly, Baah-Nuakoh (2003) finds that 45% of agro-metal firms cited finance as the most

serious constraint to their productivity. Obstacles relating to finance include lack of credit to

finance raw materials and equipment, high interest rate and difficulty in dealing with bank

(Baah-Nuakoh, 2003).

This confirms that finance is a serious problem, particularly among micro, small and new firms.

Finance tends to be a binding constraint for smaller and younger enterprises. Older, larger and

foreign-owned firms report fewer financing obstacles (Beck et al., 2006). This is because older

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firms have better record, experience and contacts to get access to credit than younger firms

(Baah-Nuakoh, 2003). According to Stephanou and Rodriguez (2008), lending is easier for retail

customers and large enterprises.

Kempson et al. (2000) identify five ways by which firms may lack face challenges in terms of

financing. Firstly, the cost of the screening process through which the eligibility of the loan

applicant is assessed and the risk involved in case of loan default may be high. Secondly,

conditions attached to the credit such as high minimum deposits and administrative charges may

make it inappropriate for the needs of some firms. Thirdly, the price or the cost of credit-high

interest rate and other fees is a deterrent to many SMEs. Fourthly, priority lending of credit to

specific SMEs in certain industries may end up diverting credit towards SMEs who may be less

financially constrained. Lastly, self-exclusion may make some firms not to apply for credit

because of the perception that they would be denied.

Lack of Access to Qualified Labour Force

Lack of adequate skilled and specialised labour also hinders the expansion of SMEs. This

problem is exacerbated by the fact that, only few number of firms offer formal training to their

labour force. Kayanula and Quartey (2000) note that insufficient supply of skilled workers can

limit the specialisation opportunities, raise costs, and reduce flexibility in managing operations.

Aryeetey et al. (1994) find that 7% of firms indicate that they have problems finding skilled

labour, and 2% had same problems with unskilled labour.

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Equipment and Technology

SMEs also lack access to appropriate technologies and information on available techniques of

production. This forces many of them to rely on simple equipment. Aryeetey et al. (1994) find

that 18% of the sampled firms old equipment among the major constraints to expansion.

Low Level of Domestic Demand

Many SMEs also cite low level of demand for their goods and services as a major obstacle to

their income. For example, Baah-Nuakoh (2003) finds that low level of domestic demand is the

second most serious obstacle facing small and medium sized firms after access to finance. This is

due to the low level of income (Baah-Nuakoh, 2003).

Competition from the International Markets

SMEs also face fierce competition from international firms as a result of many substitutes goods

imported into the country. Moreover, limited international marketing experience, poor quality

control and product standardisation and little access to international partners, impede their

expansion into international markets (Kayanula and Quartey, 2000).

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Regulations

Furthermore, SMEs face problems relating to the legal and regulatory environment. According to

the WBES (2013), SMEs cite cumbersome formalities involved in registering and commencing

their businesses. The process tends to be very costly for some SMEs, especially in developing

countries. Also, the lack of protection for property rights also affects SME access to foreign

technologies (Kayanula and Quartey, 2000). Another regulatory requirement of the business

environment is the payment of taxes. Firms complain not only of the rates of taxes but also the

administration of tax system in general (WBES, 2013).

Customs and Trade Regulations

SMEs face constraints relating to customs and trade regulations, especially manufacturing firms

that make use of imported inputs and also export their output on the international market. These

include the longer days it takes to clear direct imports and exports through customs (WBES,

2013). Lastly, regulations relating to workforce are an obstacle to SMEs (WBES, 2013).

Corruption

SMEs also encounter problems with corrupt public officials. For instance, WBES (2013) reports

that firms experience at bribery incidence in dealing with public officials. A number of firms

indicate that they were expected to give gifts in securing government contracts and also to tax

officials, and in acquiring operating and import licence (WBES, 2013).

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Infrastructure

Electricity, water and transportation are also a major problem facing most firms in Ghana. It

takes firms a longer time to have electricity and water upon application for connection.

Moreover, most firms suffer frequent power outages and insufficient flow of water. In the WBES

(2013), firms report losses due to electrical outages whilst other firms identify electricity as well

as transportation as major constraints.

Managerial Constraints

Firstly, some SMEs lack qualified staff and mangers to man their operations. Even though firms

can make use of support services, Kayanula and Quartey, (2000) find that these services are

often relatively costly and moreover, lack of information and time hinders SMEs from taking

advantage of existing services.

Institutional Constraints

This relates to lack of cohesive associations to pursue the interest of SMEs coupled with weak

linkage between SMEs and large enterprises for the market of their output. According to

Kayanula and Quartey (2000), potential economies of collaborative arrangements in production

and sales among SMEs have not been adequately explored and also there is limited

interdependence among SMEs.

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Even though all enterprises face these challenges, SMEs tend to be more constrained (Shiffer and

Weder, 2001). Kayanula and Quartey (2010) attribute this to the difficulty of SMEs absorbing

large fixed costs, the absence of economies of scale and scope in key factors of production, and

the higher unit costs of providing services.

For instance, using private sector survey covering 80 countries and one territory, Shiffer and

Weder (2001) find that the severity of these obstacles varies inversely with firm size. That is,

small firms report more problems than medium-sized firms, which in turn report more problems

than large firms. These obstacles are more severe for firms in Sub Saharan Africa (SSA), the

Latin America and the Caribbean and transition economies (Shiffer and Weder, 2001; Beck and

Cull, 2014).

2.5 Government Financial Support to SMEs

Interventions in support of SMEs are justified by economic research which has found that

enterprises facing credit constraints are less likely to participate in growth-enhancing activities

such as investment, marketing, hiring, exporting and importing (Holton et al., 2013). According

to UNCTAD (2005), the case for government intervention to assist SMEs is based on the fact

that numerous market failures prevent domestic enterprises from building capabilities because

they cannot access finance, information, technology and markets. Hence, specific policies,

programmes and institutional frameworks are needed to help SMEs overcome these failures.

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Government measures to promote SMEs are aimed at making markets work efficiently, while

providing incentives for the private sector to assume an active role in SME finance (IFC, 2011).

As a result, governments around the world have implemented a number of programmes to

enhance SME lending which include subsidized or favourable loans, guarantees, and lines of

credit by certain banks, especially public banks, usually for certain economic sectors (Stephanou

and Rodriguez, 2008). These supports are in the form of interest rate subsidies offered to SMEs

and other credit guarantee systems (De la Torre et al., 2008).

In Ghana, a number of sponsorship programme have been funded by past and current

governments through the through banking and non-banking institution, with the aim of

minimising financing constraints (Amonoo et al., 2003). These support schemes are given to

highly performing firms, with qualified employees and good future prospects (Baah-Nuakoh,

2003). As noted by Mensah (2004), government has implemented a number of lending schemes

to SMEs, either directly from government funds or with funds contracted from donor agencies.

Examples of such schemes are: Austrian Import Program (1990), Japanese Non-Project Grants

(1987-2000), Canadian Structural Adjustment Fund and Support for Public Expenditure Reforms

(SPER).

The following schemes were also implemented to support the private sector especially SMEs:

Business Assistance Funds (BAF) (1990), Ghana Investment Fund (2002); and the Export

Development and Investment Fund (EDIF) (Baah-Nuakoh, 2003). The Fund for Small and

Medium Enterprises Development (FUSMED) was also established in 1990 by the International

Development Association of the World Bank to support SMEs in terms of establishment of new

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firms, rehabilitation and expansion of existing enterprises and leasing of equipment (Baah-

Nuakoh, 2003). Other important non-banking institutions established to promote the

development of SMEs are the National Board for Small Scale industries (NBSSI) (1985) and

Empresas Technologicas (EMPRETEC) Ghana Foundation (Amonoo et al., 2003). The interest

rates charged by these institutions are usually pegged at 20 percent as compared to the average

rate charged by private commercial banks (Amonoo et al., 2003).

Challenges encountered with the implementation of these schemes were that, the high collateral

requirements deter SMEs from applying for them (Baah-Nuakoh, 2003). Moreover, these

schemes require complex legal processes to be completed as part of the application procedures.

These loan schemes are also centralised in Accra, making it difficult to be accessed by SMEs

outside Accra (Baah-Nuakoh, 2003).

2.6 Conclusion

The significant role played by SMEs cannot be overemphasized. Though there are variations in

the definition of SMEs, the common criteria used include number of employees, size of assets

and sales turnover. Empirical studies show that even though SMEs face numerous challenges

such as lack of access to finance, low demand for output, technology, raw materials, labour and

management, infrastructure, institutional and regulatory obstacles, the problem of lack of access

to finance still remains a binding constraint. Governments have taken steps to meet the financing

needs of SMEs over the years.

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CHAPTER THREE

LITERATURE REVIEW

3.0 Introduction

This chapter reviews extensively both theoretical and empirical literature on demand- and

supply-side determinants of access to credit, both in developed and developing economies, with

particular focus on Ghana. The definition and measurement of access to credit by SMEs is also

examined. The theoretical underpinnings of SMEs financing constraints are also discussed. This

chapter also reviews the supply and demand for credit, focussing on the sources, determinants

and the challenges faced by lending institutions.

3.1.0 Definition of Access to Finance

There is no universal definition of access to credit because there are different dimensions of what

constitute access to credit. According to Claessens (2005), access to credit can be defined

considering three factors: firstly, the availability of the financial service; secondly, the price or

cost of the credit available, both explicit and opportunity costs; and thirdly, the range, type and

quality of credit being offered. Access to finance has been defined as the absence of price and

non-price barriers in the use of financial services (World Bank, 2008). In other words, access to

finance refers to the availability of supply of quality financial services at reasonable costs

(Claessens and Tzioumis, 2006).

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Hence, it becomes necessary to distinguish usage and access to finance. Ganbold (2008) explains

that access refers to the supply of financial services, whereas use of the services is determined by

demand and supply. Improving access to finance means improving the degree to which financial

services are available to all at a fair price (Ganbold, 2008).

3.1.1 Measurement of Firms Access to Finance and Financial constraint

Generally, it is not easy to measure access to finance. However, it is approximated by the

financial depth (total loan outstanding/GDP or M2+/GDP) of a country because an

approximately greater depth is likely to be associated with greater access to finance among firms

(Ganbold, 2008). However, Claessens and Tzioumis (2006) note that because a well-developed

financial system could provide access only to a limited number of firms, financial depth

indicators such as M2+ need not be good measures of access to finance.

Claessens and Tzioumis (2006) further note that there are two main methods used to determine

firms access to finance, namely econometric analysis of their financial statements based on

economic theory models and through firm-level surveys. For large firms with good financial

data, econometric analyses of their financial statements are useful for measuring firms' access to

finance. However, for small and medium-sized firms, surveys are used because of limited

financial data, as most these SMEs are not obliged to publish detailed financial reports nor raise

equity or debt in public markets (Claessens and Tzioumis, 2006). That is, the reliability of the

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financial statements of these SMEs, especially in transition and developing countries is often

questionable.

Empirically, a financially constrained firm could be identified through the sensitivity of their

investment with respect to internal funds (Claessens and Tzioumis, 2006). Higher sensitivity of

investment to internal funds suggests the presence of financing constraints as external funds are

more costly than internal funds due to information asymmetries. Using balance sheet data, Beck

and Cull (2014, p. 2) explain that a firm is defined to be financially constrained if a windfall

increase in the supply of internal funds result in a higher level of investment spending

Most studies on SMEs access to financing are based on firm-level surveys, which are based on

the perceptions of entrepreneurs. Claessens and Tzioumis (2006), however, highlight the

weaknesses of firm-level surveys used in measuring financing constraints. Firstly, both the

dependent and independent variables used in empirical analyses often share a common parameter

that is omitted in the surveys as a result of self-selection and moreover, the cross-sectional nature

of those surveys is associated with simultaneity bias between survey variables. Secondly, there is

absence of a unified conceptual framework for data collection in measuring and evaluating

firms access to finance because of lack of consensus between theoretical models and empirical

evidences on a commonly accepted framework for data collection. Thirdly, the definition of

access to finance is somewhat ambiguous, as its measurement is influenced by several

dimensions among which include reliability, convenience, continuity and flexibility.

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3.2 Theoretical Framework: Stiglitz and Weiss (1981) Credit Rationing Hypothesis

Theoretically, the problem of lack of access to credit among small firms can be explained

through the theory of credit rationing propounded by Stiglitz and Weiss (1981). In their

exposition, Stiglitz and Weiss (1981) explain that, lack of access to credit is due to imperfections

in the financial market, resulting in credit rationing-a situation where either some applicants

loan applications are honoured and some rejected even though they possess similar

characteristics and are willing to pay higher interest rate or their applications for credit are

rejected because of the limited supply of credit.

Stiglitz and Weiss (1981) show that in equilibrium, the loan market can be characterised by

credit rationing. This is due to information asymmetry in the loan market, which results in

adverse selection-the sorting out of good borrowers from bad ones and moral hazard which

concerns the actions of borrowers, which they also referred to as incentive effect.

Adverse selection results from the unequal probabilities of repayment by different borrowers.

Hence, banks use interest rate as a means to distinguish good and bad risk borrowers. Stiglitz and

Weiss (1981, p. 393) posit that, the interest rate which an individual is willing to pay may act as

one such device; those willing to pay higher interest rate may on average be worse risks; they are

willing to borrow at higher interest rate because they perceive their probabilities of repaying the

loan to be low

They also note that moral hazard refers to the situation where the behaviour of borrowers may

change after the loan contract has been made because borrowers may engage in undesirable

actions which may lower the probability of paying back the loan. In their view, borrowers may

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undertake projects with lower probability of success but higher payoffs when successful

(Stiglitz and Weiss, 1981, p. 393).

Using demand and supply analysis, Stiglitz and Weiss (1981) explain the determination of

equilibrium interest rate. The supply of loans is influenced by the banks expected returns at the

optimal bank rate defined as the interest rate at which the expected return to the bank is

maximized. When there is excess demand for loans over supply, the interest rate rises.

However, banks would not lend above the optimal rate because it is riskier to do so and

moreover, the expected returns of banks would be lower.

The supply of loans is also influenced by the amount of loan, the amount of collateral or equity

demanded by banks; however increasing collateral beyond an optimal value may reduce the

returns of banks because of reduction in average risk aversion of borrowers or result in the

undertaking of riskier projects. This is due to the fact that, there would be a reduction in the

equity of borrowers who could undertake smaller projects with a higher rate of failure. Banks

would therefore choose to deny loan applications because they are unable to distinguish between

bad risks applicants from those successful applicants, resulting in credit rationing.

The theory of credit rationing is based on the assumptions that, the credit market is characterised

by many banks and borrowers, both of whom are risk neutral and aim at maximising their profits.

On the one hand, banks seek to maximise profit by the interest rate charge and the collateral they

request from borrowers. On the other hand, borrowers also choose projects that maximise profit,

while at the same time increase the probability of repaying the loan. The costs of these projects

are assumed to be fixed and indivisible.

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According to Stiglitz and Weiss (1981), interest rate serves as a screening device for

differentiating good and bad risk borrowers. Increasing interest rates however, reduces the

returns by banks because it worsens the pool of applicants who are willing to borrow from the

banks. This is because the probability of loan defaults increases with an increase in interest rate.

Hence, the expected return of the bank is not a monotonic function of interest rate and beyond

the banks optimal rate, the expected returns to the bank decrease with the increase in interest

rate; interest rates affect the quality of loans made by banks.

Stiglitz and Weiss (1981) conclude that: (i) As the supply of funds increases, the excess demand

for funds decreases but the interest rate charged remains unchanged, so long as there is any credit

rationing (ii) Increasing interest rate or collateral requirements could increase the riskiness of the

banks loan portfolio either by discouraging safer investors or by inducing borrowers to invest in

riskier projects and therefore could decrease banks profits. Therefore under these circumstances,

credit rationing takes the form of limiting the number of loans the banks make rather than

limiting the size of each loan or increasing interest rate.

A number of studies have identified weaknesses of Stiglitz and Weiss (1981) credit rationing

hypothesis (Bester, 1985). For example, Bester (1985) points out that there is no empirical

justification to support Stiglitz and Weiss arguments that increasing collateral cannot be used as

sorting device, based on the assumptions that smaller projects are more risky and decreasing the

absolute risk aversion of borrowers. Bester (1985) argues that if the rate of interest and collateral

are chosen simultaneously, it is possible to use different contracts as a self-selection mechanism;

hence, no credit rationing will occur in equilibrium. Bester (1985) also argues that banks can

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distinguish between the safe and risky borrowers by offering contracts with different

combinations of interest rate and collateral.

Wolfson (1996) also finds that the probability of loan repayment is not always known to the

borrowers and the banks. Stiglitz and Weiss (1981) theory of credit rationing which assumes

that both the borrowers and the banks know the exact probabilities of repayment of the loan

cannot be supported by empirical evidence. This is due to uncertainties in the credit market.

Therefore, borrowers may be credit rationed because projects they perceive as safe may be

considered by banks as very risky.

Stiglitz and Weiss (1981) also fail to offer alternative methods by which banks could solve

adverse selection and the moral hazard problems. They fail to consider the possibility of money

creation as instrument instead of credit rationing. According to Wolfson (1996), banks would

adjust their reserves to meet demand for credit by creditworthy borrowers.

3.3 Empirical Literature on Reasons for Lack of Access to Credit among SMEs

A number of reasons have been cited for the lack of access to credit and the subsequent financial

exclusion of SMEs. In explaining the lack of access to finance, Claessens (2005) considered two

dimensions. Firstly, due to the financial institutions specific constraints, high cost involved in

providing physical infrastructure, especially in rural areas, lack of security in cash transfers and

high transactions costs for small volumes, the provision of credit and other financial services to

small households and firms may be constrained. Secondly, constraints of the institutional

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environment, such as lack of technological innovation and distribution networks may affect the

provision of credit to households and firms.

Generally, the following reasons have been cited for the lack of access to credit among SMEs:

high-risk associated with SME lending; information asymmetry arising from SME lending; and

the high administrative and transaction costs involved in SME financing (UNCTAD, 2005). In

developing countries, these problems are often worsened by institutional factors such as the legal

system and information infrastructure (Zavatta, 2008). For Beck et al. (2008), the significant

differences that exist between SME financing in developed and developing countries are due to

deficiencies in the contractual and informational frameworks in developing countries and less

stable macroeconomic environment. In addition, financial sector policy distortions and lack of

know-how on the part of banks are also reasons for SMEs credit constraints (Gockel, 2003;

Malhotra et al., 2007).

Information Asymmetries

It is not only difficult but also costly to obtain information about the credit worthiness of SMEs.

Information asymmetries arising from SMEs lack of accounting records, inadequate financial

statements or business plans makes it difficult for creditors and investors to assess the

creditworthiness of potential SME proposals (UNCTAD, 2005). Moreover, lenders lack access to

the credit history and profile of potential SMEs. Lending institutions mitigate these information

asymmetries by charging higher interest rates or they may decide not to lend altogether

(Kempson et al., 2000).

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High Risk Inherent in SME Lending

SME financing also poses high risks. SMEs are regarded by creditors and investors as high-risk

borrowers because of insufficient assets and low capitalization, vulnerability to market

fluctuations and high mortality rates (UNCTAD, 2005). In countries without strong bankruptcy

laws or contract enforcement, banks have difficulty in enforcing repayment in case of default

(UNCTAD, 2002). In addition, SMEs are also prone to internal management problems (Aryeetey

et al., 1994). As a result of the perceived high risk associated with SME lending, they are

required to provide collateral security which is often a major obstacle for new and young SMEs

which are not well established (Zavatta, 2008).

However, contrasting study by Vos et al. (2004) indicates that SMEs are not riskier because they

are self-select in undertaking business ventures that match their own areas of expertise and

moreover, they are able to overcome risk through the development of technical skills and

practical experiences.

High Transaction Cost Involved in SME Lending

Commercial banks often consider lending to SMEs involving high transaction costs due to the

fact that small amounts require more time, effort, cumbersome administrative procedures; lack of

understanding of SME needs; inability to assess creditworthiness; poor financial information

which make SME financing a less profitable business (UNCTAD, 2002). According to Zavatta

(2008), the problem is more severe in developing countries for reasons such as the lack of

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adequate management information systems in financial institutions; the undeveloped state of the

economic information industry; and the poor state of certain public services, such as the

registration of property titles and collaterals. The transaction costs associated with processing

and administering loans are, however, fixed, and banks often find that processing small SME

loans is inefficient (Malhotra et al., 2007).

Institutional and Legal factors

Insufficiently developed legal systems prevent the development of certain financing instruments,

including the use of collateral as a risk-mitigating element. For instance, legal provisions

regarding security interests are of crucial importance in determining the efficacy of collaterals

(Zavatta, 2008). Malhotra et al. (2007) observe that although leasing, factoring, and venture

capital have been introduced in most financial markets, the lack of supportive legislation,

regulations, and tax treatment has often restrained their growth. Also, stronger rule of law is

associated with more effective private credit registries as enforcement of consumer rights that

would allow individuals and firms to question and correct data in the registry is likely to result in

better quality of data, and subsequently better predictive power of future borrower behaviour

(Love and Mylenko, 2003).Lack of access to finance is the result of poor institutional and legal

structures that facilitate the management of SME lending risk and the high cost of borrowing and

rigidities of interest rates (Mensah, 2004).

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Lack of Contract Enforcement

Problems relating to contract enforcement are also a major hindrance to SME lending. For

instance, there are lengthy procedures for filing mortgages and pledges, and for ascertaining the

status of certain assets, in addition to reported cases of corruption among personnel (Zavatta,

2008). Moreover, lending institutions are unwilling to provide credit when there is lack of

enforceable property rights on such physical assets as land (Malhotra et al., 2007). Stronger

creditor rights that guarantee secured creditors priority in the case of default allow lenders to

reduce the risk of future losses (Malhotra et al., 2007).

Lack of Information Infrastructure

Financial information infrastructures comprising accounting and auditing standards, credit

reporting systems (credit registries and bureaus), collateral and insolvency regimes, and

payments and settlement system, reduce information asymmetries and legal uncertainties that

increase risk to lenders and constrain the supply of finance and improves financial access for

firms, especially SMEs (IFC, 2011). Empirically, the existence of credit bureaus has been found

to increase the availability of credit to SMEs. For instance, Love and Mylenko (2003) finds that

the existence of private credit registries is associated with lower financing constraints and higher

share of bank financing. They also find that small and medium firms tend to have higher share of

bank financing in countries where private registries exist because they are more opaque and

face larger information asymmetries.

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Lack of Competition in the Banking Sector

With highly concentrated and uncompetitive banking sectors in many developing countries, as a

result of restrictive government regulations, banks tend to adopt very conservative lending

policies or to charge high interest rates (Zavatta, 2008). For instance, based on firm-level survey

on 74 countries, Beck et al. (2002) find that highly concentrated and uncompetitive banking

sectors are normally associated with higher financing constraints especially in countries with low

levels of economic and institutional development. Public bank ownership, a high degree of

government interference in the banking system, and restrictions on banks activities worsens the

impact of bank concentration on financing obstacles (Beck et al., 2002).

Poor Macroeconomic Management and Financial Sector Policy Distortions

Firms ability to access finance is directly related to the presence of well-functioning financial

markets that connect firms to lenders and investors willing to fund their ventures (Malhotra et al.,

2007). Stephanou and Rodriguez (2008) point out that a favourable macroeconomic environment

leads to relatively low levels of non-performing loans (NPL) for SME lending because strong

domestic macroeconomic conditions boost liquidity and increase credit to the SME sector.

However, policies such as interest rate ceilings, public sector borrowings, directed public sector

credit and guarantees discourage banks from lending to higher-risk borrowers and also, crowd

out finance from the private sector which includes SMEs (Gockel, 2003; Malhotra et al., 2007).

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In Ghana, a study by Gockel (2003) finds that lack of access to credit is the result of poor

financial reforms in the pre- and post-independence periods. Gockel (2003) further notes that the

financial sector reforms of the late 1980s, involved the active participation of government in the

financial system mostly through state ownership of banks coupled with monetary requirements

such as high reserve requirement and credit policies. The government control over credit

allocation through subsidization at low interest rates, credit ceilings and sectoral credit control

often results in moral hazard and adverse selection issues (Gockel, 2003).

Furthermore, fiscal imbalances that were financed by increased government borrowing in the

domestic credit market also restricted credit to the SME sector (Gockel, 2003). This is because

the increased government borrowing results in high interest rates which results in crowding out

of the private sector in general and hence, retarding the SME sector.

3.4.0 Supply of Credit to SMEs

As emphasized by Krasniqi (2010), it is important to investigate both the supply- and demand-

sides of small firm finance in order to enhance understanding of how small business

owners/managers make decisions among the various financing options available and whether or

not they are constrained by the availability of external finance. This section discusses the supply

of credit to SMEs, focusing on various sources of credit to SMEs and the determinants of access

to credit.

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3.4.1 Sources of Credit to SMEs

Basically, there are two major sources of financing SMEs-internal and external sources. The

internal sources are self-finance by the owner (s) of the SMEs, mostly through their savings and

retained profits. The external sources of finance include borrowing from formal, semi-formal and

informal sources (Osei-Assibey et al., 2012). Aryeetey et al. (1994) observe that even though

information on the financial performance and capital structure of SMEsin Ghanahas not been

documented, existing surveys indicate that supplier credit and bank borrowing are the main

sources of external SME financing.

Formal Sources of Credit

The formal sources of credit include the universal banks as well as Rural and Community Banks

(RCBs) (Osei-Assibey et al., 2012). According to Aryeetey and Gockel (1990), the formal

financial sector is dominated by commercial and development banks, which offer both short-

term and long-term credit, but over 90 % of these credit facilities are of short-term in nature.

Bank Loan

This is one of the important sources of credit to SMEs, both in developed and developing

countries. Banks exposure to SMEs has grown significantly in recent years and currently

comprises an important part of their commercial loan portfolio (Stephanou and Rodriguez,

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2008). The SME sector is perceived to be highly profitable to banks (De la Torre et al, 2008;

Stephanou and Rodriguez, 2008). For instance, a study by Aryeetey and Gockel (1990) of 1,000

market women indicates that 14.7% of them had ever taken credit from a bank.

Aryeetey and Gockel (1990) also identify four types of credit facilities provided by banking

institutions. These are overdraft facilities, short-term loans, medium- and long-term loans, and

group loans. A study by De la Torre et al. (2008) in Argentina and Chile shows that in addition

to short-term loans and overdrafts which are geared toward financing working capital, banks also

offer leasing and investment loans and pre-trade financing, document and cheque discounting as

well as factoring.

Bank lending requires collateral and interest payment on the loan. A study by De la Torre et al.

(2008) in Argentina and Chile finds that approximately 70% of the loans require collateral, and

the collateral requirement represents, on average, 96% of the loan amount. However, collateral

requirements are more flexible for larger enterprises and stricter for long term loan.

Semi-formal Sources Of Finance

The Semi-formal sources of finance include registered Non-Bank Financial Institutions (NBFIs)

which are mostly the Savings and Loans Companies, credit unions and Micro Finance

Institutions (MFIs) which provide credit and other financial services to SMEs. According to

Osei-Assibey et al. (2012), these lenders, unlike conventional banks, appear more willing to

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accept the greater screening and monitoring costs involved in overcoming information

asymmetry.

Informal Sources of Credit

Aryeetey and Gockel (1990) define the informal financial sector as participation in all

commercial saving and lending activity taking place outside of formal or established financial

institutions They are made up of a large number of financial institutions that are not regulated

and fall outside all the banking laws of Ghana (Osei-Assibey et al., 2012). These are mainly

dominated by the activities of money lenders, and susu operators. Other unconventional

sources considered to be informal are personal resources such as selling of properties, or to

request funding from relatives, barter for services, to lease or hire equipment and trade credit,

etc. These informal sources provide limited amounts of credit to SMEs (ibid., 2012).

Susu

Aryeetey et al.(1994) identify two forms of sususingle-collector susu system and rotating susu

system, also known as Rotating Savings and Credit Associations (ROSCA). These susu systems

serve both as deposit and lending institutions to SMEs. Whereas with the single or individual

collector susu system, individuals usually save with the collector who offer them credit on

demand, the rotating susu system involves members of the same economic activity coming

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together to form a saving club where the deposit or lump sum is paid to a member of the club in

rotation (Aryeetey and Gockel, 1990).

Hence, the susu system provides not only an avenue for savings but it is also a source of credit to

SMEs. A study by Aryeetey and Gockel (1990) of 1000 market women indicates that about 65

percent of the market women indicated that they had access to credit facilities from their susu

collectors and an estimated 77 percent of these market women save with these susu collectors.

This is because of the easy access to the collector who comes regularly; and the fact that

collectors accept small sums.

A major problem encountered in dealing with the susu system is that savers sometimes fall

victims to illegal susu operators. This is partly because usually, there is no signing of any

undertaking between the susu collector and their clients. For example, Aryeetey and Gockel

(1990) find that 40.3% of a sample of 1000 market women lost their money to a defaulting

collector.

Money Lenders

This is made up of individuals who lend money out of their own resources. They are regulated by

the Moneylenders Ordinance 1951 of Ghana. They include all such persons who lend a sum of

money at interest or who lend a sum of money in consideration of a larger sum being repaid.

Aryeetey and Gockel (1990) identify two major categories of money lenders namely those who

are licensed Money lenders and those who operate without official authority. The ordinance

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requires that any contract between moneylenders and their clients be supported by a written and

signed memorandum which should contain all the terms of the contract including the date on

which the loan was made the amount of the principal of the loan; and the rate of interest per

annum, and the amount of such interest (ibid, 1990). Money lending is also characterised by high

interest rates which is sometimes fixed at 100 percent at the end of the specified period. In other

cases, the borrower has to pledge a valuable or some income-generating property against the

amount borrowed which the lender has every right to use and enjoy all benefits accruing from the

property until the amount is repaid (ibid, 1990).

Aryeetey and Gockel (1990) note that, although it is generally suspected that the informal

financial sector in many African countries may be larger than the formal one, there is no accurate

estimate of the two sectors, implying that weak links exist between them. This is because, there

is a greater likelihood of obtaining credit facilities so long as people have maintained good

savings records and there are not too many demands on the collector. They argue that the

rationale for the continuing existence of the informal sector of the financial market derives from

its dynamism both from developments within the formal sector and also from its own internal

characteristics. As a result of the recognition of the growing importance of the informal financial

market, they are required by the government to register their businesses for tax purposes.

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3.4.2 Determinants of Access to Credit among SMEs

There are numerous research conducted on determinants of access to credit which indicate that

small firms lack of access to credit may result either from supply-side market failures due to

rejection from the banks for lack of viability of the proposal or high risk and costs involved or

from demand-side market failures due to insufficient information in the project proposal, high

cost of bank credit etc. (Pandula, 2011). Ahmed and Hamid (2011) find that access to formal

credit is a function of two main factors: (i) the availability of infrastructure to provide credit; and

(ii) lending organizations risk perception of the borrower. Thus, banks evaluate an establishment

on the basis of its current financial position as reflected by its accounts or turnover.

This sub-section describes the factors that influence SMEs access to credit. With regards to the

determinants of access to credit several research work have been conducted (Kumah, 2011;

Alhassan and Sakara, 2014; Osei-Assibey, 2014). According to Pandula (2011), financial

institutions consider the creditworthiness of SMEs, which depends on firm-specific

characteristics, owner/managers characteristics and financial characteristics of the firm. Access

to credit is therefore influenced by observable socio-economic characteristics of the owner(s)of

the firm as well as firms characteristics (Osei-Assibey, 2014).

3.4.2.1 Firm-Specific Characteristics that Determine Access to Credit

A recent empirical work by Alhassan and Sakara (2014) finds that the number of firm

characteristics such as fixed assets possessed, the size and form of business as well as and sector

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of business in the economy are important success factors in accessing bank finance in Ghana.

Osei-Assibey (2014) finds that firms age, asset structure and ownership of bank account

increase the likelihood of having access to finance among rural non-farm enterprises in Ghana.

Firms Performance

SMEs performance is one of the criteria for assessing the creditworthiness of the firm. This is

because performing firms are more likely to be able to pay back loans (Aryeetey et al., 1994).

Firms performance can be measured by several indicator among which include labour

productivity; increase in sales or turnover ratios; profit and firm capacity utilization; and export

growth over a given period of time (Aryeetey et al., 1994; Baah-Nuakoh, 2003; Bebczuk, 2004).

Pandula (2011) uses the average annual sales growth for the past three years as measured by firm

performance because it gives a better indication of financing needs than that of a single year.

Evidence from empirical studies indicates that greater sales and profits are associated with

greater access to credit (Aryeetey et al., 1994; Bebczuk, 2004). In fact, poor business

performance is one of the reasons for lack of credit. Baah-Nuakoh (2003) finds that credit is the

most severe constraint among declining and stagnant firms.

Firms Innovation

Empirical study by Ahmed and Hamid (2011) indicates that innovation of the firm also

significantly impacts on the firms access to credit. On the other hand, based on a sample of 256

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small firms who applied for bank loans, Freel (2007) finds that most innovative firms are less

successful in loan markets than less innovative ones. This is because of the lender's perspective

of risk and uncertainties associated with, especially product innovation.

However, these studies considered only loans from banks. Moreover, they differ in terms of how

innovation is measured. Ahmed and Hamid (2011) defines innovative firms are as those which

have introduced a new process only over the last three years. In addition to this measure, Freel

(2007) also uses several proxies such as research and development expenditure as a proportion of

turnover and the proportion of turnover and profits from newly introduced products/process in

the last three years as measures of firm innovativeness.

Firms Size

The size of a firm is also one of the criteria for assessing its creditworthiness by financial

institutions (Pandula, 2011; Kumah, 2011). Empirical studies by Pandula (2011) indicate that

small firms are more credit constrained than large firms due to their inability to provide financial

information requested by the financial institutions for screening and in most cases, they lack

audited financial statements. In addition, smaller firms have less fixed assets to offer as

collateral; and moreover, they have high risk of failure rate compared to large firms. This finding

is corroborated by that of Ahmed and Hamid (2011) which finds that small and medium firms

are, respectively, 12.2 and 7.4 percent less likely to have access to external finance compared to

large firms, all things being equal. Aryeetey et al. (1994) also find that medium-sized enterprises

and older firms are provided with credit three times more often than smaller ones.

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However, Vos et al. (2004) argues that the popular notion that small firms face financing

constraint is not supported by empirical evidence. Vos et al. (2004) argues that bigger SMEs

have more alternative sources of funds because they usually have superior track records to

convince prospective creditors and investors for loan approval.

Firm size is usually defined as the number of full time employees of the firm, from top to lower

level management. According to Pandula (2011), the use of employment rather than financial

measures as a proxy for firm size is because the number of employees is easily understood and

readily visualised, and moreover, it is the common measure used by many government and other

formal institutions like the banks. However, the use of financial measures of firm size would,

overtime, need to be adjusted for inflation.

Firms Location

One important factor that lending institutions, especially formal financial institutions take into

consideration is the proximity of the firm to their formal place of establishment (Kumah, 2011).

Ahmed and Hamid (2011) find that there is a significant relationship between the location of a

firm and accessibility to credit. In their study, Ahmed and Hamid (2011) find that firms located

in metropolitan cities have a higher probability of access compared to other firms located in rural

areas. This is due to the nature of the rural market, which is very limited and dispersed (Deakins

et al., 2010). Pandula (2011), defining firm location by its population density, however, did not

find evidence of any significant relationship between the location of a firm and the probability of

having a bank loan due to the closeness of firms location to a market.

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Firms Age

A number of studies have argued that older firms face fewer constraints in accessing credit

compared to newer firms. For instance, Beck and Cull (2014), find that older firms with more

than 15 years of operation, are more likely to have access to a loan than mid-aged firms with

between 6 and 15 years of operation, which are in turn more likely to have a loan than young

firms with 5 or less years of operation. This is because older firms tend to have greater

reputation which increases the chances of accessing credit (Osei-Assibey, 2014).

Aryeetey et al. (1994) find that, only 10 % of start-up firms in Ghana could obtain bank loans.

Baah-Nuakoh (2003) also finds that access to finance is a severe constraint among new and

mature enterprises. This is because the lack of adequate information on the financial performance

of new and young firms makes it difficult for lenders to approve their credit demand (Adomako-

Ansah, 2012). Also, the information required by the lenders at the time of granting credit may be

limited for younger firms due to lack of established track record making the transaction costs

associated with lending to younger firms relatively higher (Pandula, 2011). Moreover, new and

younger firms are less likely to meet the collateral requirements of the banks because they have

not accumulated sufficient fixed assets (Pandula, 2011; Adomako-Ansah, 2012).

Industry/Sector of the Firm

Empirical studies indicate that firms in services sector are more likely to access credit compared

to their counterparts in the agricultural sector due to the low level of risk and relatively rising

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sales level and revenue associated with the former (Kumah, 2011). Also, Deakins et al. (2010)

find that manufacturing SMEs have less access to credit because they are more information is

required of them, particularly in situations involving new products, new technology and

diversification. This finding is consistent with that of Baah-Nuakoh (2003), whose study of 200

manufacturing firms in Ghana, indicates that finance is a severe constraint among firms

manufacturing wood, garments and furniture.

Firms Asset Structure

Collateral security is a very important determinant of access to credit, as emphasized in the

literature on SME finance (Stiglitz and Weiss, 1981; Berger and Udell, 2006). This is due to the

high risks and transaction costs associated with SME lending (Berger and Udell, 2006).

Collateral security, therefore serves as protection for lenders against defaulting borrowers.

Empirically, firms asset structure is often measured by the firms possession of tangible fixed

asset (Kumah, 2011; Pandula, 2011; Osei-Assibey, 2014).This is because fixed assets can be

used as collateral, which reduces potential losses of the bank and discourages moral hazard

behaviour of borrowers (Bebczuk, 2004). Conversely, it is argued that the more liquid the assets

of the firm are, the easier it is for them to withdraw the money from the firm and, hence, transfer

their risk to the lender in the event of default.

For instance, Osei-Assibey (2014) finds that firms ownership land, which is used as a proxy of

its asset structure, is a significant determinant of access to credit among rural non-farm

enterprises in Ghana because this collateral saves the lenders in case of default by borrowers.

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This finding confirms a study by Adomako-Ansah (2012), which shows that out of a number of

15 banks and non-bank institutions in Ghana, 13 of them consider collateral as the most

important factor in approving loans.

However, Pandula (2011) finds no significant relationship between asset tangibility (measured as

the ratio of tangible net fixed assets to total assets) and access to credit among 228 Sri Lankan

SMEs. This is because asset tangibility does not always reflect the availability of collateral since

the personal assets of the proprietor or partner which represent an important element in the

security offered for bank loan are not shown in the balance sheet of the business. This finding is

consistent with the study of Bebczuk (2004) who finds that asset tangibility of the firm is not a

significant determinant of access to credit because banks are willing to take a risky position

when making loans to SMEs.

Firm-Bank Relation

The relationship between SMEs and the lending institutions also affect the ease with which credit

is accessed (Berger and Udell, 2006). This is because, a long lending relationship reduces the

severity of the informational asymmetries experienced by the bank by providing it with

information on the borrowers credit history, her account movements, and the personal behaviour

of the firms manager (Bebczuk, 2004). SMEs with established relationship with suppliers of

credit find it relatively easier to access funding, especially from informal sources and moreover,

banks support established businesses with which they have an existing personal relationship

(Deakins et al., 2010). As noted by Vos et al. (2004), it is easier for SMEs to obtain capital from

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existing lenders as compared to new creditors due to the establishment of social networks and

firm reputation.

The relationship between firms and financial institutions is often measured by the firms

ownership of savings bank account (Osei-Assibey, 2014). For instance, Osei-Assibey (2014)

finds that relationship between firms and financial institutions, as measured by ownership of

bank account is positive and statistically significant factor in accessing credit from formal

financial institutions. This is because this relationship enables banks to assess the credit history

and cash flow of firm; hence, reducing transaction costs of generating information on firms.

Also, ownership of bank account implies that the borrower may be financially literate and may

be able to repay loan.

Conversely, Bebczuk (2004), studying the determinants of the access to credit for 140Argentine

firms, finds that even though length of lending relationship increases the probability of accessing

credit, the relationship is not statistically significant. This is because banks are more willing to

provide credit to SMEs with good investment opportunities.

3.4.2.2 Characteristics of the Owner that Determine Access to Credit

The characteristics of the owner are also important factors considered in SMEs loan assessment

in order to determine their credit worthiness and ability to repay loans (Pandula, 2011; Osei-

Assibey, 2014). This is based on the human capital theories which establish a relationship

between the characteristics of the owner and the success rate of their firms, and hence, the ability

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of repaying loans. Thus, owners characteristics such as age, gender, educational level,

experience and skills of the owner are significant determinants of access to finance. For instance,

Alhassan and Sakara (2014) find that the firm owners experience in credit use and attitude

towards risk are factors that increase the SMEs access to credit in Ghana.

Owners Gender

Empirical studies by Cole and Mehran (2009) on the relationship between gender differences in

the ownership of privately held U.S. firms and the availability of credit indicates that, female-

owned firms are significantly more likely to be credit constrained because they are more likely to

be discouraged from applying for credit.However, Beck and Cull (2014) observe that female-

managed firms are also more likely to have credit than male-managed firms in Sub-Saharan

Africa. In Ghana, studies by Kumah (2011) and Osei-Assibey (2014) show no significant gender

difference in access to credit. This is because financial institutions tend to be fair and non-

discriminatory in their provision of credit to SMEs.

Owners Level of Education

The owners level of education also increases the probability of SMEs access to credit. This is

because highly qualified owners/managers of SMEs are more efficient in their work and

moreover, providers of funds have more confidence in those with higher academic qualifications

than those with lower levels of qualification (Berger and Udell, 2006). Owners education is used

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as a proxy for managerial ability, which leads to greater efficiency and ability to attract a loan

(Pandula, 2011). Educated managers/owners are able to understand the loan application

procedures, present positive financial information and build closer relationships with their

bankers (Pandula, 2011).

In a study, Ahmed and Hamid (2011) finds that owners level of education is positively and

significantly related to probability of access to credit because firms in which the top manager

has a bachelors or a post graduate degree have a greater likelihood of access to credit compared

to those firms in which the top manager is not a graduate. Similarly, a study by Zarook et al.

(2013), using 557 firms in Libya also indicates that owner/managers level of education impacts

significantly on access to credit-a years increase in owners level of education increases their

access to finance by 0.80%.

Owners level of education is measured by the number of years spent by the owner/manager of

the business in formal education-whether owner/manager did complete secondary, secondary

school, vocational training and some university, graduate degree and/or postgraduate degree.

However, most SMEs owners in developing countries tend to have low level of formal

education. Most firm owners learn their trade through apprenticeship with an experienced master

(Aryeetey et al., 1994).

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Owners Managerial Experience and Skills

Empirical studies by Ahmed and Hamid (2011) indicate that the experience and managerial

competency of the firms manager/owner implies quality of human capital which would likely

ease interaction and facilitate negotiations with the providers of credit. A study by Zarook et al.

(2013), find that a percentage increase in managers years of experience increases access to

finance 1.062 percent. Owners managerial experience and skills is measured by the number of

years they have been in operation.

Deakins et al. (2010) note that young and inexperienced SME owners tend to be credit

constrained as a result of factors such as limited security, lack of personal resources, limited

trading records, credibility and alternative sources of finance.

Owners Affiliation or Networking with Business Association

Several studies have indicated that membership with an association increase SMEs access to

finance (Vos et al., 2004; Pandula, 2011, Kumah, 2011). This is because group liability is

preferred by financial institutions especially microfinance institutions because it mitigates both

the adverse selection and moral hazard problems which results in credit market failures

(McKenzie, 2009). Group lending increases a firms access to credit because group members

have the incentive to screen and monitor their group members to ensure that they invest their

funds wisely (McKenzie, 2009). Owners affiliation is defined as belonging to and participating

in any business or social group with similar characteristics and financing needs (Pandula, 2011,

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Kumah, 2011). Pandula, (2011) finds that networks ease SMEs access to credit because

affiliation to social ties or professional associations allows SME operators to establish relations

with bankers.

3.5.0 SMEs Demand for Credit

Access to finance is determined not only by supply-side factors but also by demand-side factors

(Krasniqi, 2010). According to Krasniqi (2010), the demand for credit is consists of a two-step

process. Firstly, the entrepreneur must have the willingness to grow and hence, decide whether to

apply for external credit or choose to finance its project by internal funds and Secondly, the firms

has to fulfil the requirements of the loan such as sound financial information, business plan,

collateral, and the ability to absorb these loans.

As observed by Gregory et al. (2005), SMEs demand for finance focuses on their capital

structure, because small businesses have a unique capital structure different from those of large

enterprises. Gregory et al. (2005) identify the following theories proposed on the capital structure

of small enterprises: agency cost theory by Jensen and Meckling (1976); pecking order theory by

Myers (1984); and finance growth cycle theory by Berger and Udell (1998). Although, these

theories explain the corporate investment behaviour of firms, their approach based on the

hierarchy of sources of finance can be easily applied to small firms (Krasniqi, 2010).

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3.5.1 Empirical Literature on Determinants of SMEs Demand for Credit

Empirical studies identify credit conditions such as interest rates, maturity, collateral

requirements and lending procedures as important factors that explain SMEs demand for credit

as these factors are perceived to constrain their demand for credit (Stephanou and Rodriguez,

2008).

Amonoo et al. (2003) find that demand for credit among firms in Ghana is also influenced by

interest rate charged as well as the owners equity and firms annual profit. There is a negative

relationship between interest rate(defined as the lending rate at which SMEs borrow from

lending institutions) and SMEs demand for credit and loan repayment at both bank and non-

bank financial institutions. Amonoo et al. (2003) also find that owners equity is also correlated

with SMEs demand for credit as financial institutions favour of enterprises that own greater share

of financial capital. Thus, small firms in Ghana mostly consider factors such as easiness,

flexibility, affordability, availability and successful outcomes of loan demand (Osei-Assibey et

al., 2012).

Demirg-Kunt et al. (2004), find that incorporated firms are more likely to borrow than

unincorporated ones because unlimited liability increases the risks borne by the owners of

unincorporated enterprises. As a result of this increased risks, the owners will be unwilling to

borrow enough to fund investment opportunities that would have been profitable in the absence

of unlimited liability.

A study by Kimuyu and Omiti (2000) of the institutional impediments to access to credit by

micro and small scale enterprises in Kenya finds that inclination towards seeking external funds

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is explained by attributes of entrepreneurs and enterprises. Firstly, there is a positive correlation

between firms size and level of demand for credit because of the need for increase working

capital by large firms (Kimuyu and Omiti, 2000). Secondly, the likelihood of applying for credit

is higher among older enterprises since they are able to build contacts and reputation needed in

seeking out and making use of credit. In addition, formally registered enterprises are more likely

to borrow significantly than the informal ones because most unregistered firms are characterised

by low productivity, inadequate access to infrastructure services and poor property rights over

their business premises. Moreover, there is a greater incidence of loan application by female

proprietors and among enterprises located in urban areas than by male entrepreneurs and those

located in rural Kenya. Sole proprietorship type of ownership are less inclined to seek out credit

relative to enterprises under other ownership structures as they are less prone to risk taking.

Furthermore, entrepreneurs who belong to a support group borrow more than those who do not

because of the externality enjoyed by group members. In summary, older, more educated

entrepreneurs operating older, larger, and/or registered enterprises are more likely to seek-out

external credit.

These findings are confirmed by a similar study by Messah and Wangai (2011), who investigate

factors that influence demand for credit among small-scale investors in Kenya. The study seeks

to determine the impact of demographic as well as socio-economic factors on firms demand for

credit or not. Their study finds that entrepreneurs who are 40 years and above, and are more

educated, with few dependants and with a higher business income are more likely to apply for

credit from formal credit institutions. Thus, socio-economic factors also determine whether

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credit is applied for, the amount applied for, the amount of credit provided, and credit rationing

(Messah and Wangai, 2011).

3.6 Conclusion

Empirical studies show that SMEs face numerous challenges among which include access to

credit. The reasons for credit constraints are explained through the theory of credit rationing.

Moreover, empirical studies indicate that characteristics of the firm as well as that of owners and

managers are important determinants of demand and supply of finance to SMEs.

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CHAPTER FOUR

RESEARCH METHODOLOGY AND FINDINGS

4.0 Introduction

A review of the literature on SMEs finance indicates that their demand and access to credit is

influenced by characteristics of the firm as well as that of owners and managers. This chapter

describes the conceptual framework underlying this study. It also presents the estimation of the

determinants of demand and access to credit through the heckman probit selection method, using

data from the World Bank Enterprise Survey (2013). Lastly, this chapter concludes with the

discussion of findings from the empirical estimations of these determinants. These factors

include owner gender, years of experience, firm age, size, registration, etc.

4.1 Conceptual Framework

Based on previous studies (Pandula, 2011; Kumah, 2011), the study conceptualizes that access to

credit by SMEs is influenced by firm-specific attributes and owner-manager characteristics. This

is because financial institutions assess the firms creditworthiness and ability to repay loans

based on these factors. Lending to SMEs involves risks due to problems of information

asymmetry. Information on these factors is considered important by financial institutions in their

loan evaluation process (Krasniqi, 2010; Pandula, 2011).

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Firm specific attributes such as age, size, ownership type, industry sector, performance, location,

innovation, registration, ownership of bank account and audited financial record affect not only

the likelihood of applying for credit but also the chance of accessing credit. Also, owner-

manager characteristics such as gender, educational level, and experience affect both demand

and supply of credit.

4.2 Method of Data Analysis

The study employs Heckman probit regression with sample selection to estimate the factors that

influence firms access to credit and the determinants of likelihood of applying for credit among

SMEs in Ghana. In this study, firms are said to have access to credit only if they have applied for

credit and their application has been approved. However, as noted by Krasniqi (2010), firms

access to credit can be estimated if and only if they applied for credit. It would be difficult to

estimate the access to credit for firms that did not apply for credit for various reasons.

The decision to apply or not to apply for credit is made by the individual firms. Some firms may

choose not to apply for credit because they thought that they would be denied whilst for other

firms, features of the loan such as application process, interest rate and maturity may deter them

from applying for credit. Thus, firms that did not apply for credit constitute a self-selected

sample and not a random sample. Therefore, there is a likelihood that estimations based on only

firms that did apply for credit will overestimate the access to credit for the whole population of

firms as a result of selection bias (Cuddeback et al., 2004).

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According to Heckman (1979), sample selection bias results from self-selection by the

respondents who are being investigated; and non-random samples selected by analysts or data

processors. Hence, estimations based on this selected sample do not give a correct prediction of

the true population being estimated because analysis is not based on a randomly selected sample

(Heckman, 1979). This results in specification error. This implies that estimations based on a

sample of only firms that have applied for credit would give rise to biased estimates of access to

credit (Krasniqi, 2010). This selection bias can be corrected through the use of Heckman probit

regression with sample selection model.

The heckman selection model is used in a situation where there are two models (for example, Y 1

and Y2) in which the explanatory variables of the first model (Y1) can be observed if only Y2 can

be observed. That is, Y1 = 1 if Y2 > 0 and Y1 = 0, if otherwise. In other words, the heckman

selection model is used when a researcher is dealing with a subsample and the unobservable

factors determining inclusion in the sample are correlated with the unobservable factors

influencing a variable of interest (Vella, 1998). Thus, sample selection bias would occur when

the unobservable owner and firm characteristics that determine a firms demand for credit is

correlated with the unobservable factors that influence firms access to credit. This implies a

relationship between demand for credit and access to credit. As cautioned by Vella (1998),

failure to include an estimate of these unobservable factors would lead to incorrect inferences

about the observable factors the influence the variable of interest, which, in this study, is access

to credit.

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The model is based on the following assumptions. Firstly, error terms in both models are

normally distributed with mean 0, constant variances and are correlated. Secondly, the error

terms are independent of the sets of explanatory variables in both equations. Therefore, the use

of Ordinary Least Square (OLS) estimation of the parameters, based on the sample observed,

will lead to inconsistent estimates because of the correlation between the error terms of two

models (Vella, 1998).

The likelihood ratio test is used to detect whether there is selection bias. This is based on the null

hypothesis that there is no correlation between the error terms of both the outcome model and the

selection model (StataCorp, n.d.). If the value of the correlation coefficient is statistically

different from zero, the null hypothesis is rejected. This implies that the model is affected by

selection bias. This provides justification for the use of heckman probit selection method.

The heckman probit sample selection method of estimation gives consistent estimates because it

eliminates the specification error of the censored samples (Heckman, 1979). The estimates are

consistent an asymptotically efficient. It also provides estimates which are close to the maximum

likelihood estimates. Moreover, it is simple and flexible (Heckman, 1979).

4.3 Model Specification

Following the study of Krasniqi (2010), the model used for the study is specified as follows:

ACCESSi = i (OwnerCharacteristics, FirmCharacteristics) + i .......... (1)

DEMANDi = i (OwnerCharacteristics, FirmCharacteristics) + i ............................... (2)

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Where:

Equations (1) and (2) represent the outcome and selection equations respectively.

ACCESSi is the probability of an individual firm accessing credit, which is assigned a

value of 1 if the firm has its application for credit approved and 0, if otherwise. This

represents the dependent variable of the model of interest.

DEMANDi is the probability of an individual firm applying for credit, which is assigned a

value of 1 if the firm has applied for credit and 0, if otherwise. This represents the

dependent variable of the selection model.

OwnerCharacteristics is a vector of explanatory variables that denote characteristics of

owner or top manager that influence both firms demand and access to credit.

OwnerCharacteristics = {owners age, experience}.

FirmCharacteristics is a vector of explanatory variables that represents the specific

characteristics of the firm that influence both firms demand and access to credit.

FirmCharacteristics = {firm size, age, industry sector, performance, registration,

innovation, ownership of bank account, asset structure, location and having audited

financial statements}.

i is a vector of parameters in the model.

i and i are the error terms which represent other factors which affect access to credit and

credit demand respectively but cannot be observed.

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In this case, the firm is observed to have its application for credit approved if and only it has

applied for the credit. That is, Prob (ACCESSi) =1 if and only if Prob (DEMANDi) = 1. The

assumption underlying this model is that the error terms are normal and independent of the

explanatory variables Xi. That is, (i , i) ~ N (0, 1) and there is correlation between the error

terms. That is, corr (i , i) = .

The selection equation should contain at least one variable that is not in the outcome equation in

order to ensure that the model is well identified (StataCorp, n.d.). Hence, to ensure consistent

estimation of the parameters of the model, the explanatory variables that influence a firms

demand for credit must exceed those influencing firms access to credit. Following a study by

Krasniqi (2010), this study includes firms future expansion plans which influence firms

demand for credit but does not have direct influence on access to credit. According to Krasniqi

(2010) future expansion plans require future increases demand for credit to finance investment

projects. Additionally, firms export status is included because capital requirement of firms

engaged in export induces them to apply for credit.

4.4 Definition and Measurement of Variables

The variables used for the study are defined as follows:

ACCESS is the dependent variable for outcome model of interest. It is defined as a dummy

variable which takes the value of 1 when loan is approved and 0, if otherwise. In this study, firms

are said to have access to credit if and only if they have they applied for credit and their

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application has been approved. SMEs that have their loan application approved are considered as

having access to credit while those whose loan application has been rejected do not have access

to credit. This variable is based on the outcome of the most recent application for a line of credit

or loan by a firm.

DEMAND is the dependent variable of the selection model which indicates whether or not a firm

has applied for a loan or line of credit in the fiscal year of 2012. It is defined as a dummy

variable that is assigned a value of 1 if a firm has applied for loan and 0, if otherwise. Firms

demand for credit is based on whether they have applied for credit only in the previous year.

OWNERS GENDER: This refers to the sex of the owner or top manager of the enterprise. This

is a dummy variable which is assigned 1 if the firm is owned or managed by a female, and 0 if

male owned. Gender of the owner or manager is included as an explanatory variable because of

the differences in efficiency and performance levels of male- and female-owned firms which

affect the firms ability to repay loans. According to Cole and Mehran (2009), private firms

owned by women in America are efficient but they tend to more credit constrained than male-

owned firms.

OWNERS EXPERIENCE: This variable measures the number of years that the owner or top

manager has spent on the job. Owners experience is measured as a continuous variable. The

experience of the owner or manager of a firm is a direct indicator of the level of efficiency of

that firm and ability to repay loans [Pandula (2011); Kumah (2011)]. Therefore, financial

institutions will be more willing to give out loans to experienced manager than inexperienced

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ones because the former has a higher probability of success. More experienced owners are

expected to have better access to credit.

FIRM AGE: This is variable measured by the number of years the firm had been in operation. It

is measure as a continuous variable. The age of a firm is included because it gives an idea about

the perpetuity of the firm. According to Osei-Assibey et al. (2012), the age of a firm is a measure

of its reputation. Hence, it is expected that the older a firm is, the higher its access to credit.

FIRM SIZE: The variable is defined by the number of permanent, full-time employees

including managers of the enterprise as at the end of fiscal year 2012. It is measured as a

continuous variable. The size of a firm gives an insight into the value of its assets which can be

used as collateral in accessing credit (Pandula, 2011). It is expected that larger firms would have

better access to credit.

FIRM PERFORMANCE: This is measured by the growth in actual annual sales revenue of all

products and services of the enterprise. The performance of a firm, in terms of sales turnover and

profit can be used to assess its creditworthiness as performing firms have a higher probability of

repaying the loan (Baah-Nuakoh, 2003). Therefore it is expected that the higher the performance

of a firm, the better its access to credit. In the survey, firms were asked to indicate their actual

sales revenues in years 2012 and 2010. This variable is constructed based on the differences in

annual sales revenue between these periods. It is measured as a dummy variable assigned 1 if the

firm has an increase in sales and 0, if otherwise.

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INDUSTRY SECTOR: This variable represents sector of activity of the enterprise. It is defined

as a dummy variable which is assigned 1 if the firm is engaged in manufacturing and 0 if the

firm is engaged in retail and services. The firms sector of operation affects their access to credit

because of the risk and profitability involved and their ability to pay back loans (Kumah, 2011).

AUDITED FINANCIAL RECORD: This variable is defined as a dummy variable which is

assigned a value of 1 if the enterprise has an audited financial record and 0, if otherwise. This

variable is used because it indicates the firms transparency, which lending institutions can use to

assess the creditworthiness of a firm (Krasniqi, 2010). Audited accounts build confidence in

financial institutions since it provides information on the financial performance of the firm. Also,

firms with audited financial records can provide it when seeking credit from financial

institutions.

FIRM REGISTRATION: This is a dummy variable which is assigned a value of 1 if the

enterprise has been registered formally with the Registrar Generals Department or with other

appropriate authorities and 0, if otherwise. Firms formality status does not only increase its

chances of seeking credit but also having access to credit. This is because financial institutions

can have information about the owners and their operations, based on the certificates of

incorporation provided by registered firms as evidence when applying for credit. This can be

used to assess their creditworthiness.

FIRM LOCATION: This is a dummy variable which is assigned a value of 1 if the enterprise is

located in the business or industrial city such as Accra and Tema and 0, if otherwise. Firms

location also has impacts on its ability to have access to credit because the proximity of the firm

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to financial institutions is used as a measure of its creditworthiness due to moral hazard problems

(Kumah, 2011).

ASSET STRUCTURE: This is proxied by land ownership by the enterprise. It is measured as a

dummy variable which is assigned a value of 1 if the firm fully owns the land on which it

operates and 0 if, otherwise. This variable is used because the ownership of land which is a

tangible fixed asset can be used as collateral for loan, hence is a measure of credit worthiness of

a firm (Osei-Assibey, 2014).

FIRM INNOVATION: This is also measured as dummy variable which is assigned a value of 1

if the enterprise has introduced new or significantly improved products or services or improved

methods of manufacturing products or offering services during the last three years. Innovation in

firm is expected to increase the demand for credit because of the capital requirement needed in

adopting and adjusting to new technologies and changing situations. Also, firms which are

innovative are expected to have increased access to credit because they are likely to perform well

in terms of sales and profits; hence, they are more credit worthy than less innovative firms.

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Table 1: Description and Measurement of Variables and Expected signs


Expected
Dependent Variables Description and Measurement
signs
Dummy: outcome of recent loan application;
ACCESS 1, if firms application for credit is approved and
0 if otherwise

Dummy: 1, if firms has applied for credit in the


DEMAND
last fiscal year and 0 if otherwise

Independent variables

Dummy: sex of owner or top manager of the


Owners Gender -/+
firm: 1 if is a female and 0, if otherwise.

Owners Experience Continuous variable: years of business experience


+
of owner or top manager of the firm

Continuous variable: Number of full time


Firm Size +
employees.

Continuous Variable: Number of years that the


Firm Age +
firm has been in operation.

Dummy: Sector of activity of firm 1 if


Industry Sector -/+
manufacturing firm and 0 if otherwise.

Dummy: Sales or turnover of firm: 1, if firm


Performance experienced positive sales growth and 0, if +
otherwise

Dummy: 1, if firm if formally registered and 0, if


Formality status +
otherwise

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Table 1 (contd)
Expected
Independent Variables Description and Measurement
signs
Dummy variable: 1, if firm has introduced new or
improved products or services or method of
Innovation +
manufacturing products or offering services over
the past three year and 0, if otherwise

Dummy: 1, if firm owns either current or savings


Firm-bank Relation +
account and 0, if otherwise.

Dummy: Ownership of land


Asset Structure 1, if firm fully owns the land on which it operates +
and 0, if otherwise.

Dummy: 1, if firm has its financial statement


Audited financial statement checked and certified by an independent external +
auditor and 0, if otherwise.

Dummy: 1, if firm is located in the Accra or Tema


Location +
and 0, if located in Takoradi and Tamale

Dummy: 1, if firm purchases fixed assets in the


Future Expansion plans +
previous year and 0, if otherwise.

Dummy variable: 1, if the firm sells its main


Export status product in the international market and 0, if +
products are sold locally.

Source: Authors Construct Based on Literature

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The World Bank Enterprise Survey (WBES, 2013) used stratified sampling technique. Firms

were stratified by sector of activity, firm size and geographical location. The degree of

stratification by sector of activity is determined by the size of the economy as measured by the

Gross National Income (GNI). Firm size is stratified on the basis of number of employees as

follows: small firms (5-19 employees), medium-sized firms (20-99 employees) and large firms

(100 or more employees). Under geographic location, firms were stratified based on the

distribution of non-agricultural economic activity of the country which takes place mostly in the

main urban economic centres of the country. The survey was carried out through face-to-face

interviews with owner and mangers of firms.

The enterprise survey studies only non-agricultural firms which are formal and privately owned.

The firms covered by the survey are those in the manufacturing, retail and services industries,

including hospitality, construction transportation and communication firms. Firms excluded from

the survey are agricultural, extractive and fully government-owned firms. In addition, firms with

less than 5 employees are excluded because of lack of adequate data on their operations. This is

also due to the fact that most of these micro firms are informal.

The World Bank Enterprise Survey (WBES, 2013) assesses the business environment in which

enterprises in the private sector operate for purposes of impact assessment of reforms. This

includes the constraints on enterprises performance and growth in these economies, based on the

firm owners experiences and perceptions of the business environment. The survey therefore

provides information concerning the business environment and factors that are challenges to

firms growth such as infrastructure, competition, crime and bribery, land and permits, and

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government-business relations. Other obstacles reported by firms include the costs of inputs and

labour, licensing, trade, capacity utilization, taxation, informality, innovation and technology.

The survey data also provides information on the characteristics of the firms such as the

composition of labour force, type of ownership, sector of operation, location, sales performance,

assets ownership, etc. Also, characteristics of the owners and managers of firms, such as their

gender of the top manager and years of work experience are provided in the data.

A major limitation of the Enterprise Surveys is that in the majority of the cases the resulting data

sets represent only firms that were willing to participate in the survey. Respondents were

reluctant in providing data on their performance such as sales, employment, cost of labour, cost

of intermediate inputs and raw materials, net book value of fixed assets, and purchase value of

fixed assets. The problem of non-response or refusal to answer the questionnaires was however,

solved by substituting with respondents who are more willing to answer them.

On access to finance, the study provides information on indicators such as access to financial

services, the sources of credit and loan requirements. In addition, the survey also provides some

information on how enterprises finance their working capital and fixed investment. The survey

reports about fifteen indicators which measure the availability of financing. These indicators are

created by computing the weighted averages of businesses responses to questions in the survey

using sampling weights.

This study adopts the definition of SMEs based on the number of employees, as given by the

World Bank Enterprise Survey (WBES, 2013). Small enterprises are defined as firms employing

five (5) to nineteen (19) workers. Medium-sized enterprises are defined as firms employing

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between twenty (20) to ninety-nine (99) workers. This definition captures a large number of

enterprises under the SMEs category.

This definition is in contrast with the current definition used in Ghana by the NBSSI, which

defines small enterprises as firms employing between 6 and 29 workers as well as the definition

used by the Ghana Statistical Service (GSS), which also defines small-scale enterprises as those

employing up to 9 employees; medium-scale enterprises as those employing between 10 and 29

workers; and large enterprises as those employing 30 or more employees (Gockel, 2003).

4.5 Research Findings and Discussion of Results

This sub-section presents the findings from the enterprise survey conducted in Ghana by the

World Bank in 2013.

The WBES covered business owners and top managers of 720 firms located in four regions of

Ghana distributed as follows: Accra (358 firms), Tema (158 firms), Takoradi (57 firms) and

Tamale (147 firms). Out of the 720 firms covered in the survey, small firms constitute 472

(65.56%) firms; medium-sized enterprises are made up of 189 (26.25%) firms; and large firms

numbered 59 (8.19%) firms. The distribution of firms by size and sector of economic activity is

shown in Table 2.

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Table 2: Distribution of Firms by Size and Sector of Activity


Sector of Activity Number of
Size of Firm
Manufacturing Retail Services Firms

Small (5 - 19) 253 90 129 472

(67.11%) (78.26%) (56.58%) (65.56%)

Medium (20 - 99) 88 23 78 189

(23.34%) (20.00%) (34.21%) (26.26%)

Large (100+) 36 2 21 59

(9.55%) (1.74%) (9.21%) (8.19%)

Total 377 115 228 720

Source: Authors Construct Based on WBES (2013)

4.6 Descriptive Statistics of Dependent Variables

The two dependent variables in this study are demand and access to credit. In order to determine

the demand for credit, firms were asked whether they have applied for a loan or a line of credit in

the last fiscal year (2012). Out of a total of 720 firms, 167 of them (approximately 23%) applied

for credit whilst 553 of them (approximately 77%) did not apply for credit.

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Table 3: Descriptive Statistics of Dependent Variables


Dependent Percentage
Definition Number of firms
Variables (%)

1= Apply for credit 167 23.19


Demand For Credit
0= Did not apply for credit 553 76.81

1= Application approved 143 85.63


Access to credit
0= Application not approved 24 14.37

Source: Authors Construct Based on WBES (2013)

Out of the 167 firms that applied for credit, 143 firms (approximately 86%) had access to credit

whilst 24 firms (approximately 14%) did not have access to finance. Furthermore, with regards

to firm size, 98 small firms and 53 medium-sized firms, represent approximately 58.68% and

31.74% of the firms respectively that applied for credit. Out of 143 firms that had access to credit

small and medium-sized firms constitute 52% and 36% respectively. On the other hand, 16 large

firms applied for credit and all of these firms had access to credit. These findings are consistent

with previous studies (Aryeetey et al., 1994; Kumah, 2011) which indicate that, SMEs tend to be

more financially constrained than large enterprises.

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Table 4: Demand for and Access to credit by Firm size


Size of Firm Demand for Credit Access to Credit

98 75
Small (5 - 19)
(58.68%) (52.45%)

53 52
Medium (20 - 99)
(31.74%) (36.36%)

Large (100+)
16 16

(9.58%) (11.19%)
Total 167 143

Source: Authors Construct Based on WBES (2013)

The survey results also show that less than a quarter of all firms (23.19%) applied for credit

whilst majority of them did not apply for credit because of various reasons. Firms were asked to

indicate one major reason for not applying for credit. The survey results also show that most of

the firms did not apply for credit because they had no need for loan. In addition, features of the

loan such as complex application process, unfavourable interest rates, high collateral requirement

and short loan maturity period were also major obstacles preventing firms from applying for

credit. Particularly, interest rate and collateral security are the two most important factors that

hinder firms from participating in the credit market. The main reasons given by firms for not

applying for credit are indicated in Table 5.

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Table 5: Main Reason for Not Applying for Credit


Reason For Not Applying Number of firms Percentage

No need for a loan 154 28.73

Interest rates were not favourable 145 27.05

Collateral requirements were too high 87 16.23

Application procedures were complex 84 15.67

Size of loan and maturity were


8 1.49
insufficient

Did not think it would be approved 8 1.31

Other reasons 43 8.02

Dont know 7 1.49

Total 536 100

Source: Authors Construct Based on WBES (2013)

Sources of Credit

With regard to firms access to credit, firms were asked to indicate the outcome of a recent loan

or line of credit they have applied. This definition of access to credit is consistent with the study

by Kumah (2011). This is because firms that have their applications approved are not financially

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constrained. The survey results also show that private commercial banks are the greatest source

of credit among all firms in Ghana. Out of a valid response of 153 firms, approximately 76% of

firms were financed from private banks. This is followed by Non- Bank Financial Institutions

(NBFIs) and government sources and lastly through other informal sources such as family,

friends and money lenders and susu operators respectively. These findings are consistent with

that of Osei-Assibey (2014), in whose study majority of financially included rural enterprises

obtained finance from formal finance sources.

Table 6: Sources of Credit


Sources Number of Firms Percentage

Private Commercial banks 117 76.47

State-owned banks and


12 7.84
government agency

Non-Bank Financial Institutions


21 13.73
(NBFIs)

Other informal sources 3 1.96

Total 153 100

Source: Authors Construct Based on WBES (2013)

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Incidence of Collateral Requirement

The survey shows that approximately 75% of 153 firms report that collateral security was

demanded from them by the financial institutions, as part of requirement for the most recent loan

or line of credit. Most of the collateral securities requested are in the form of fixed and

immovable assets such as land and buildings (81 firms) and machinery and equipment (36

firms), account receivables (28 firms), personal assets (43 firms) and other assets (8 firms). This

result is consistent with that of Aryeetey et al. (1994) where land and personal guarantor is

requested from 70% and 12% of firms respectively. Tables 7 and 8 show the incidence of

collateral security and the assets required respectively.

Table 7: Request for Collateral Security

Request for Collateral Number of Firms Percentage (%)

Yes 114 74.51

No 39 25.49

Total Number of Firms 153 100

Source: Authors Construct Based on WBES (2013)

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Table 8: Assets Required as Collateral


Asset 1=Yes 0=No Total

81 33
Land and Buildings 114
(71.05%) (28.95%)

Machinery and 36 78
114
Equipment (31.58%) (68.42%)

28 86
Account receivables 114
(24.56%) (75.44%)

43 71
Personal assets 114
(37.72%) (62.28%)

8 106
Others 114
(7.02%) (92.98)

Source: Authors Construct Based on WBES (2013)

Furthermore, firms were asked to indicate the most significant obstacle to their growth and

expansion. Lack of access to credit was a major constraint facing all firms. Overall, 334 firms

(approximately 46%) identify access to finance as the biggest obstacle to their growth and

expansion. This finding confirms the results obtained by empirical studies in Ghana where access

to finance was the most severe constraint facing firms [(Aryeetey et al., 1994); (Baah-Nuakoh,

2003); (Osei-Assibey, 2014)]

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Table 9: Biggest Obstacle Affecting the Operations of the Establishment


Obstacles Number of Firms Percentage

Access to finance 334 46.39

Electricity 142 19.72

Access to land 46 6.39

Customs and trade regulations 43 5.97

Tax rates 35 4.86

Corruption 27 3.75

Practices of competitors in the


21 2.92
informal sector

Political instability 10 1.39

Tax administration 10 1.39

Transport 10 1.39

Inadequately educated workforce 6 0.83

Labor regulations 5 0.69

Crime, theft and disorder 5 0.69

Business licensing and permits 4 0.56

Courts 4 0.56

Dont Know 3 0.42

Non Response 15 2.08

Total 720 100


Source: Authors Construct Based on WBES (2013)

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4.6.1 Descriptive Statistics of Explanatory Variables

The descriptive statistics of the explanatory variables used in this study is shown in Table 9. The

survey results show that 107 and 613 firms are owned by females and males respectively.

Moreover, there is higher incidence of application for credit among female-owned firms than

male-owned firms. Also, female owners had greater access to credit than male owners.

High performing firms, measured in terms of positive sales growth applied for and received

credit more than firms which are not experiencing increase in sales revenue. In terms of

formality status, a higher proportion of formal firms applied and received credit more than

unregistered firms. This may be attributed to the fact that financial institutions may be able to

assess the risk of default by examining documents presented by registered firms. This suggests

that unregistered firms tend to be more credit constrained whilst registered ones are self-select in

seeking out credit.

In the same way, application for credit as well as access to credit is higher among firms that

possess bank account. This can be attributed to established relationship that these firms have

with financial institutions. Financial institutions can assess their bank statements and therefore

determine their ability to repay loans.

Moreover, firms with audited financial statements showed higher demand for credit and also had

access to credit more than firms without audited financial statements. This finding is consistent

with that of Krasniqi (2010) who attributes this to the transparency of those firms. This is

because information about firms with audited financial statements is accessible by examining

their balance sheet.

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Furthermore, firms situated in Takoradi and Tamale applied and received credit more than firms

located in Accra and Tema. This may be due to financial institutions focusing on increasing their

market share outside Accra and Tema. This implies that firms located in the capital and industrial

cities are more credit constrained.

Table 10: Descriptive Statistics of Explanatory Variables


Firms that applied Firms that have
No. of
for credit access to credit
Variables Description firms
(N=720) Number Percent Number Percent

Owners 1= Female 107 25 23.36 22 20.56


Gender 0 = Male 613 142 23.16 121 19.74

1 = Manufacturing
Industry 377 93 24.67 78 20.69
0 = Non-
sector 343 74 21.57 65 18.95
manufacturing.

Firm 1= sales growth 477 114 23.89 98 20.55


Performance 0=No sales growth 243 53 22.63 45 18.52

1= formal 535 128 23.93 109 20.37


Registration
1=informal 185 39 21.08 34 18.39

Firm 1= Yes 452 127 28.10 111 24.56


Innovation 0= No 268 40 14.93 32 11.94

Bank 1=Yes 684 162 23.68 140 20.47


Account 0= No 36 5 13.89 3 8.33

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Table 10 (contd)
No. of Firms that applied Firms that have
Variables Description firms for credit access to credit
(N=720) Number Percent Number Percent

1= Accra/Tema 501 98 19.56 86 17.17


Location
0=Takoradi/ Tamale 219 69 31.51 57 26.03

1=land fully owned


Asset 256 75 29.30 64 25.00
0=Land Not fully
structure 464 92 19.83 79 17.03
owned

Audited
1= Yes 415 120 28.92 104 25.06
Financial
0= No 305 47 15.41 39 12.79
statement

4.6.2 Heckman Probit Estimation of Determinants of Access to Credit

This section discusses the results obtained from the heckman probit regression with sample

selection for access to credit. Access to credit is the dependent variable of the outcome model of

interest, whilst demand for credit is the dependent variable of the selection model. In order to

find the magnitude of the effects of the determinants on firms access to credit, the marginal

effect of these factors was calculated after the heckman probit selection regression.

The Wald test for the overall model with the probability value of chi square statistic [(P> chi2=

0.0001] implies that access to credit and demand for credit are explained by the independent

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variables used in this study. The correlation coefficient between the error terms of the two

models which is represented by rho () = 0.0064. This indicates that the unobservable factors

that influence demand for credit are positively related to the unobservable factors that influence

access to credit. However, a correlation coefficient close to zero suggests that the process of self-

selection is random (Cuddeback et al., 2004). This implies that the model is not affected by

selection bias.

The likelihood ratio test of independence between demand and access to credit also indicates that

the probability value of the correlation coefficient is not statistically significant [(P > chi2) =

0.1901]. Therefore, we fail to reject the null hypothesis that there is no correlation between the

two equations. This finding contradicts a study by Krasniqi (2010), which shows that there is a

high degree of self-selection among small firms in the credit market. Since the model is not

affected by selection bias, the standard probit estimation of access to credit and demand for

credit is carried out. This produces consistent estimators (Heckman, 1979). In addition, a

multinomial logit regression of access to credit is also carried out. The results obtained from the

heckman probit selection and multinomial logit estimations are shown Tables 12 and 13 in the

appendix.

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Table 11: Standard Probit Estimation of Access to Credit


Access to Credit Demand for Credit
Variables Marginal Marginal
P>Z P>Z
Effect Effect
Owners Gender: Female 0.0312 0.485 0.0099 0.829

Owners Experience (years) 0.0024 0.119 0.0024 0.156

Firm Size 0.066 0.279 0.0008 0.989

Firm Age (year) 0.0078 0.249 0.0034 0.609

Sector: Manufacturing 0.0027 0.928 0.0168 0.601

Performance: Sales growth 0.0046 0.876 0.0101 0.753

Firm Registration 0.067* 0.089 0.0553 0.173

Innovation 0.096*** 0.001 0.0881*** 0.006

Bank Account 0.113** 0.019 0.0848 0.178

Asset structure: Own land 0.044 0.165 0.063** 0.065

Audited Fin. Statements 0.108*** 0.000 0.111*** 0.001

Location -0.0896** 0.013 -0.1052*** 0.006

Future expansion plans - - 0.1003*** 0.002


Export status - - -0.0723 0.448
Diagnostics: Number of obs = 720 Number of obs= 720
LR chi2(12) = 53,45 LR chi2(14) = 64.38
Prob> chi2 = 0.0000 Prob> chi2 = 0.0000
Pseudo R2 = 0.0745 Pseudo R2 = 0.0825
Log likelihood = -332.17 Log likelihood = -357.77
Note: ***, **, * significant at 1%, 5% and 10% respectively
Source: Authors Construct Based on WBES (2013)

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Determinants of Access to Credit

The results obtained from the heckman probit selection show that access to credit is significantly

influenced by firm innovation, possession of bank account and having audited financial

statements. In addition to these factors, findings obtained from both the probit and multinomial

logit regressions indicate that access to credit is influenced by firm registration and location.

Firstly, access to credit is significantly related to firms innovation. The positive coefficient

implies that firms that have introduced new products and services or improved method of

production or delivery of services are more likely to have better access to credit than firms that

are not innovative. The marginal effect calculated after the standard probit and heckman probit

estimation shows that innovative firms have approximately 10 percentage points and 17

percentage points higher access to credit compared to enterprises that are not innovative. These

results are also supported by findings from multinomial logit estimation of access to credit. This

is because innovative firms that adopt new techniques tend to be more productive and profitable

due to the lower cost of production; hence, there is a higher probability of repaying the amount

of loan borrowed. This finding contradicts the results found by Freel (2007), where innovative

firms have less access to credit than less innovative ones because of the bias towards innovative

firms.

Secondly, there is a positive and statistically significant relationship between firms having

audited financial statements and access to credit. The results obtained from the marginal effects

calculated after the standard probit and heckman probit estimation shows that enterprises with

audited financial statements have approximately 11 percentage points and 34 percentage points

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higher access to credit compared to firms without audited financial records. This is because these

firms are transparent; hence, information about their financial performance can be obtained for

purposes of loan evaluation. The reason for this is that lending institutions have access to peruse

the financial statements of borrowing firms to boost their confidence in providing credit to those

firms. This finding, however, contradicts the study by Kumah (2011) which finds that keeping

accounting records does not significantly influence firms access to credit because not all

financial institutions give priority to financial records.

Thirdly, having savings or current bank account significantly influences firms access to credit.

The marginal effects calculated from the standard probit and heckman probit selection show that

firms that possess bank accounts have approximately 11 percentage points and 39 percentage

points higher access to credit than those without bank account. This finding is in line with a

study by Osei-Assibey (2014). This is because banks account gives financial institutions insight

about the credit history of firm owners in their loan evaluation process.

Furthermore, there is a positive and significant relationship between firms registration and

access to credit. This means that registered firms are more successful in their access to credit as

compared to informal and unregistered firms. The marginal effect calculated after the probit and

multinomial logit estimations shows that registered enterprises have approximately 7 percentage

points and 6 percentage points higher probability of having access to credit compared informal

enterprises respectively. This finding confirms a study by Kimuyu and Omiti (2000) who finds

that formal businesses receive more credit than informal ones. This is because registered firms

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present certificates of incorporation when seeking credit. Financial institutions have idea of

where to locate the firm in case of loan default.

Lastly, both the probit and multinomial logit estimations show that firms location significantly

increase firms access to credit. The results show that firms located in Accra and Tema have

approximately 9 percentage points lower access to credit than firms located in Takoradi and

Tamale. In case of Takoradi, the reason may be attributed to springing up of financial institutions

after the discovery of oil in the western region.

Contrary to expectations, the characteristics of the owner or manager of the firm, such as gender

and years of business experience do not significantly influence firms access to credit. Moreover,

there is no significant relationship between firm size, age, industry sector, performance, and

ownership of land as a collateral, on the one hand, and access to credit among SMEs in Ghana.

This is probably because more emphasis is placed by financial institutions on other movable

assets like machinery and account receivables. Also, firm age, performance, industry sector are

not statistically significant determinants of access to credit among SMEs in Ghana.

Determinants of Demand for Credit

The results obtained from the both probit regressions and multinomial logit estimations show

that demand for credit is also significantly determined by firm innovation, location, ownership of

land, possession of audited financial statements. Moreover, firms future expansion plans also

influence their demand for credit.

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Moreover, innovation also significant increases firms demand for credit. The results obtained

from all the estimation shows that firm that firm that are innovative in introducing new products

or services or method of production have 9% percentage points higher probability of applying for

credit than less innovative firms. This can be attributed to the huge capital requirements of the

firms that adopt new techniques of production.

Furthermore, firms having audited financial statements show significant higher demand for credit

compared to firms that do not have their financial records audited by external auditors. The

results obtained from the multinomial logit estimation show that firms with audited financial

statements have 12 percentage points higher in demanding for credit than firms without audited

financial records. This is because firms with audited financial statements can present those

records to financial institutions when applying for credit.

Moreover, firms ownership of land, which is used as a proxy for asset structure, significantly

increases their demand for credit. The results obtained from the heckman probit selection and the

usual probit estimations indicates that firms that fully owned their land show approximately 11

percentage points higher demand for credit than firm that do not own the land on which they

operate. This can be attributed to the fact that those firms can provide land as collateral security

in applying for credit.

Furthermore, results from both probit and multinomial logit estimations show that location of a

firm also significantly influences the firms demand for credit. The results obtained from all the

estimations show that firms located in Accra and Tema have approximately 10 percentage points

lower demand for credit compared to firms located in Takoradi and Tamale. This finding

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contradicts that of Krasniqi who finds that there is no significant difference in demand for credit

between firms located in urban and rural areas. This can be attributed to a major increase in

economic activity in a location, such as the oil discovery in the western region of Ghana that has

attracted many new firms. Competition among those firms may encourage them to have higher

demand for credit so as to expand their operations.

Lastly, firms future expansion plans also increases their demand for credit significantly. This

result obtained from the probit and multinomial logit estimations indicate that firms that have

future expansion have approximately 10 percentage points higher demand for credit than firms

without future expansion plans. This finding is consistent with that of Krasniqi (2010). The

reason may be that future expectation of increases in profit and sales encourages firms that have

invested in fixed assets to demand for credit.

4.7 Conclusion

The results derived from this study show that access to credit is still most severe constraint

reported by firms in Ghana, especially SMEs. Many small firms do not apply for credit because

of feature of loan such as complex application procedures, unfavourable interest rate and

collateral requirements and short loan maturity period.

The determinants of access to finance among firms in Ghana were estimated using the heckman

probit selection method. It is found that there is not enough evidence to support the hypothesis

that there is selection bias regarding firms access to credit. This implies that firms selection

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process into credit demand is random and that, there is little evidence of self-selection among

firms participation in the credit market in Ghana.

The results obtained show that access to credit is significantly influenced by firm innovation,

possession of bank account and having audited financial statements. In addition to these factors,

findings obtained from both probit and multinomial logit regressions indicate that access to

credit is also influenced by firm registration and location.

On the other hand, demand for credit is significantly influenced by firm innovation, location,

ownership of land and possession of audited financial statements as well as firms future

expansion plans.

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CHAPTER FIVE

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.0 Introduction

This chapter presents the summary and conclusion of this study. Recommendations based on the

findings of this study are also provided. These recommendations would be of significance to

owners of SMEs, financial institutions, government policy makers and other stakeholders who

are committed to overcoming SMEs financing obstacles. The limitations of this study are

provided at the end of the chapter.

5.1 Summary of Study Findings

The motivation for this study is the persistent lack of access to credit facing all firms in general

and SMEs in particular. The study examined factors that determine access to finance as well

challenges facing SMEs in their access to finance in Ghana. The specific objective is to find the

factors that influence SMEs demand for credit in Ghana as well as the factors that determine

their success of having access to credit from financial institutions. The study focused on

characteristics of the owners/managers of SMEs and features of those SMEs that influence their

demand and access to credit in Ghana.

The study used a firm-level survey of 720 firms conducted by the World Bank in Ghana in 2013.

The study employed heckman probit regression with sample selection model. This is because the

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firms may be self-selected in their decision to apply for credit. Therefore, usual estimations

based on a sample of only firm that have applied for credit can lead to sample selection bias as

the selected sample is not based on a random process.

The study finds that the demand for credit is significantly influenced by firm characteristics.

Firstly, firms that are innovative in introducing new products or services or adopting new

methods of production are more inclined to seek out credit due to the huge capital requirement in

adapting to the new conditions.

Secondly, firm registration also significantly increases the demand for credit among SMEs

Registered enterprises are found to be more likely to participate in the credit market as compared

to unregistered firms.

Thirdly, firms that have full ownership of land are more likely to show higher demand for credit

than those that do not fully own the land on which they operate.

Moreover, firms location significantly affects their demand for credit; firms located in Takoradi

showed significantly higher demand for credit than firms situated in Accra.

Also, firms with audited financial records have significantly higher demand for credit than firms

that do not have audited financial statements due to the transparency of these firms.

Lastly, it is found that firms that have future expansion plans have significantly higher demand

for credit than those that do not have future expansion plans.

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The study also finds that access to credit is influenced by specific characteristics of the firm such

as firm innovation, firm registration, location, possession of bank account and having audited

financial statements.

Innovation in firms significantly influences access to credit as innovative firms are found to have

higher probability of accessing credit than less innovative firms. Registered firms also have

higher access to credit than unregistered firms. This reinforces the importance of formality status

in access credit in Ghana. Moreover, firms located in Takoradi and Tamale are found to have

higher access to credit than firms located in Accra and Tema. Furthermore, firms that have either

savings or current bank account have higher access to credit than those without bank account.

Last but not least, firms which have audited financial record have easier access to credit. This is

due to the transparency of their operations and the accessibility to information about the financial

performance.

On the contrary, firms size, age, industry sector and performance as measured by sales growth

do not bear any significant relationship with either demand or access to credit. Moreover, none

of the entrepreneurs characteristics such as gender and owners years of business experience is a

significant determinant of demand and access to credit in Ghana.

5.2 Conclusions of the Study

Several conclusions can be drawn both from findings from firms demand and access to credit

which are the specific objectives of this study.

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Firstly, the study finds evidence to support the case that all Ghanaian firms in general, and SMEs

in particular, face credit constraints as only less than a quarter (19.86%) of firms have access to

credit. Therefore, access to credit still remains a major obstacle to firms growth and

productivity. Firms rank access to finance as the biggest obstacle of the business environment.

Secondly, financial challenges among firms in Ghana include complex loan application process,

unfavourable interest rate and collateral requirement, small loan size and short loan maturity

period.

Moreover, it can be deduced that there is little evidence of self-selection among firms in Ghana

regarding their decision of seeking for external funding or their participation in the credit market.

Approximately 28% of firms indicated that they did not need a loan.

Also, the study finds that access to credit is influenced mostly by specific characteristics of the

firm such firm innovation, registration, location, possession of bank account and having audited

financial statements. However, owners gender and experience as well as firm size and

ownership of land, which can be used as collateral, do not have significant influence on firms

access to credit.

Finally, the study concludes that demand for credit is influenced by a mixture of firm

characteristics. Specifically, firms innovation, location, ownership of land, having audited

financial statements and future expansion plans significantly affect the participation of SMEs in

the credit market.

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5.3 Recommendations

To solve the problem of access to credit, both demand- and supply-side barriers need to be

identified and tackled through regulatory reforms and policy initiatives. Based on the findings of

this study, the following steps are recommended.

Firstly, providing training to owner and managers of SMEs in such areas as preparation of

financial accounts would not only promote their demand for credit but also increase their access

to credit. SMEs must have their financial accounts examined by independent external auditors.

Moreover, SMEs should be encouraged to register their businesses and become formal. In this

regard, the processes as well as costs involved in registering and licensing of firms need to be

checked in order to remove obstacles. This would help build confidence in lending institutions

when providing credit to SMEs as they know the owners of the firm and their ownership rights.

Owners of SMEs should be encouraged to adopt new technologies and innovations as this

increases their chances of having access to credit. This requires building the capacity and

development of SMEs so that they can easily adapt to new technologies and innovations.

The successful implementation of these recommendations however requires effective mechanism

for co-ordination between governments efforts and that of the private sector including financial

institutions and other stakeholders who are contributing towards providing finance to SMEs. An

enabling regulatory framework is essential to sustain and significantly improve access to credit

in Ghana.

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5.4 Limitations of the Study

One of the major limitations of this study is that the data used does not include many

characteristics of the owner/ manager such as educational level and affiliation to business

association which are also important factors that are considered in loan evaluation process.

Secondly, the data is a cross sectional data which does not allow for comparison of the problems

relating to small firms credit constraints over different periods of time. In this regard, there is the

need for future studies to consider time series data in order to make well informed conclusions

on the subject of lack of access to credit among SMEs.

Moreover, the study includes only firms in the urban centres and cities such as Accra, Tema,

Takoradi and Tamale. Rural enterprises are not covered by the survey. However, studies of these

rural enterprises would help make comparison with the urban firms. Despite these limitations,

the findings of this study will be useful in providing insight for further studies.

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APPENDIX

Table 12: Heckman Probit Estimation of Access to Credit


Access to Credit Demand for Credit
Variables Marginal Marginal
P>Z P>Z
Effect Effect
Owners Gender: Female 0.0025 0.850 0.0113 0.808

Owners Experience (years) 0.00238 0.561 0.0026 0.125

Firm Size 0.0337 0.107 0.0013 0.982

Firm Age (year) 0.0011 0.559 0.0033 0.634

Sector: Manufacturing 0.0096 0.305 0.0161 0.616

Performance: Sales growth 0.0032 0.682 0.0098 0.759

Firm Registration 0.0071 0.545 0.0524 0.197

Innovation 0.1715*** 0.007 0.0894 *** 0.005

Bank Account 0.3948* 0.066 0.0834 0.192

Asset structure: Own land 0.0059 0.502 0.0637** 0.062

Audited Fin. Statements 0.3412** 0.023 0.1105*** 0.001

Location : -0.0214 0.220 -0.1084*** 0.005

Future expansion plans - - 0.0973*** 0.004


Export status - - -0.0976 0.244
Diagnostics: rho = 0.0064
Number of obs. = 720; Censored obs. = 553; Uncensored obs = 167
Wald chi2(12) = 18.76; Prob > chi2 = 0.0001 ; Log likelihood = -428.16
LR test of indep. eqns. (rho = 0): chi2(1) = 1.72; Prob > chi2 = 0.1901
Note: ***, **, * significant at 1%, 5% and 10% respectively
Source: Authors Construct Based on WBES (2013).

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Table 13: Multinomial Logit Estimation of Access to Credit


Access to Credit Demand for Credit
Variables Marginal Marginal
P>Z P>Z
Effect Effect
Owners Gender: Female 0.0304 0.458 0.0112 0.798

Owners Experience (years) 0.0023 0.126 0.0025 0.121

Firm Size 0.0583 0.235 0.0013 0.982

Firm Age (year) 0.0093 0.233 0.0038 0.571

Sector: Manufacturing 0.0034 0.908 0.0177 0.571

Performance: Sales growth 0.0050 0.864 0.009 0.768

Firm Registration 0.0617* 0.070 0.0481 0.185

Innovation 0.103*** 0.002 0.0914*** 0.007

Bank Account 0.1424 0.123 0.0842 0.315

Asset structure: Own land 0.0392 0.187 0.0559* 0.073

Audited Fin. Statements 0.1135*** 0.001 0.1168*** 0.001

Location : -0.0867*** 0.006 -0.1008*** 0.002

Future expansion plans - - 0.0998*** 0.002

Export status - - -0.0726 0.531

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Table 13 (contd)
Diagnostics:
Number of obs = 720
LR chi2(12) = 53.97
Prob> chi2 = 0.0000
Pseudo R2 = 0.0752
Log likelihood = -331.91

Note: ***, **, * significant at 1%, 5% and 10% respectively


Source: Authors Construct Based on WBES (2013)

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