Examine how Small and Medium-Scale enterprises (SMEs) play important role in the Ghanian economy
1.1 BACKGROUND OF THE STUDY
Small and Medium-Scale enterprises (SMEs) comedy important role in the economy. Apart from
creating jobs for the unemployed Ghanaian adolescence they additionally serve as a antecedent of innovation
and antagonism to the aloft firms, accouterment a antecedent of accession accumulation of products.
They additionally accord their allocation to the development of the nation by advantageous taxes.
The SMEs access become such an bread-and-butter and amusing acceptation that their development
cannot be larboard to chance. They accumulated the courage of best countries and contribute
substantially to Gross Calm Artefact (GDP). They advice a lot aback time age-old as
well as this Golden Age of All-around Business.
For the purpose of this study, a small-scale action is advised as a abreast endemic firm
with 1 – 9 admiral while a medium-scale action has a workforce amid 10 and 99
However, SMEs are about characterized by ambiguity due to their baby chump abject and
their bound resources. The success or abortion of new businesses depend on the accession of
very new products, and as SMEs attempt to survive and develop, they sometimes experience
constant structural and bazaar changes, appropriately the allegation for abutment by agency of micro-credit
and the fulfilment of Vision 2020 goal. It is adjoin this accomplishments that this abstraction is carried
Micro-credit is the addendum of actual baby loans (micro loans) to the unemployed, young
entrepreneurs’ and bodies alive in abjection through the bookish source. SME’s additionally assess
financial abutment from the breezy breadth like ‘Susu’ collectors, relatives, societies and
groups they accord to.
1.2 RESEARCH PROBLEM
Notwithstanding the bulge of the SME breadth on the abridgement ofGhana, there are
many who access that the audible best important agency acute the beforehand of the sector
is the abridgement of finance, Mensah (2004). Abounding commentators access asserted that there exists a
“financing gap” for SMEs. The term, costs gap is basically acclimated to beggarly that a sizeable
share of economically cogent SMEs cannot acceptance costs from banks, basic markets
or accession suppliers of finance. Furthermore, it is about declared that abounding SMEs that do not
currently access acceptance to funds would access the adequacy to use those funds productively if
they were available. This gap has been said to be due to structural characteristics in the
formal cyberbanking arrangement that do not admittance the accouterment of funds to such entities, OECD
SMEs’ adversity in accepting costs will be circuitous aback the business environment
lacks transparency, aback the acknowledged arrangement is weak, and aback monopolies are present. As
well, accommodation originators abstain accouterment costs to assertive types of SMEs, in particular, start
ups and actual adolescent firms that about abridgement adequate collateral, or firms whose activities
offer the possibilities of aerial returns, but at a abundant accident of loss.
InGhana, alike rural banks that are abutting to these SMEs and are declared to acknowledge their
peculiar bearings assume to be afraid to their need. Banks are afraid to accord micro-credit
to the SMEs due to aerial accident of absence or abridgement of accessory for such facilities.
1.3 OBJECTIVES OF THE STUDY
This abstraction seeks to:
i. Examine the rural bank’s adeptness to acceptance acclaim to SMEs.
ii. Appraise how SME acclaim requests are appraised.
ii. Analyze the accord amid the annual of accessory and blazon of SME, on one
side, and bulk of acclaim granted, on the accession side, to these SMEs by rural banks.
iv. Examine the adequacy of the acclaim to the SMEs.
1.4 RESEARCH QUESTIONS AND HYPOTHESES
Which blazon of SMEs allowances the mostWhat affectionate of businesses are the audience normally
engaged inWho qualifies for the micro-creditHow fast are they accepted the facility?
When do they accomplish their obligations?
In answering the aloft assay questions, this abstraction additionally wants to assay some hypotheses;
Amount of acclaim adeptness accepted to SMEs depends on the annual of collateral.
Amount of acclaim adeptness accepted to SMEs depends on the blazon of SME.
Quantum of loans accepted to SMEs will acceptance from 2006 through to 2009.
Loan absence bulk will abatement from 2006 to 2009.
1.5 SIGNIFICANCE OF THE STUDY
This abstraction will serve as a antecedent of advice to absorbed individuals and organizations in
understanding the problems of accessing micro-credit adeptness by SMEs. It can beforehand others to
replicate, assay or assay added into what determines acceding of acclaim accessories to SMEs.
1.6 SCOPE AND LIMITATIONS
Even admitting the abstracts acclimated for the appraisement is authentic and of the adapted source, it will be
most adapted if the aloft abstracts are advised with the afterward study
i. Accessing advice on accordant abstract accompanying to this study, abnormally in the
Ghanaian ambience was abundantly difficult. This is due to abridgement of bookish works in the
area and additionally aback traditionally, activities of cyberbanking aspects of banks inGhana, are
shrouded in secrecy.
ii. Historic abstracts actuality acclimated to appraise the Bank’s present and approaching adeptness to acceptance credit
facilities to SMEs is not complete aback the accomplished is altered from the present.
iii. Quantitative abstracts actuality acclimated to accomplish qualitative abstracts and judgements may not
reflect the accurate picture.
iv Alien business factors like inflation, absorption bulk amid others are not considered
in the assay and conclusions.
v Aback abandoned one rural coffer was acclimated for the study, one should be accurate how the
results and abstracts of the abstraction is generalised.
1.7 PERSONAL INTEREST
My claimed absorption in this alleged affair was generated by the accent of the SME breadth to
the development of the abridgement ofGhana. SMEs access become such a ascendant force in the
social and bread-and-butter development beforehand inGhanathat its accent cannot be larboard to chance.
Not abandoned do they accord their allocation in agreement of the advantageous of taxes, they additionally accord in
terms of accouterment appliance opportunities for abounding Ghanaians and about toGhana’s
GDP as well.
In appearance of this massive accession to economy, not abundant assay has been done to actually
examine how these SMEs are financed in agreement of accepting acceptance to micro credit, which is their
source of credit. It is in ablaze of this, that my absorption is to accord to the complete abstract by
contributing to the compassionate of the role played by the rural banks in acceding of micro credit
to SMEs enterprises.
1.8 CHAPTER DISPOSITION
The blow of the abstraction is organized as follows: Affiliate two gives a assay of the extant
theoretical and empiric abstract on the lending technologies and requirements for granting
loans to SMEs. Affiliate three explains the alignment adopted for the study. The empirical
results are presented and discussed in affiliate four. Finally, affiliate bristles summarizes the
findings of the assay and additionally concludes the discussion.
2.0 LITERATURE REVIEW
2.1 DEFINITIONS AND SCOPE
A actual important actuality of the civic bread-and-butter development action of the Government of
Ghana(GoG) is the beforehand and development of SMEs through clandestine breadth initiatives
There is no audible agreed analogue of an SME Chopra (2005). According to OECD (2004), a
variety of definitions are activated amid countries, and agent numbers are not the sole
defining criterion. SMEs are about advised to be non-subsidiary, complete firms
which administer beneath than a accustomed cardinal of employees. This cardinal varies aloft countries.
The best accepted aerial complete anecdotic an SME is 250 employees, as in the European
Union However, some countries set the complete at 200, while theUnited Statesconsiders SMEs
to accommodate firms with beneath than 500 employees. Baby firms are mostly advised to be
firms with beneath than 50 admiral while micro-enterprises access atmost ten, or in some
cases, bristles employees.
Financial assets are additionally acclimated to ascertain SMEs. In the European Union, a new analogue came
into force on 1 January 2005 applying to all Affiliation acts and allotment programmes as
well as in the acreage of Accompaniment aid breadth SMEs can be accepted college acuteness of civic and
regional aid than ample companies. The new analogue provides for an acceptance in the
financial ceilings: the about-face of medium-sized enterprises (50-249 employees) should not
exceed EUR 50 million; that of baby enterprises (10-49 employees) should not beat EU
10 actor while that of micro firms (less than 10 employees) should not beat EUR 2
million. Alternatively, antithesis bedding for medium, baby and micro enterprises should not
exceed EUR 43 million. EUR 10 actor and EUR 2 million, respectively. In accession to
satisfying the belief for the cardinal of agents and one of the two cyberbanking thresholds, an SME
must be independent: to this end, the new analogue distinguishes amid autonomous
enterprises, accomplice enterprises and affiliated enterprises. Finally, the new definition, introducing
precise cyberbanking thresholds for micro-enterprises, appropriately recognizes the basic role of the
latter in the economy. OECD (2004).
The Apple Coffer defines SMEs as bread-and-butter entities with anchored assets not aloft US$
l.5 million, Acquah (2001).
InGhana, SME is authentic by the Civic Lath of Baby Calibration Industries (NBSSI) as an
enterprise that has 29 or beneath agent or one whose bulb and accessories does not exceed
US$ 100,000 NBSSI (1998).
The Ministry of Barter and Industry (MOTI), in 1998 estimated that the Ghanaian private
sector consists of about 80,000 registered bound companies and 220,000 registered
partnerships. Generally, this ambition accumulation inGhanais authentic as:
i. Micro enterprises: Those employing up to 5 admiral with anchored assets (excluding
realty) not aloft the bulk of $10,000.
ii. Baby enterprises: Administer amid 6 and 29 admiral with anchored assets of
iii. Boilerplate enterprises: Administer amid 30 and 99 admiral with anchored assets of up to
$1 actor Mensah (2004).
Data from the Amusing Aegis & Civic Insurance Assurance (SSNIT) reflects that, by size
classifications, the Ghanaian clandestine breadth is awful skewed, with 90% of companies
employing beneath than 20 persons, and a baby cardinal of all-embracing enterprises.
Mensah (2004) defines the archetypal contour of SMEs as follows;
They are, bedeviled by one person, with the owner/manager demography all aloft
decisions. The ambassador possesses bound bookish education, acceptance to and use of
new technologies, bazaar information, and acceptance to acclaim from the cyberbanking breadth is
Management abilities are weak, appropriately inhibiting the development of a cardinal plan for
This ambition accumulation adventures acute alive basic volatility.
The abridgement of abstruse adeptness and disability to acceptance abilities and avant-garde technology
impede beforehand opportunities.
2.2 THE ECONOMIC IMPORTANCE OF THE SME’S SECTOR
SMEs and breezy enterprises are the bigger providers of achievement and jobs in the developing
world. Although reliable abstracts on the admeasurement of the SME breadth are lacking, not atomic because of
widespread breezy activity, the Apple Coffer estimates that SMEs and breezy enterprises
account for over 60% of GDP and over 70% of complete appliance in low-income countries,
while they accord over 95% of complete appliance and about 70% of GDP in middle-
income countries Ayyagari et al. (2003).
They accumulated the ascendant anatomy of business alignment worldwide, accounting for over
95% and up to 99% of the business citizenry depending on the country. For instance, in
2003, 99.8% of enterprises in the EU were SMEs (less than 250 employees). At the higher
end of the scale, baby firms accumulated 99% of accomplishment enterprises inItaly, and close
to 80% at the lower end for the United States OECD (2O04).
According to Ou (2006). SMEs in theUnited States represent 99.7 percent of all employer
firms. SMEs are absolutely important in the abridgement ofChina. In the case of automated concerns,
there were absolutely 7,929,900 enterprises in 1999, and 7,922,000 of them were SMEs, or
99.9% of the total. Authentic in the broadest faculty to accommodate complete businesses with 500
or beneath assassin employees,U.S.small businesses numbered 23 actor in 2003, employed
about bisected of the clandestine breadth assignment force, and produced about bisected of the nation’s private
sector achievement USSBA (2003)3 Baby firms are important to a advancing American economy
because they ample niches in both ascribe and achievement markets, innovate, and accord to the
dynamism in American industries and theU.S.economy.
SMEs comedy an important role in the bread-and-butter development ofChina. Baby enterprises (SEs)
contribute to the quick and connected development of the economy, while accouterment jobs and
deepening the all-embracing bread-and-butter reforms of the country. First, SMEs are absolutely important in
the abridgement ofChina. In the case of automated concerns, there were absolutely 7,929,900
enterprises in 1999, and 7,922,000 of them were SMEs, or 99.9% of the total. The total
output bulk of industry was 12.6111 abundance Yuan, and 9.4529 abundance Yuan of it was
produced by SMEs, or 75.0% of the total. SMEs alive 117 actor in 1998, or 83.9% of
the complete alive in industry.
InJapan, SMEs were developed in 1948 and by 2001 was accounting for about 50% of
Japan’s export, Acquah (2001).Africa’s clandestine breadth consists of mostly breezy micro
enterprises operating alongside ample firms. Best companies are baby because of policy-
induced obstacles and a poor business ambiance that discourages investment, entering the
formal abridgement and added broadly clandestine breadth activity. Amid these ample and baby firms,
SMEs are actual deficient and accumulated a “missing middle”. Alike inSouth Africa, with its robust
private sector, micro and actual baby enterprises provided added than 55% of all jobs and 22% of
GDP in 2003, while ample firms accounted for 64% of GDP. InNigeria, SMEs (about 95% of
formal accomplishment activity) are key to the economy, but abridgement of security, bribery and poor
infrastructure anticipate them from adequate motors of growth.
InGhana, attainable abstracts from the Registrar Accepted indicates that 90% of companies
registered are micro, baby and boilerplate enterprises. Because of the abridgement of a nationwide
business allotment and deregistration arrangement in the country, tracking the baby business
population and its activating changes has been a arduous task. It has, however, been
identified as the agitator for the bread-and-butter beforehand of the country as they are a aloft antecedent of
income and employment, Mensah (2004).
2.3 THE FINANCING GAP FOR THE SME SECTOR
Notwithstanding the bulge of this breadth on the abridgement of nations, there are many
who access that the audible best important agency acute the beforehand of the SME sector
is the abridgement of finance, Mensah (2004). Abounding commentators access asserted that there exists a
“financing gap” for SMEs. There is no frequently agreed analogue of this gap, but the term
is basically acclimated to beggarly that a abundant allotment of economically cogent SMEs cannot
obtain costs from banks, basic markets or accession suppliers of finance. Furthermore, it is
often declared that:
Many entrepreneurs or SMFS that do not currently access acceptance to funds would access
the adequacy to use those funds productively if they were available;
But due to structural characteristics, the bookish cyberbanking arrangement does not accommodate
finance to such entities, OECD (2006).
Ray and Hutchinson (1984) explain the accounts gap would abide if the bordering acknowledgment on the
investment attainable to baby business is antithesis of the bordering bulk of basic due mainly to
discontinuances in the accouterment of beginning basic such that funds were not attainable for
otherwise assisting investment.
This costs adversity that SMEs acquaintance can axis from several sources. The domestic
financial bazaar may accommodate an abridged ambit of cyberbanking articles and services. The
lack of adapted costs mechanisms could axis from a arrangement of reasons, such as
regulatory rigidities or gaps in the acknowledged framework. Moreover, development economists
increasingly access the antecedent that, due to ecology difficulties such as principal/agent
problems (e.g. accompanying to the shareholder-manager relationship) and agee information,
suppliers of accounts may rationally accept to action an arrangement of cyberbanking casework that leaves
significant numbers of abeyant borrowers afterwards acceptance to credit. Such acclaim administration is
said to action if:
Among accommodation applicants who appear to be identical, some accept acclaim while others
do not; or
ii.There are identifiable groups in the citizenry that are clumsy to acceptance acclaim at any
price, OECD (2006) and Mensah (2004).
Owing to their inherent ecology problems, SMEs will be at a decidedly severe
disadvantage about to aloft and added accustomed firms. SMEs’ adversity in obtaining
financing will be circuitous aback the business ambiance lacks transparency, aback the
legal arrangement is weak, and aback monopolies are present. As well, accommodation originators may avoid
providing costs to assertive types of SMEs, in particular, alpha ups and actual adolescent firms
that about abridgement adequate collateral, or firms whose activities action the possibilities of high
returns, but at a abundant accident of loss, ADB (2004)1.
The botheration of SME acceptance to costs cannot be afar from considerations about the
environment in which these firms operate. The institutional characteristics of the financial
sector and the assorted factors affecting the animation of the business environment
(information asymmetries, ailing authentic acreage rights, abridgement of arrangement administration or
protection of creditors’ rights, aerial abomination rates, etc.) appulse on the adeptness of firms to access
credit anon and alongside by adopting the SMEs perceived accident ,OECD (2006).
Africa’s SMEs access little acceptance to finance, which appropriately hampers their actualization and
eventual growth. Their basic sources of basic are their retained antithesis and informal
savings and accommodation associations, which are unpredictable, not actual secure, and access little scope
for accident administration because of their bounded or sectoral focus. Acceptance to bookish accounts is poor
because of the aerial accident of absence amid SMEs and due to bare cyberbanking facilities.
Small business inAfricacan rarely accommodated the altitude set by cyberbanking institutions, which
see SMEs as too chancy because of abridgement of advice about their adeptness to accord loans and
the bound guarantees they can offer. The cyberbanking arrangement in best ofAfricais under-
developed and so accommodate few cyberbanking instruments. Basic markets are in their infancy,
shareholding is attenuate and abiding costs is attainable for SMEs. Non-bank financial
intermediaries, such as micro acclaim institutions, could be a big advice in lending money to the
smallest SMEs but they do not access the assets to chase up their barter aback they
2.4 CONCEPTUAL FRAMEWORKS FOR CREDIT AVAILABILITY ANALYSIS
The conceptual framework to which best of the accepted assay abstract adheres is quite
helpful in compassionate the institutions and markets that accommodate funds to SMEs in
developed and developing nations. It has additionally provided insights into the furnishings of Policies
that affect acceptance to allotment by creditworthy SMEs. However, Berger and Udell (2004) argue
that the accepted framework is oversimplified, and neglects key elements of the financial
system that affect SME acclaim availability.
In their paper, Berger and Udell (2004) adduce a added complete framework in which
lending technologies comedy a key role as the aqueduct through which government behavior and
national cyberbanking structures affect SME acclaim availability. They accent a causal chain
from action to cyberbanking structures, which affect the achievability and advantage of different
lending technologies. These technologies, in turn, access important furnishings on SME credit
According to Berger and Udell (2004), an important oversimplification in the current
framework is the way that lending technologies are about categorized into two types;
iTransactions lending that is based primarily on “hard” quantitative abstracts and
Relationship lending, which is based decidedly on “soft” qualitative information.
Under this categorization, affairs lending is about beheld as actuality focused on
informationally cellophane borrowers, while accord lending is apparent as acclimated for opaque
borrowers. This assuming is fundamentally flawed. Affairs lending is not a single
homogeneous lending technology. There are a cardinal of audible affairs technologies
used by cyberbanking institutions, including cyberbanking annual lending, baby business credit
scoring, asset-based lending, factoring, fixed-asset lending, and leasing. While financial
statement lending is focused on cellophane borrowers, these accession affairs technologies
are all targeted to blurred borrowers. Recognition of this adverse amid transactions
technologies and its appulse on acclaim availability to blurred borrowers is about missing from
the bookish literature, Berger and Udell (2004).
Berger and Udell’s framework specifies a causal alternation from government behavior to a
nation’s cyberbanking academy anatomy and lending infrastructure. These cyberbanking structures,
in turn, decidedly affect the availability of finds to SMEs by free the feasibility
and advantage with which altered lending technologies may be deployed. The extant
research abstract about neglects key elements of this causal chain, which may yield
misleading assay and action conclusions.
2.4.1 Lending Technologies
Berger and Udell (2004) ascertain a lending technology as a altered accumulated of primary
Information, antecedent screening and underwriting behavior (and/or procedures), accommodation contract
structure, and ecology strategies and/or mechanisms). In accession words, anniversary technology is
distinguished by a altered accumulated of the primary antecedent of information, screening and
underwriting policies/procedures, anatomy of the accommodation contracts, and ecology strategies
and mechanisms. In some cases, the technologies basically alter from one accession in just
one of these ambit (e.g., fixed-asset lending and leasing primarily alter from each
other on the appliance ambit specifically, the buying of the anchored assets). In other
cases, lending technologies alter in assorted ambit (e.g., baby business acclaim scoring
and asset-based lending alter in primary advice sources and ecology mechanisms).
In abounding cases, a accessory advice source, screening/underwriting procedure, contract
feature, or ecology apparatus is used, but we analyze the technologies based on the
primary foundations of the lending decisions. Thus, a acclaim annual may be acclimated as secondary
information or accessory may be acclimated as a accessory antecedent of repayment, but the lending
technology would still be accord lending if the lending decisions are primarily based on
soft advice accumulated over the beforehand of a relationship.
Lending technologies are about categorized into affairs and accord lending.
188.8.131.52 Affairs Lending Technologies
Transactions lending is based primarily on “hard” quantitative abstracts and includes financial
statement lending, baby business acclaim scoring, asset-based lending, factoring, fixed-asset
lending and leasing. Affairs lending is about beheld as actuality focused on
informationally cellophane borrowers.
184.108.40.206.1 Cyberbanking Annual Lending
Financial annual lending is a affairs technology based primarily on the backbone of a
borrower’s cyberbanking statements. There are two requirements for this technology that depend
on adamantine information. First, the borrower allegation access advisory cyberbanking statements, such as
audited statements able by acclaimed accounting firms according to broadly accepted
accounting standards such as GAAP.
Second, the borrower allegation access a able cyberbanking action as reflected in the financial
ratios affected from these statements. The accommodation arrangement that arises out of the assay of
these cyberbanking statements may reflect a arrangement of altered appliance elements such as
collateral and claimed guarantees. However, beneath cyberbanking annual lending, the lender
views the accepted approaching banknote breeze of the SME as the primary antecedent of repayment.
Financial annual lending, clashing accession lending technologies, is aloof for relatively
informationally cellophane firms.
220.127.116.11.2 Baby Business Acclaim Scoring
Small business acclaim scoring is a affairs technology based primarily on hard
information about the SME’s buyer as able-bodied as the firm. The buyer advice is primarily
personal customer abstracts acquired from customer acclaim bureaus. This is accumulated with data
on the SME calm by the cyberbanking academy and about from bartering acclaim bureaus.
The abstracts are entered into a accommodation achievement anticipation model, which yields a score, or
summary accomplishment for the loan. The models are usually advised for credits up to $250,000,
but abounding institutions use them abandoned for credits up to $100,000. The technology is relatively
not broadly acclimated in theU.S.until the mid-l990s.
This technology may be activated to actual blurred SMEs, accustomed that abundant of the advice is
based on the claimed history of the owner, rather than the SME. Constant with this opacity,
recent assay finds that this technology is associated with credits beneath $100,000 that are
rated as almost risky, access aerial absorption rates, and are about amid alfresco of the banks’
local markets Frame et al. (2004) and Berger et al. (2004).
18.104.22.168.3 Asset-Based Lending
Asset-based lending is a affairs lending technology in which cyberbanking institutions
address the caliginosity botheration by absorption on a subset of the firm’s assets, which are pledged
as collateral, as the primary antecedent of repayment. This technology provides alive capital
financing anchored primarily by accounts receivable and inventory. The bulk of credit
extended is affiliated on a blueprint base appliance adamantine abstracts to a dynamically-managed estimation
of the defalcation bulk of the assets acclimated as collateral. The bulk of accessory is assessed
daily in the case of accounts receivable, and about annual or annual for inventory, and
linked to the admeasurement of the acclaim available, so that the defalcation bulk of the accessory always
exceeds the acclaim exposure, Udell (2004).
The use of accessory itself, however, does not analyze asset-based lending from the other
lending technologies. The alliance of accounts receivable and annual is about associated
with cyberbanking annual lending, accord lending, and acclaim scoring, breadth accessory is
used as accessory antecedent of repayment. Beneath asset-based lending, in contrast, the addendum of
credit is primarily based on the bulk of the collateral, rather than the all-embracing creditworthiness of
Factoring involves the acquirement of accounts receivable by a “lender” accepted as a factor. As in
asset-based lending, factoring focuses on the bulk of an basal asset, rather than the
overall value/risk of the firm. Factoring is agnate to asset-based lending, but there are three
important distinctions. First, factoring abandoned involves the costs of accounts receivable,
unlike asset-based lending which additionally involves costs inventory. Second, beneath factoring,
the basal asset is awash to the “lender.” Third, factoring is about a array of three
financial services: a costs component, a acclaim basic and a collections component.
Under best factoring arrangements, the borrower outsource its acclaim and collections
activities in accession to accepting financing. Factoring is a affairs technology because
the underwriting action based on adamantine advice about the bulk of a “borrower’s”
accounts receivable. Factoring addresses the caliginosity botheration by absorption primarily on the
quality of the obligor, rather than the “borrower.”
The use of factoring varies broadly aloft countries. For example, the arrangement of the accumulated of
factoring to GDP in 2002 was 11.9% inItaly, but abandoned 0.9% in Switzerland Bakker et al. (2004).
22.214.171.124.5 Fixed-Asset Lending
Fixed-asset lending technologies absorb lending adjoin assets that are abiding and are
not awash in the accustomed beforehand of business (e.g., equipment, motor vehicles, or complete estate).
Like asset-based lending – which is based on accounts receivable and annual – the
underlying assets in fixed-asset lending are apprenticed to the lender as collateral. However,
unlike accounts receivable and inventory, the apprenticed assets are around consistently uniquely
identified by a consecutive cardinal or a deed. The continued action and altered identification of anchored assets
leads to actual altered underwriting processes, arrangement structures, and monitoring
mechanisms. At the underwriting stage, the focus is on assessing the bazaar bulk of the
asset – for accessories and complete estate; this is about in the anatomy of a bookish appraisal. The
contract anatomy about specifies an antecedent loan-to-value arrangement beneath than one. It also
typically involves ambience a accommodation acquittal agenda with a final adeptness beneath than the
lifep of the asset. The agenda insures that the arrangement of the outstanding accommodation antithesis to the
liquidation bulk of the asset is beneath than one over the action of the loan. This arrangement structure
also feeds aback to the underwriting process, breadth the primary cyberbanking assay focuses on
coverage ratios that admeasurement a firm’s adeptness to accommodated the acquittal agenda (i.e., debt
service). Clashing ecology asset-based loans, the actuality of accessory (i.e., buying of
collateral by the borrower) is not cryptic in fixed-asset lending.
The borrower can abandoned anchored asset by alteration of title, which can abandoned action if the
lender agrees to absolution the lien: Ecology the borrower’s adeptness to pay (i.e., its banknote flow)
is angry to the ascertainment of adapted claim as authentic by the acquittal schedule.
Failure to accommodated a adapted acquittal signals bare banknote breeze and triggers a absence on the
Leasing involves the acquirement of anchored assets by a “lender” accepted as a lessor. Leasing is a
very accepted adjustment of costs equipment, motor vehicles, and complete acreage in many
countries by both banks and accession institutions. The freeholder purchases the anchored assets and then
simultaneously enters into a rental arrangement with the aborigine (the “borrower”) that specifies the
payment schedule. The arrangement about contains an advantage whereby the aborigine can acquirement the
assets at the end of the charter at a pre-specified price.
Leasing is a affairs technology because underwriting is about based on hard
information about the bulk of the basal asset, akin to asset-based lending,
factoring, and fixed-asset lending.
Like these accession technologies, leasing can be acclimated to accommodate costs to blurred firms
because the underwriting accommodation is primarily based on the bulk of the asset actuality leased. it
has additionally been apparent that leasing can abate an adverse accession problem, either in the used
equipment bazaar by auspicious a college affection of artefact awash “off-lease” (i.e., awash by
lessors aback the acquirement advantage is not exercised) or in the new artefact market, Chemmanur
and Yan (2000); Hendel and Lizzeri (2002); Gilligan (2004).
126.96.36.199 Accord Lending Technologies
Under accord lending, the cyberbanking academy relies primarily on bendable information
gathered through acquaintance over time with the SME, its buyer and the bounded affiliation to
address the caliginosity problem. This advice is acquired in ample allotment by the accommodation officer
through complete acquaintance with the borrower and through celebratory the SME’s achievement on
all ambit of its cyberbanking relationship. This bendable advice may additionally accommodate an assessment
of the approaching affairs of the SME accumulated from accomplished communications with SME’s suppliers,
customers, or adjoining businesses, Petersen and Rajan (1994), Berger and Udell (1995),
Degryse and Van Cayseele (2000). As noted, this bendable advice may about abide proprietary
to the accommodation ambassador because it is not calmly observed, verified, or transmitted to others.
Relationship lending is about apparent as acclimated for blurred borrowers.
2.4.2 Cyberbanking Academy Anatomy
Financial academy anatomy refers to the bazaar attendance of and antagonism among
different types of cyberbanking institutions. Cyberbanking structures accommodate the attendance of different
financial academy types and the altitude beneath which they operate.
The assay abstract provides a ample bulk of affirmation on the furnishings of cyberbanking
institution anatomy on SME lending, but the allegation rarely go aloft the distinction
between affairs lending technologies adjoin accord lending to anatomize amid the
different affairs technologies. Assay of the allegation has been done with attention to the
comparative advantages of ample adjoin baby institutions, foreign- adjoin domestically
owned institutions, state- adjoin privately-owned institutions, and bazaar competition.
188.8.131.52 Ample adjoin Baby Institutions
For a cardinal of reasons, ample institutions may access a allusive advantage in transactions
lending and baby institutions may access an advantage in accord lending. Large
institutions may be able to booty advantage of economies of calibration in the processing of hard
information, but be almost poor at processing bendable advice because it is difficult to
quantify and abode through the advice channels of ample organizations e.g., Stein
(2002). Beneath accord lending, there may be agency problems created aural the
financial academy because the accommodation ambassador that has complete acquaintance over time with the SME is
the athenaeum of bendable advice that cannot be calmly appear aural the financial
institution. This may accord a allusive advantage in accord lending to small
institutions with beneath layers of administration e.g., Berger and Udell (2002). Finally, large
institutions may be disadvantaged at accord lending because of Williamson-type.
Williamson(1988) authoritative diseconomies associated with additionally accouterment transactions
loans and accession broad services.
The empiric abstract about does not analyze the lending technologies, but in some
cases draws abstracts from the characteristics of the SME borrowers and their
relationships with cyberbanking institutions.
In best cases, the assay is based on abstracts fromU.S.banks and SMEs. Ample institutions are
found to accommodate to larger, earlier SMEs with stronger cyberbanking ratios, and baby institutions are
found to await added on bendable advice and accommodate to SMEs with which they access stronger
relationships e.g., Berger et al. (2004). The able cyberbanking ratios and SME admeasurement and age
findings are constant with a allusive advantage for ample institutions in appliance financial
statement lending based on cyberbanking ratios for almost cellophane SMEs (which tend to be
larger and older), accustomed that cyberbanking annual lending is the abandoned lending technology
generally acclimated for cellophane borrowers. The able relationships and use of bendable information
by baby institutions is constant with a allusive advantage for baby institutions in
relationship lending. There is actual little affirmation on allusive advantages by financial
institution admeasurement in the accession affairs lending technologies, although it is adequate that large
institutions access allusive advantages of differing degrees in the accession transactions
technologies due to economies of calibration in processing adamantine information.
A bound bulk of empiric affirmation additionally addresses the affair of a accepted comparative
advantage of ample adjoin baby institutions in SME lending and the action catechism of
whether a abundant attendance of baby institutions is all-important to beforehand acclaim availability
for SMEs. One abstraction finds that the likelihood that an SME has a band of acclaim from a large
bank adjoin a baby coffer is almost proportional to the drop bazaar attendance of large
versus baby banks according to Berger and Udell (2004). This is not constant with a
general allusive advantage by cyberbanking institutions admeasurement and suggests that a strong
presence of baby institutions may not be bare for accepted SME acclaim availability. This
study additionally begin few cogent differences in the caliginosity or accession characteristics of small
businesses that borrow from ample adjoin baby banks. These two allegation are constant with
the antecedent that ample institutions appliance assorted affairs technologies are aloof as able
to accumulation SME acclaim to blurred SMEs as baby institutions appliance accord lending.
Another abstraction begin that the bounded bazaar shares of ample and smallU.S. banks have
relatively little affiliation with SME acclaim availability, but did not annual for the admeasurement of
institutions authoritative the loans, Jayaratne and Wolken (1999). This abstraction is additionally consistent
with the antecedent that ample institutions are not disadvantaged in SME lending and that a
strong attendance of baby institutions may not be bare for accepted SME acclaim availability.
An accession antecedent to explain this award is that ample institutions may be generally
disadvantaged at SME lending, but that a adequate bazaar attendance of baby institutions
efficiently arises aback bare to accommodate able SME credit. Acknowledging this second
hypothesis, several studies accretion that ample institutions abate their SME lending afterwards mergers
and acquisitions, but that accession banks in the aforementioned bounded markets appear to acknowledge by
increasing their accumulation of SME acclaim about e.g., Berger et al. (1998); Berger et al.
(2001); Avery and Samolyk (2004). As well, new baby banks are about created in these
markets that accumulation added SME acclaim Berger et al. (2004).
184.108.40.206 Foreign-owned adjoin Domestically-owned Institutions
Foreign-owned institutions may access a allusive advantage in affairs lending and a
disadvantage in accord lending in allotment because these institutions are about large. In
developing nations, adopted institutions headquartered in developed nations may have
an added advantage in affairs lending because of acceptance to bigger information
technologies for accession and assessing adamantine information, Berger et al. (2004). Foreign
institutions may additionally face added hurdles in accord lending because of difficulties in
processing and transmitting bendable advice over greater distances, through added managerial
layers, and arresting with assorted economic, cultural, language, and authoritative environments
e.g., Buch (2003).
There is little empiric affirmation on SME lending by foreign-owned institutions in developed
nations. Some assay finds that these institutions tend to access a broad acclimatization e.g.,
DeYoung and Nolle (1996), and in some cases tend to specialize in confined multinational
corporations headquartered in their home nation e.g., Goldberg and Saunders (1981).
Presumably, these institutions use affairs technologies activated to adamantine information.
There is added affirmation on foreign-owned institutions and SME acclaim availability in
developing nations. In best of the studies, adopted banks are associated with greater SME
credit availability e.g., Berger et al. (2004). However, some accretion that foreign-owned banks
may access added adversity in bartering acclaim to SMEs than to ample firms e.g., Berger and
Klapper (2004). This about accession for ample firms over SMEs has additionally been begin for
foreign lenders entering aforetime left-wing countries, Giannetti and Ongena (2005). Again,
the lending technologies are about not identified. Although adopted institutions almost
surely use affairs technologies, it is usually not accepted which of these technologies are
employed or the caliginosity of the borrowers served.
220.127.116.11 State-owned adjoin privately-owned institutions
State-owned institutions may be accepted to access a allusive advantage in transactions
lending and a disadvantage in accord lending because these institutions are typically
large. Accession arguments apropos the adeptness of these institutions to accumulation funds to
creditworthy SMEs through any lending technology may additionally apply. State-owned institutions
generally accomplish with government subsidies and about access mandates to accumulation additional
credit to SMEs in general, or to those in specific industries, sectors, or regions. Although this
might beforehand allotment to creditworthy SMEs in principle, it could access the adverse effect
in convenance because these institutions may be inefficient due to a abridgement of bazaar discipline. As
well, abundant of their SME allotment may be to SMEs that are not creditworthy because the
lending mandates do not necessarily crave that the allotment be acclimated to accounts complete net
present bulk projects, or that loans be repaid at bazaar rates. Some of the funds may additionally be
subsidized or directed for political purposes, rather than bread-and-butter ends e.g., Cole (2004);
Sapienza (2004). State-owned institutions may additionally arrange almost anemic monitoring
strategies and/or burden from advancing accumulating procedures as allotment of their authorization to
subsidize targeted borrowers or because of the abridgement of bazaar discipline. In nations with
substantial state-owned cyberbanking sectors, there may additionally be cogent spillover furnishings that
discourage privately-owned or foreign-owned institutions from SME lending due to a
“crowding out” aftereffect from subsidized loans from state-owned institutions.
The empiric allegation are about constant with abortive furnishings of accompaniment ownership.
Studies of accepted achievement about accretion that abandoned state-owned banks are relatively
inefficient and that ample shares of accompaniment coffer buying are about associated with
unfavorable macroeconomic after-effects and beneath developed cyberbanking and economic
systems e.g. Berger et al. (2004). Some affirmation additionally suggests that beneath SME acclaim is
available in nations with ample bazaar shares for state-owned banks e.g., Berger et al. (2004).
As well, nonperforming accommodation ratios at state-owned banks tend to be actual high, constant with
lending based on abrogating net present bulk projects anemic monitoring, and/or abridgement of
aggressive accumulating procedures e.g., Berger et al. (2004). Studies of the furnishings of bank
privatization in both developed nations and developing nations about accretion improvements
in achievement afterward the abolishment of accompaniment buying e.g., Clarke et al. (2005). Similar
to the case for foreign-owned institutions, state-owned institutions adequate use transactions
technologies, but the technologies are about not articular in the research.
18.104.22.168 Bazaar Antagonism
Under the adequate structure-conduct-performance (SCP) hypothesis, bazaar power
reduces acclaim acceptance through any lending technology. Institutions with added bazaar power
may allegation aerial ante or fees on loans; access bound acclaim standards; and/or be beneath aggressive
in award or confined creditworthy SMEs so managers can booty advantage of a “quiet life”.
An accession antecedent suggests that for one of the lending technologies relationship
lending, bazaar adeptness may be associated with greater acceptance to acclaim for SMEs.
Market adeptness may animate institutions to beforehand in lending relationships because the
SMEs are beneath adequate to accretion accession sources of acclaim in the future. Bazaar adeptness helps
the academy accomplish a abiding complete arrangement in which the borrower receives a
subsidized absorption bulk in the abbreviate term, and again compensates the academy by advantageous a
higher-than-competitive bulk in a afterwards period, Sharpe (1990); Petersen and Rajan (1994).
However, beneath a altered abstract archetypal of accord lending, greater concentration
may be associated with beneath acclaim availability appliance this technology.
Thus, bread-and-butter approach offers adverse empiric predictions that appear out of different
theoretical models about one of the lending technologies, accord lending. Without
separately anecdotic accord lending from the accession technologies, the empirical
predictions for acceptance to acclaim for SMEs are not clear. For example, bazaar adeptness could
increase acclaim availability for some SMEs through a complete aftereffect on accord lending,
but may abatement availability for accession SMEs that are added ill-fitted to one of the transactions
lending technologies. Thus, the aftereffect of bazaar adeptness on all-embracing SME acclaim availability
may go either way, depending on the backbone of the altered hypotheses and the admeasurement to
which the altered lending technologies are employed.
A cardinal of studies access looked at measures of SME acclaim availability, activity, and general
economic achievement and their affiliation with indicators of bazaar adeptness such as
concentration and authoritative restrictions on acceptance and competition. The empiric after-effects are
mixed, with some studies award about abortive furnishings from bazaar adeptness e.g., Elsas
(2005) and others award favorable furnishings e.g., Petersen and Rajan (1995)
2.4.3 Lending Basement
The lending basement refers to the rules and altitude that affect the adeptness of these
institutions to accommodate and includes the advice environment, the legal, administrative and
bankruptcy environments, the amusing environment, and the tax and authoritative environments.
All of these elements may affect SME acclaim availability by influencing the admeasurement to which
the altered lending technologies may be accurately and profitably employed. The final element,
the authoritative environment, may additionally bind SME acclaim availability by acute the
financial academy structure.
22.214.171.124 The Advice Ambiance
An important aspect of the advice ambiance is the accounting infrastructure. Strong
accounting standards and aboveboard complete accounting firms are all-important altitude for
informative cyberbanking statements, which is key to the cyberbanking annual lending technology.
These are additionally important for abounding apparatus of accommodation appliance associated with financial
statement lending and some of the accession lending technologies to a bottom extent. For example,
covenants based on cyberbanking ratios are not achievable if the ratios affected from the financial
statements are not reliable.
Another important aspect of the advice ambiance is the administration of information.
Commercial and customer acclaim bureaus accommodate bookish authoritative mechanisms for the
exchange of acquittal achievement data. Acclaim bureaus access additionally been begin to abate the
cost and time to action loans and the, akin of defaults Miller (2003). Bartering credit
bureau abstracts access additionally been apparent to access adeptness in admiration close abortion aloft financial
ratios and accession anecdotic advice about the firm.
There is ample aberration aloft countries in agreement of the actuality of acclaim bureaus,
whether they are publicly- or privately-owned, and the advantage of attainable information
Miller (2003). Empiric affirmation suggests a statistically important articulation amid the
existence of third-party advice exchanges and acclaim availability Love and Mylenko
Specifically, countries with stronger bookish advice administration display greater coffer lending
relative to GNP and country-level acclaim accident is abnormally activated with measures of formal
information administration Jappelli and Pagano (2002).
Credit agency information, breadth available, is acclimated in affiliation with all of the lending
technologies, but it is a alive basic of one of the lending technologies, baby business
It is all-important to access a ample database on SME accommodation achievement and the variables acclimated to
predict that achievement in adjustment to appraisal a aboveboard acclaim scoring model. The evidence
also indicates that acceptance to actual acclaim advice such as business acclaim bureaus is
positively accompanying to the attendance of factoring, Klapper (2005)3.Under assertive circumstances
factoring can additionally assignment able-bodied alike in anemic calm advice environments if the
receivables are from obligors amid in able advice environments.
126.96.36.199 The Legal, Administrative and Defalcation Environments
A country’s legal, judicial, and defalcation environments decidedly acceptance the context
in which accommodation appliance is conducted. The acknowledged ambiance that affects business lending
consists of the bartering laws that specify the acreage rights associated with a commercial
transaction. The administrative and defalcation environments actuate how able-bodied these laws are
enforced in bartering disputes and in defalcation resolutions. This enforceability, in turn,
determines the aplomb of appliance parties in cyberbanking contracts. Collectively, these
features accumulated the aphorism of law as it relates to the addendum of credit.
Countries alter decidedly on this dimension: for some, bartering laws are unambiguous
and accessory to bartering affairs and administration is predictable; for others
commercial law is cryptic and incomplete, administration is problematic, and bent and
racketeering behavior block the conception of new businesses, attenuate complete ones, and
deter adopted investment, EBRD (2003).
Empirical studies access apparent that firms in countries with greater cyberbanking development and
stronger acreage rights access added levels of beforehand adjourned by alien finance.
Firms in countries with weaker cyberbanking development and acreage rights, in contrast, are
more adequate to await on potentially beneath able costs from development banks, the
government, or breezy sources, Berger et al. (2004). Abate firms may be particularly
affected. One abstraction begin that the aftereffect of financial, acknowledged and bribery problems
consistently answerable the beforehand of abate firms added than aloft firms in a cross-country
analysis, Berger et al (2004).
Commercial laws and their administration of these laws additionally affect the adeptness of banks to
deploy specific appliance elements that can be acclimated to abode advisory opacity
problems. Specifically, they can affect the deployment of appliance elements such as
covenants, maturity, collateral, and claimed commitments that access been apparent to mitigate
adverse accession and moral hazard problems e.g., Sharpe (1990).
The bartering law on aegis interests (collateral liens) in a nation, for example, is
important in free the adeptness of accessory in a accommodation contract, the basic component
of the asset-based lending and fixed-asset lending technologies. Key issues accommodate whether a
country’s bartering law acutely defines how a accessory affirmation can be perfected, how
collateral antecedence is determined, and how notification of a affirmation is made.
The adeptness of the administrative and defalcation systems is additionally analytical to acclaim availability.
Recent abstract and empiric assay suggests that administrative disability (i.e., high-cost
judicial procedures) is associated with decreased acceptance to credit, Jappelli et al. (2005). It has
also been apparent that countries with greater acknowledged procedural ceremonial – about associated
with civilian law countries -take best to accomplish some types of cyberbanking contracts.
The breadth of time in defalcation is a decidedly important ambit of efficiency. Also
important is the bulk to which the appliance of defalcation procedures is associated with
adherence to complete priority. The adeptness of accessory ex ante ultimately depends on the
whether the antecedence rights of anchored lenders are upheld in defalcation ex post.
188.8.131.52 The Amusing Ambiance
The amusing ambiance may additionally affect SME acclaim availability. Affirmation suggests that the
level of amusing basic and assurance may be important in facilitating the autograph and enforcement
of cyberbanking contracts. Amusing capital, as proxied by balloter participation, has been begin to be
significant in answer bounded differences in some measures of ambitious activity, such
as cardinal of firms and new close entry. Accepted accent may additionally advice beforehand alternate trust
and facilitate accord building. It has additionally been begin that cultural differences across
countries are associated with differences in the akin of broker protection, Stulz and
The greatest appulse of the amusing ambiance is adequate on accord lending because social
norms, religion, and adeptness may access the best aftereffect on the assembly of bendable information
and the adeptness of banks to use this advice to coin relationships. The amusing environment
could additionally affect the assembly and use of adamantine advice acclimated in the transactions
technologies, but adequate to a bottom degree.
184.108.40.206 The Tax and Authoritative Environments
The tax and authoritative environments may access cogent furnishings on SME acclaim availability.
For example, brand taxes on factored invoices and assertive types of value-added taxes can
have abrogating impacts on factoring. Changes in basic regulations and tougher bank
supervision in theU.S.are additionally about cited as accidental to the abridgement in accumulation of
business acclaim or “credit crunch” in theU.S.in the aboriginal 1990s e.g., Berger and Udell
The authoritative ambiance may additionally affect SME acclaim availability by acute the
financial academy structure. Government behavior about affect the acceptance of altered types of
financial institutions, their bazaar shares, their abilities to compete, and their corporate
governance structure. In abounding genitalia of the world, the abatement of geographic and product
restrictions has resulted in cogent alliance aural the cyberbanking industry and between
banks and accession types of cyberbanking institutions. In the EU, the audible cyberbanking authorization and other
parts of the Audible Bazaar Programme appeared to activation ample cyberbanking institution
consolidation aural nations and somewhat beneath action aloft all-embracing borders within
Government behavior that bind adopted acceptance may access ample furnishings on SME credit
availability, accustomed the allegation that aloft bazaar shares for foreign-owned banks are often
associated with greater SME acclaim availability in developing nations. Accession assay has also
found that restrictions on foreign-bank acceptance may be added acerb affiliated to bank
performance than the bazaar attendance of foreign-owned banks, Levine (2003)2 which may
suggest these restrictions access decidedly able furnishings in attached competition, with
potential after-effects for SME customers. As well, restrictions on adopted institutions may
limit the able use of some of the affairs lending technologies in developing nations,
given the adequate advantage of these institutions in accession and processing adamantine information.
Finally, government behavior with account to accompaniment buying of cyberbanking institutions clearly
have important furnishings on acclaim availability. Accompaniment buying is about begin to have
significant abrogating furnishings on SME acclaim availability, with some changeabout of these effects
after privatization. State-owned institutions adequate use affairs lending technologies, but
the affirmation does not beforehand which ones these institutions use or that they access advantages
in any of the technologies.
2.5 ADDRESSING THE SMEs FINANCING GAP
SMEs crave costs to authorize and accomplish activities effectively. Apart from appliance such
credits as “seed money”, amplification of business activities like accretion of new equipment
is accession breadth that needs aloft financing. Others alike use the credits as alive capitals.
Acquah (2001) states bookish and breezy sources as the two basic sources of credits for the
In avant-garde cyberbanking systems, surplus funds may canyon from “savers” to borrowers through
intermediated channels (e.g. banking, securitisation) or may be allocated anon to
borrowers. At its core, the action of cyberbanking intermediation is about processing information
of one anatomy or another. Indeed, in the adequate approach of cyberbanking intermediation, financial
intermediaries abide abandoned because of bazaar imperfections, in particular, the aberration of
information amid savers (sources of finds) and borrowers (users of funds). The theory
concedes that banks and accession intermediaries add some bulk via about-face (i.e.
expanding the beforehand choices attainable to savers and the sources of acclaim for borrowers,
as able-bodied as the frequently important role of administration and about-face of risk) and by
transforming cyberbanking affairs and antithesis of one anatomy (e.g. maturity, etc.), into another,
but concludes that intermediaries capitalize mostly on their ascendancy of superior
information, OECD (2006).
In analytical the cyberbanking intermediation action it is important to agenda that, because the
supply of acclaim is not inexhaustible, there will consistently be some borrowers whose appeal for
credit is not satisfied, at atomic not in abounding or on agreement they accede appropriate. That outcome
results from the accustomed operation of the acclaim allocation process.
Assessing college absorption accuse and fees for borrowers advised to be chancy is the barometer in
commercial lending, but while absorption accuse and accession fees and motoring abode some
risks, they do not absolutely annihilate them and accommodation originators in some affairs may
be absorbed to bind lending to abode risks aloft a assertive level, either by acid aback on
the bulk of acclaim continued or by abstinent acclaim altogether for assertive categories of
borrowers. In the antagonism for credit, borrowers whose acclaim accident is almost attainable to
assess access the advantage, while entities such as SMEs are added adequate to access their requests
for funds denied. In fact, alike in cyberbanking markets that are absolutely advancing and access no
major structural distortions, SMEs may able-bodied be at a ample disadvantage in obtaining
financing compared with added accustomed companies. Obviously, the achievability that large
numbers of baby firms will be afar from the acclaim bazaar becomes alike college as
market imperfections accretion is significance.
In abbreviation this difficulty, SMEs commonly await on breezy acclaim sources such as private
money lenders, “susu” operators, acclaim from accompany and relatives, ancestors fund, accumulated
savings, alternating savings, acclaim associations and Non Governmental Organizations (NGOs).
Even admitting these schemes are accessible, they are not able for the abundant growth
and development of the SME sector.
2.5.1 Bookish Sources of Allotment for SMEs
According to Acquah (2001), the bookish sources of costs mainly appear in four (4) ways;
Automatic costs which comes in the anatomy of barter credits and outstanding
ii.Short term, which includes abbreviate appellation coffer loans, bartering affidavit and factorizing
Intermediate term, which appear from boilerplate appellation micro-loan facilities.
iv. Continued appellation costs which may appear from adventure funds, sales of shares, band and
220.127.116.11 Cyberbanking Institutions and SME Credits
In best jurisdictions, bartering banks as a accumulation are the basic antecedent of alien finance
for SMEs. However, there are cardinal of rigidities of a macroeconomic, institutional and
regulatory attributes that may bent the complete cyberbanking arrangement adjoin lending to SMEs.
Macroeconomic behavior may beforehand to antithesis appeal for attainable calm savings, while
government action may favour industrialization and/or acceptation substitution, which effectively
gives ample calm firms advantaged acceptance to finance. The acknowledged arrangement may not provide
adequate aegis for the rights of creditors and may be almost inefficient in resolving
cases of behind payments and bankruptcy.
Additionally, the tax and authoritative framework may animate firms to accomplish opaquely.
Furthermore, the cyberbanking bazaar may not accommodate the all-important ambit of articles and
services to accommodated the needs of SMEs.
The characteristics of the cyberbanking arrangement in arising markets frequently arrest SME
lending. In abounding cases, abounding banks are state-owned. Histories of abominable lending may
leave abounding banks with anemic antithesis sheets. Cogent shares of complete acclaim are often
allocated on the base of government guarantees or beneath appropriate programmes to support
targeted sectors. Banks may additionally be subjected to absorption bulk ceilings that accomplish it difficult to
price acclaim to SMEs in adjustment to absolutely reflect the accident of lending to SMEs. In abounding countries,
the authorities access been afraid to acquiesce banks to abort and the cyberbanking arrangement was
therefore accurate by complete or complete government guarantees. Abounding banks may have
ownership and accession ties to automated interests and, thus, tend to favour affiliated companies:
If the cyberbanking arrangement has possibilities to access adequate allotment by lending to other
borrowers, it will not beforehand the abilities bare to do SME lending. If the bookish banking
system shows little affection to accommodate to SMEs, there is little allurement for firms to produce
credible accounts and accomplish transparently.
On a all-around level, a archetypal of market-based cyberbanking has acquired accepting beneath which
banks’ administration and boards are answerable for accomplishing aerial allotment to shareholders
and advancement aerial prudential standards, OECD (2006). As this archetypal is activated and as the
business ambiance becomes added competitive, banks access stronger incentives to find
means to affected the difficulties in SME lending. However, abounding arising markets have
been analogously apathetic in implementing this model, which may be reflected in low
volumes in SME lending. Lending to the SME breadth would still be, in any case, accountable to
agency problems and the abnormality of abridged markets.
The actuality that SMEs in abounding arising markets do not access acceptance to acclaim costs is
especially awkward because SMEs about administer a ample allotment of the labour force and
account for a ample allotment of civic income.
By way of contrast, banks in the best avant-garde countries are adopting strategies to reduce
the accident of lending to SMEs. They are beforehand ample assets in gluttonous to
overcome advice aberration problems by appliance acclaim scoring models and other
sophisticated techniques to discriminate amid aerial barren low-risk borrowers. These lending
mechanisms accredit banks to analyze businesses adequate to survive and expand, and with which
it is advantageous to beforehand a abiding relationship. Banks are additionally altering the attributes of
their products. An accretion admeasurement of coffer acquirement now comes from fees for services,
which favours lending to entities such as SMEs.
18.104.22.168 Adventure Armamentarium and Disinterestedness Costs of SMEs
Venture basic provides a articulation amid the SME and institutional sources of capital.
By accouterment opportunities for assertive investors to arrange their basic to avant-garde and high
growth sectors of the economy, adventure basic can action about-face to account the risks in
other asset classes adventure basic additionally holds the affiance of college complete allotment over
time in adjustment to atone for the bottom clamminess and accuracy of adventure basic
The adventure basic firm, which is about organized as a bound partnership, brings
together adventure capitalists (the accepted partners), who are alive specialists in the various
stages of the adventure basic cycle, with the investors (the bound partners.) The partnership
has a audible action afterwards which it terminates. The affiliation will commonly access a cardinal of
investments at assorted credibility of the beforehand cycle. Revenues from exits will commonly be
reinvested in new ventures.
The SME about gain through several stages, from “seed” afore assembly has
begun through “early stage” and through one or added “expansion” or “development” rounds.
The adventure backer may participate at any date of that process, although as acclaimed above,
the trend is added to beforehand afterwards in the action aeon of the company. At the end of the
process, the adventure capitalists aim to apprehend a acknowledgment on the beforehand through “exit”. The
exit may booty the anatomy of a barter auction to a aggregation that wishes to acceptance the aggregation as
part of a cardinal business or through an IPO. The accustomed apprehension is that the investment
will be asleep aural a authentic time horizon.
InGhana, continued appellation costs in agreement of disinterestedness capital, bare by growth-oriented mainly
small and boilerplate companies, is around non-existent for SMEs. Abandoned two commercial
venture basic funds access been accustomed inGhanaover the accomplished 10 years, Mensah (2004).
In 1991, U.S. Agency for All-embracing Development (“USAID”) and the Commonwealth
Development Corporation (“CDC”) sponsored the accumulation of a adventure basic armamentarium in
Ghanain acknowledgment to a perceived allegation for cyberbanking articles and casework advised to meet
the abiding costs requirements of growing businesses inGhanawithin the ambience of
Ghana’s cyberbanking breadth ameliorate program.
In the absence of a authoritative environment, the sponsors agreed to establish, a non-bank
finance academy to authority the funds – Ghana Adventure Basic Armamentarium (“GVCF”), and a
management company, Adventure Armamentarium Administration Aggregation (VFMC) to accomplish investment
USAID provided a one actor and ninety-four thousandUnited States’ dollars
(US$ 1,094,000) acceptance to accede the operational expenditures over a three year period
ending in 1994, while CDC’s two millionUnited States’ dollars (US$2,000,000)
commitment to GVCF was leveraged for an added three actor and eight hundred
thousandUnited States’ dollars (US$3,800,000) in invested basic from developmental
finance and bounded institutions. The accumulated beforehand basic appropriately became bristles actor and
eight hundred thousand United States’ dollars (US$5,800,000). The GVCF became
operational in November 1992, and was absolutely invested with 13 investee companies. The
average beforehand was two hundred and fifty thousandUnited States’ dollars (US$250,000).
In accession to managing the GVFC, VFMC in 1995 was awarded the administration of a four
millionUnited States’ dollars (US$4,000,000) Action Fund, answer by the European
Unionwhich is additionally absolutely invested with 18 complete investee companies and 12 aberrant (through
leasing) investee companies. The boilerplate admeasurement of beforehand by the Action Armamentarium was one
hundred thousandUnited States’ dollars ($100,000).
Subsequent to the GVFC, a bristles millionUnited States’ dollars ($5,000,000) Fidelity Equity
Fund was accustomed by a collective adventure amid Fidelity Discount House and FMO (The
Netherlands Development Accounts Company). This armamentarium is additionally absolutely invested with 10
investee companies, and managed by the Fidelity Beforehand Advisors. In the contempo past,
there has additionally been a trend of adopted complete adventure basic beforehand inGhanafrom pan-
African focused VCFs such as Modem Africa Beforehand Fund, the Commonwealth Africa
Investment Armamentarium and the AfricanEnterpriseFund, Mensah (2004).
A cardinal of institutional investors access additionally been alive in accouterment anon without
formally ambience up a adventure basic fund. Notable amid these are:
i. Amusing Aegis and Civic Insurance Assurance (SSNIT)
ii. Development Accounts Institutions conspicuously the All-embracing Accounts Corporation,
CDC Basic Partners
In general, all these efforts access so far been targeted at beforehand aggressive ample enterprises.
Although there appears to be a acceptable cardinal of potentially applicable investments in the (upper)
small and boilerplate sized segment, the risks and costs complex in managing shareholding in
SMEs access so far rendered those investments not interesting. Usually, abridgement of management
skills and inappropriate administration systems account abundant college business abortion risks for
SMEs than for ample companies. To amend these risks through increased
involvement into the circadian administration of the firms after-effects in aerial costs for the venture
fund that can hardly be recovered through the acknowledgment of the analogously baby investments.
In accession to adventure funds and clandestine disinterestedness investments, the Ghana Stock Barter is
potentially a applicable advantage for SME disinterestedness financing. Accustomed in 1990 with 9 listings, the
GSE now has 26 listed equities. The GSE has facilitated the accord of SME by
establishing three Official lists.
The belief for acceptance to advertisement on the GSE are abbreviated in Table 1, and are such that
the bigger and best assisting companies are on the Aboriginal Official List, while boilerplate sized
and baby companies are on the Second and Third Official Lists, respectively.
Table 1: GSE Advertisement Requirements
Aboriginal Official Account Second Official Account Third Official List
Stated Basic ?100 actor ?50 actor ?20 million
?30 actor ?15 actor ?5 million
Public Allotment Float (%)25% of Complete Issued Shares
Accounts 5 Years 3 Years1 Year (May be Waived)
Assisting on Assisting on Not all-important but company
Profitability accumulated during accumulated during allegation authenticate potential
Previous 5 Years Previous 3 Years to be profitable
In 1999, Camelot Ghana Bound became the aboriginal and abandoned aggregation to beforehand the Second
Official Account to accession disinterestedness capital. The GSE has fabricated a added accomplishment to facilitate the entry
of SMEs to the barter by creating the Provisional List, which allows companies to list
provisionally for six months during which they are guided by the GSE, with the abutment of
the Africa Project Development Adeptness and cyberbanking admiral to accommodated the requirements for
Government abutment for disinterestedness costs for SMEs inGhanahas been limited. It has,
however, provided incentives for alive accord of both issuers and investors on the
Ghana Stock Barter in the afterward ways:
i. Basic assets on shares listed on the GSE are tax absolved till 2005
ii. Dividends are accountable to a denial and final tax of 10%
iii. Companies listed on the Ghana Stock Barter adore a lower accumulated tax rate.
Until 2003, this bulk was 30% compared to the accepted accumulated tax bulk of 32.5%.
Effective 2004, companies advertisement on the GSE for the aboriginal time will adore a lower tax
rate of 25% (compared to a accepted 30% accumulated tax rate) for the aboriginal three years of
There are break that government will now actively participate in the accouterment of equity
financing of SMEs. In 2003, the Government appear its ambition to abutment equity
financing for SMEs through the allotment of 25% of the Civic Reconstruction Levy
over a three-year aeon for the enactment of a adventure basic fund. We are abreast that
the modalities for the operation of the adventure basic armamentarium will be appear in the beforehand of
22.214.171.124 Official SMEs Acclaim Schemes in Ghana
Official schemes are schemes alien by government, either alone, or with the abutment of
donor agencies to acceptance the breeze of costs to SMEs, Mensah (2004). Government has
in the accomplished attempted to apparatus a cardinal of such complete lending schemes to SMEs either
out of government funds or with funds apprenticed from donor agencies. These funds were
usually managed by the Aid and Debt Administration Unit of the Ministry of Accounts and
Economic Planning. Best of the on-lent accessories were acquired beneath specific programs
with mutual organizations in abutment of the Government of Ghana’s Bread-and-butter Recovery
Program and Structural Adjustment Program. Examples of such schemes are:
Austrian Acceptation Abutment Affairs (AISP)(1990)
Japanese Non-Project Grants (1987-2000)
Canadian Structural Adjustment Armamentarium and Abutment for Accessible Expenditure Reforms
In all cases, the funds were advised to abetment importers. For example, beneath the Austrian
Import Abutment Affairs (AISP), the beneficiaries were to use the adeptness to procure
equipment, machinery, raw abstracts and accompanying casework fromAustria. The Consign Finance
Company, a quasi-public academy was fabricated the sole ambassador of the facility. The
Japanese and Canadian accessories were analogously advised to abutment imports from the
respective countries. While these schemes were not accurately targeted to SMEs, there were
no restrictions with account to minimum aggregation admeasurement and abounding companies that would fit
the SME analogue were beneficiaries. The after-effects of the complete lending schemes operated by
government access been mixed. For example, beneath AISP, 20 companies of capricious sizes
benefited from the scheme. Beneficiaries were accustomed six years fabricated up of a one-year
moratorium and a five-year claim period.
Since the loans were disbursed in 1990, the borrowers should access absolutely liquidated
their loans by the end of 1996. About as at December 2001, abandoned 1 out of 20 beneficiaries
had absolutely paid. The after-effects for the Japanese and CIDA schemes were abundant added encouraging
from a accretion angle because repayments were affirmed by assorted financial
institutions, although the Government has had to appoint 18 debt collectors to recover
outstanding acknowledgment beneath both schemes.
In accession to donor-supported schemes for complete lending, government has attempted at
various times to accomplish lending schemes for SMEs. The schemes access included the
Business Assistance Fund: The Business Assistance Armamentarium was operated in the 1990s
to accommodate complete government lending to the SME sector. The affairs was widely
seen to access been abused politically, with best of the loans activity to perceives
GhanaInvestment Fund: In 2002, theGhanainvestment Armamentarium Act (Act 616) was
passed to authorize a armamentarium to accommodate for the acceptance of acclaim accessories by designated
financial institutions to companies. However, the arrangement was never implemented.
iii. Consign Development and Beforehand Armamentarium (EDIF): Beneath this scheme, companies
with consign programs can borrow up to $500,000 over a five-year aeon at a
subsidized cedi absorption bulk of 15%. While the arrangement is administered through banks,
the EDIF lath maintains bound control, acknowledging all the acclaim recommendations of
the accommodating banks.
126.96.36.199 Agreement Facilities
Section 13 of the Loans Act of 1970 (Act 335) empowers the Government of Ghana (G0G)
to accommodate government agreement to any alien financiers who ambition to beforehand funds to any
Ghanaian alignment and the agreement of such adeptness crave the accouterment of agreement from
the Government. Agreement accessories are accidental liabilities of the Government. The onus
for repaying the adeptness lies with the borrower and not the Government. The facility
crystallizes and becomes accountability due from GoG if the borrower is clumsy to honour his/her
loan obligation and the Government is alleged aloft to achieve the adeptness as a guarantor. In that
case the borrower is adapted to after balance the Government for the amount
Although GoG in exercise of the accordant accoutrement in the Loans Act, has provided
guarantees to a cardinal of’ mutual and multilateral organizations in the accomplished on account of
selected Ghanaian organizations in both the clandestine and accessible sectors of the economy, no
targeted SME agreement accessories has been introduced. A Accommodation Agreement Arrangement was
announced by the Ministry of barter and Industries in 2001 but was not implemented.
Currently, the abandoned government-supported accommodation agreement arrangement in operation is operated by
Eximguaranty Company, which is majority-owned by the Coffer of Ghana. However, the
company’s operations are bound by the admeasurement of its agreement fund. Although GH?10 billion was
voted in the 2004 account to augment the agreement fund, it is baby about to the needs of
the SME sector.
188.8.131.52 Complete Interventions from Development Ally
Many donor activities apply on assorted acclaim schemes through both bartering banks
and micro-finance institutions, and additionally on deepening of micro, baby and medium-scale
enterprises through training and business abutment services. Table 2 presents a account of projects
by the assorted development partners.
Table 2. Donor activities in the breadth of acknowledging SMEs
DONOR SUPPORT PROGRAMME
CIDA Clandestine Breadth Development Support
DANIDA Clandestine Breadth Programme
DANIDA Business Breadth Development
GTZ Beforehand of Clandestine Sector
GTZ Beforehand of Baby and MicroEnterprise
GTZ Rural Cyberbanking Casework Project
IFC African Project Development Facility
UNDP African Administration Casework Company
UNDP Promoting Clandestine Breadth Development
UNIDO Deepening competitiveness of MSMEs
USAID MicroEnterpriseDevelopment Assistance
USAID Barter and Beforehand Programme
WB Non-Bank Cyberbanking Institutions Assistance
Perhaps, as a aftereffect of the abhorrent acquaintance of complete lending by government in the
recent past, added contempo donor interventions in SME accounts access acclimated departure financial
institutions to approach funds to SMEs. Table 1 provides a arbitrary of attainable credit
facilities for SMEs inGhana. A cardinal of lending programs are undertaken as partnerships
between government and donors are listed such as:
Trade and Beforehand Affairs (TIP), operated by USAID and the Ministry of
Private Action and Consign Development Armamentarium (PEED) managed by Coffer of
Ghanabut administered through banks.
Increasingly, however, donors access implemented lending programs anon with financial
institutions. Examples of such schemes are:
i. Baby Business Accommodation Portfolio Agreement (USAID)
ii. European Beforehand Coffer Facility
iii. Care-Technoserve Armamentarium for Baby Calibration Enterprises
iv. DANIDA SME Fund
v. GTZ Armamentarium for the Promot
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