Supply and demand for finance of small enterprises in Ghana

Abstract

This study investigates the apparent contradiction between the high propensity of small- and medium-sized enterprises (SMEs) in Ghana to identify finance as their primary constraint and the view of banks that SME lending remains low in part for lack of bankable demand. Surveys were conducted of relatively successful microenterprises and SMEs to assess demand and sources of finance, and formal and informal financial institutions were interviewed to analyze constraints on the the supply side. The survey results show that credit for start-up is rare. Many SMEs achieve substantial growth through reinvestment of profits. Other forms of finance, such as customers' advances and supplier's credit, are as important as bank credit. The evidence suggests that exploitation of highly profitable opportunities by SMEs could be accelerated if they had greater access to external financing. Strong excess demand for credit is indicated by SMEs' high loan application rates and their willingness to pay above-market rates of interest. Financial liberalization has so far had little effect on the access of SMEs to bank credit. The study suggests techniques that banks could adopt to overcome the problems of high transaction costs and risks in SMES lending, drawing on the methods of informal financial agents. -from Authors � 2017 Elsevier B.V., All rights reserved.