References for Thesis

7/31/2019 References for Thesis

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SMU

THE ROLE OF FINANCIAL INSTITUTIONS IN FINANCING SMALL AND

MEDIUM ENTERPRISE


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CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Banks financing to small and medium enterprises in Ghana relates to the current

developments in the Ghanaian banking sector. A number of commercial banks

have been noted to enter into the microloan industry offering financial services

to petty traders, farmers, artisans, bakers, tailors and dressmakers, and other

low-income earners of the Ghanaian economy. A practice which until recently

was the relentless efforts by government and Non-governmental organisations

(NGOs) to reduce poverty in the economy with the support from foreign

partners and donors. Given their nature of businesses, micro entrepreneurs tend

to operate in the margins of the formal economy without permanent addresses or

formal records of their business in terms of documentation, and usually lacking

fixed assets that could qualify them for loans from the formal financial

sectors. In addition these enterprises do not keep formal records of their

incomes and expenses. This may be due to the fact that their incomes are generally

very low and most often living from hand to mouth. Other characteristics of


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these enterprises are that they most likely have one employee who is usually the

owner and in most cases do not employ more than five people.

Notwithstanding their peculiar situation, the contribution of this sector to the

economy cannot be underestimated. It is believed that the micro sector contributes

not less than 70 - 80% to the Ghanaian economy. Indeed , much of the private

sector activities take place informally or semi-informally (ISSER, 2006; cited

by Alabi et al., 2007). However in spite of these to the economy, the sector

has mostly been served by the informal financial institutions operating outside

the scope of the banking laws and regulations in Ghana. These include

moneylenders, rotating savings and credits associations, cooperative unions,

and savings collectors some of whom charge interest rates as high as 25-50% a

month.

The use of microfinance as a poverty reduction strategy was applauded when the

concept was popularized by the Grameen bank of Bangladesh in the 1970s.

However, in Ghana, (just like many other developing countries), the idea had

been the preserve of NGOs most of whom have been assisted by international

donors and charitable organisations whose capital is constrained by the size of

the market. They had operated microfinance as a non-profit venture by providing

financial assistance to women groups to help cater for themselves and their

families. However, to help sustain their programmes, innovative ideas were


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introduced by these NGOs by offering group loans without the traditional

collateral known in the banking sector. All these achievements and successes

of these organisations were without the

involvement of the traditional commercial banks because banks by the

nature of their business are reluctant to do business with the poor due to

the perceived risk of the poors inability to repay their loans.

1.2 PROBLEM STATMENT

The existence of the informal sector for the provision of credit to

individuals and micro enterprises is believed to be the result of limited access to

deposits and credit facilities from the formal financial sector. In Ghana, only

about 5 - 6% is reported to have access to the formal banking facilities

(Basu et al., 2004). The traditional commercial banks have been reluctant to

offer credit and savings facilities to the micro sector of the economy and

low income earners notwithstanding their tremendous potential in terms of

skills, capital and branch networks to service the microfinance market

profitably and the fact that about two thirds of the money in circulation in

Ghana is believed to be in the informal sector; in the hands of market

traders, artisans and micro-entrepreneurs, because of the perceived risk

associated with transacting business with the poor. The perception generally is


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that, small clients do not have stable and viable businesses for which to

borrow and from which to generate repayment (Baydas et al., 1997). In

short, the poor have been regarded as not bankable. Banks have been cautious with

lending to these groups of the economy because; on the one hand, they cannot

provide the necessary collateral securities demanded by these financial

institutions to guarantee their loans, and on the other hand, the high cost of lending

to these groups as well as the perceived high default rates, make it unprofitable to

service the micro sector. In this respect, the study seeks to identify the impact

(NOTE: WHAT SPECIFIC PROBLEM DO YOU WANT TO ADDRESSS:

PLEASE BE SPECIFICIF CAN PUT IT IN BULLETS POINTS)

.

1.3 RESEARCH OBJECTIVES

The objective of the study is generally to find out the role financial institutions

play in financing small and medium enterprises in Ghana with focus on Unibank

Ghana Ltd.

Specifically the study hopes to achieve the following specific objectives

To find out the various program put in place by Unibank Ghana Ltd in

support of small and medium enterprises in Ghana


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To find out whether small and medium enterprises have benefited from the

bank in terms of financing

To find out the challenges small and medium enterprises face in assessing

finance

To find out the factors which propel the bank to support small and medium

enterprises

1.4 RESEARCH QUESTIONS

The study seeks to provide answers to the following research questions at the end

of the study.

What are the various programs put in place by Unibank Ghana Ltd in

support of small and medium enterprise?

Have small and medium enterprises benefited from the bank in terms of

financing?

What are some of the challenges small and medium enterprises face in

assessing finance?

What factors propel the bank to enter into small and medium enterprise

financing?

1.5 SIGNIFICANCE OF THE STUDY


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The state of knowledge regarding the practice of small and medium enterprises by

banks in Ghana is mixed especially in the academic circles. However, with the

liberalization of the financial sector in Ghana, and as more and more banks enter

into the market, and also new banks enter the banking sector, it is important to

document the practice and actual experience of small and medium enterprise

financing by these institutions that have opted to take the bull by the horn and

enter into providing credit to the small and medium enterprise. According to

Young et al, (2005), it is generally perceived that commercial banks enter into

SMEs market for social reasons, either as corporate citizens or under pressure

from governments and have stayed because they find the market profitable. This

study therefore will seek to evaluate the situation in the case of Ghanaian

banks. .

1.6 ORGANISATION OF THE STUDY

The rest of the study will be structured in four chapters as follows:

Chapter two Literature review: This deals with the various issues related to

the topic of small and medium enterprise financing and banks participation in

the small and medium enterprise. This is will be compiled from textbooks,

journals, the internet and various articles written by different writers. Chapter

three Theoretical framework and research methodology: This will describe

the detailed methodology that will be used including the research design, data


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collection, and analysis and presentation procedure. Chapter four An analysis

of the data and interpretation of results: This will present the analyzed data

from the field for ease of understanding. Chapter five conclusion,

recommendation and suggestions for further research: This final chapter will

state the conclusions reached by the researcher and recommendations provided

for further research.

CHAPTER TWO


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LITERATURE REVIEW

2.0. What is an SME?

The issue of what constitutes a small or medium enterprise is a major concern in

the literature. Different authors have usually given different definitions to this

category of business. SMEs have indeed not been spared with the definition

problem that is usually associated with concepts which have many components.

The definition of firms by size varies among researchers. Some attempt to use the

capital assets while others use skill of labour and turnover level. Others define

SMEs in terms of their legal status and method of production. Storey (1994) tries

to sum up the danger of using size to define the status of a firm by stating that in

some sectors all firms may be regarded as small, whilst in other sectors there are

possibly no firms which are small. The Bolton Committee (1971) first formulated

an economic and statistical definition of a small firm. Under the economic

definition, a firm is said to be small if it meets the following three criteria:

It has a relatively small share of their market place;

It is managed by owners or part owners in a personalized way, and not through

the medium of a formalized management structure;

It is independent, in the sense of not forming part of a large enterprise.

Under the statistical definition, the Committee proposed the following criteria:


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The size of the small firm sector and its contribution to GDP, employment,

exports, etc;

The extent to which the small firm sectors economic contribution has changed

over time;

Applying the statistical definition in a cross-country comparison of the small

firms economic contribution.

The Bolton Committee applied different definitions of the small firm to different

sectors.

Whereas firms in manufacturing, construction and mining were defined in terms of

number of employees (in which case, 200 or less qualified the firm to be a small

firm), those in the retail, services, wholesale, etc. were defined in terms of

monetary turnover (in which case the range is 50,000 - 200,000 British Pounds to

be classified as small firm). Firms in the road transport industry are classified as

small if they have 5 or fewer vehicles. There have been criticisms of the Bolton

definitions. These centre mainly on the apparent inconsistencies between defining

characteristics based on number of employees and those based on managerial

approach.

The European Commission (EC) defined SMEs largely in terms of the number of

employees as follows:

firms with 0 to 9 employees - micro enterprises;


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10 to 99 employees - small enterprises;

100 to 499 employees - medium enterprises.

Thus, the SME sector is comprised of enterprises (except agriculture, hunting,

forestry and fishing) which employ less than 500 workers. In effect, the EC

definitions are based solely on employment rather than a multiplicity of criteria.

Secondly, the use of 100 employees as the small firms upper limit is more

appropriate, given the increase in productivity over the last two decades (Storey,

1994). Finally, the EC definition did not assume the SME group is homogenous;

that is, the definition makes a distinction between micro, small, and medium-sized

enterprises. However, the EC definition is too all-embracing to be applied to a

number of countries. Researchers would have to use definitions for small firms

which are more appropriate to their particular target group (an operational

definition). It must be emphasized that debates on definitions turn out to be sterile,

unless size is a factor which influences performance. For instance, the relationship

between size and performance matters when assessing the impact of a credit

programme on a target group (Storey, 1994).

Weston and Copeland (1998) hold that definitions of size of enterprises suffer from

a lack of universal applicability. In their view, this is because enterprises may be

conceived of in varying terms.


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Size has been defined in different contexts, in terms of the number of employees,

annual turnover, industry of enterprise, ownership of enterprise, and value of fixed

assets. Van der Wijst (1989) considers small and medium businesses as privately

held firms with 1 9 and 10 99 people employed, respectively. Jordan et al

(1998) define SMEs as firms with fewer than 100 employees and less than 15

million turnover. Michaelas et al(1999) consider small independent private limited

companies with fewer than 200 employees and Lpez and Aybar (2000)

considered companies with sales below 15 million as small. According to the

British Department of Trade and Industry, the best description of a small firm

remains that used by the Bolton Committee in its 1971 Report on Small Firms.

This stated that a small firm is an independent business, managed by its owner or

part-owners and having a small market share (Department of Trade and Industry,

2001).

The UNIDO also defines SMEs in terms of number of employees by giving

different classifications for industrialized and developing countries (see Elaian,

1996). The definition for industrialized countries is given as follows:

Large - firms with 500 or more workers;

Medium - firms with 100-499 workers;

Small - firms with 99 or less workers.

The classification given for developing countries is as follows:


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Large - firms with 100 or more workers;

Medium - firms with 20-99 workers;

Small - firms with 5-19 workers;

Micro - firms with less than 5 workers.

It is clear from the various definitions that there is not a general consensus over

what constitutes an SME. Definitions vary across industries and also across

countries. It is important now to examine definitions of SMEs given in the context

of Ghana and South Africa.

2.1. The Ghanaian Situation

There have been various definitions given for small-scale enterprises in Ghana but

the most commonly used criterion is the number of employees of the enterprise

(Kayanula and Quartey, 2000). In applying this definition, confusion often arises in

respect of the arbitrariness and cut off points used by the various official sources.

In its Industrial Statistics, the Ghana Statistical Service (GSS) considers firms with

fewer than 10 employees as small-scale enterprises and their counterparts with

more than 10 employees as medium and large-sized enterprises. Ironically, the

GSS in its national accounts considered companies with up to 9 employees as

SMEs (Kayanula and Quartey, 2000).


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The value of fixed assets in the firm has also been used as an alternative criterion

for defining SMEs. However, the National Board for Small Scale Industries

(NBSSI) in Ghana applies both the fixed asset and number of employees criteria.

It defines a small-scale enterprise as a firm with not more than 9 workers, and has

plant and machinery (excluding land, buildings and vehicles) not exceeding 10

million Ghanaian cedis. The Ghana Enterprise Development Commission (GEDC),

on the other hand, uses a 10 million Ghanaian cedis upper limit definition for plant

and machinery. It is important to caution that the process of valuing fixed assets

poses a problem. Secondly, the continuous depreciation of the local currency as

against major trading currencies often makes such definitions outdated (Kayanula

and Quartey, 2000).

In defining small-scale enterprises in Ghana, Steel and Webster (1991), and Osei et

al(1993) used an employment cut-off point of 30 employees. Osei et al(1993),

however, classified small-scale enterprises into three categories. These are: (i)

micro - employing less than 6 people; (ii) very small - employing 6-9 people; (iii)

small - between 10 and 29 employees. A more recent definition is the one given by

the Regional Project on Enterprise Development Ghana manufacturing survey

paper. The survey report classified firms into: (i) micro enterprise, less than 5

employees; (ii) small enterprise, 5 - 29 employees; (iii) medium enterprise, 30 99

employees; (iv) large enterprise, 100 and more employees (see Teal, 2002)


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2.2 Characteristics of SMEs in Developing Countries

Fisher and Reuber (2000) enumerate a number of characteristics of SMEs in

developing countries under the broad headings: labour characteristics, sectors of

activity, gender of owner and efficiency. Given that most SMEs are one-person

businesses, the largest employment category is working proprietors. This group

makes up more than half the SME workforce in most developing countries; their

families, who tend to be unpaid but active in the enterprise, make up roughly

another quarter. The remaining portion of the workforce is split between hired

workers and trainees or apprentices. SMEs are more labour intensive than larger

firms and therefore have lower capital costs associated with job creation (Anheier

and Seibel, 1987; Liedholm and Mead, 1987; Schmitz, 1995).

In terms of activity, they are mostly engaged in retailing, trading, or manufacturing

(Fisher and

Reuber, 2000). While it is a common perception that the majority of SMEs will fall

into the first category, the proportion of SME activity that takes place in the retail

sector varies considerably between countries, and between rural and urban regions

within countries. Retailing is mostly found in urban regions, while manufacturing

can be found in either rural or urban centres. However, the extent of involvement


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of a country in manufacturing will depend on a number of factors, including,

availability of raw materials, taste and consumption patterns of domestic

consumers, and the level of development of the export markets.

In Ghana, SMEs can be categorized into urban and rural enterprises. The former

can be subdivided into organized and unorganized enterprises. The organized

ones mostly have paid employees with a registered office, whereas the unorganized

category is mainly made up of artisans who work in open spaces, temporary

wooden structures, or at home, and employ few or in some cases no salaried

workers (Kayanula and Quartey, 2000). They rely mostly on family members or

apprentices. Rural enterprises are largely made up of family groups, individual

artisans, women engaged in food production from local crops. The major activities

within this sector include:- soap and detergents, fabrics, clothing and tailoring,

textile and leather, village blacksmiths, tin-smithing, ceramics, timber and mining,

bricks and cement, beverages, food processing, bakeries, wood furniture, electronic

assembly, agro processing, chemical-based products and mechanics (Osei et al.,

1993; Kayanula and Quartey, 2000).

Majority of SMEs are female-owned businesses, which more often than not are

home-based compared to those owned by males; they are operated from home and

are mostly not considered in official statistics. This clearly affects their chances of


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gaining access to financing schemes, since such programmes are designed without

sufficient consideration of the needs of businesses owned by females. These

female entrepreneurs often get the impression that they are not capable of taking

advantage of these credit schemes, because the administrative costs associated with

the schemes often outweigh the benefits. Prior empirical studies in Ghana have

shown that female-owned SMEs often have difficulty accessing finance. Females

are mostly involved in sole-proprietorship businesses which are mainly

microenterprises and as such may lack the necessary collateral to qualify for loans

(Aryeeteyet al, 1994; Abor and Biekpe, 2006).

Measures of enterprise efficiency (e.g. labour productivity or total factor

productivity) vary greatly both within and across industries. Firm size may be

associated with some other factors that are correlated with efficiency, such as

managerial skill and technology, and the effects of the policy environment. Most

studies in developing countries indicate that the smallest firms are the least

efficient, and there is some evidence that both small and large firms are relatively

inefficient compared to medium-scale enterprises (Little et al., 1987). It is often

argued that SMEs are more innovative than larger firms. Many small firms bring

innovations to the market place, but the contribution of innovations to productivity


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often takes time, and larger firms may have more resources to adopt and

implement them (Acs et al., 1999).

2.3 Contributions of SMEs to Economic Development

There is a general consensus that the performance of SMEs is important for both

economic and social development of developing countries. From the economic

perspective, SMEs provide a number of benefits (Advani, 1997). SMEs have been

noted to be one of the major areas of concern to many policy makers in an attempt

to accelerate the rate of growth in low-income countries. These enterprises have

been recognized as the engines through which the growth objectives of developing

countries can be achieved. They are potential sources of employment and income

in many developing countries. SMEs seem to have advantages over their large-

scale competitors in that they are able to adapt more easily to market conditions,

given their broadly skilled technologies. They are able to withstand adverse

economic conditions because of their flexible nature (Kayanula and Quartey,

2000). SMEs are more labour intensive than larger firms and therefore have lower

capital costs associated with job creation (Anheier and Seibel, 1987; Liedholm and

Mead, 1987; Schmitz, 1995). They perform useful roles in ensuring income

stability, growth and employment.


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Since SMEs are labour intensive, they are more likely to succeed in smaller urban

centres and rural areas, where they can contribute to a more even distribution of

economic activity in a region and can help to slow the flow of migration to large

cities. Due to their regional dispersion and their labour intensity, it is argued,

small-scale production units can promote a more equitable distribution of income

than large firms. They also improve the efficiency of domestic markets and make

productive use of scarce resources, thus facilitating long-term economic growth

(Kayanula and Quartey, 2000). SMEs contribute to a countrys national product by

either manufacturing goods of value, or through the provision of services to both

consumers and / or other enterprises. This encompasses the provision of products

and, to a lesser extent, services to foreign clients, thereby contributing to overall

export performance. In Ghana and South Africa, SMEs represent a vast portion of

businesses. They represent about 92% of Ghanaian businesses and contribute about

70% to Ghanas GDP and over 80% to employment. SMEs also account for about

91% of the formal business entities in South Africa, contributing between 52% and

57% of GDP and providing about 61% of employment (CSS, 1998; Ntsika, 1999;

Gumede, 2000; Berry et al., 2002).

From an economic perspective, however, enterprises are not just suppliers, but also

consumers; this plays an important role if they are able to position themselves in a


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market with purchasing power: their demand for industrial or consumer goods will

stimulate the activity of their suppliers, just as their own activity is stimulated by

the demands of their clients. Demand in the form of investment plays a dual role,

both from a demand-side (with regard to the suppliers of industrial goods) and on

the supply side (through the potential for new production arising from upgraded

equipment). In addition, demand is important to the income-generation potential of

SMEs and their ability to stimulate the demand for both consumer and capital

goods (Berry et al., 2002).

2.4 General Constraints to SME Development

Despite the potential role of SMEs to accelerated growth and job creation in

developing countries, a number of bottlenecks affect their ability to realize their

full potential. SME development is hampered by a number of factors, including

finance, lack of managerial skills, equipment and technology, regulatory issues,

and access to international markets (Anheier and Seibel, 1987; Steel and Webster,

1991; Aryeetey et al, 1994; Gockel and Akoena, 2002). The lack of managerial

know - how places significant constraints on SME development. Even though

SMEs tend to attract motivated managers, they can hardly compete with larger

firms. The scarcity of management talent, prevalent in most countries in the region,

has a magnified impact on SMEs. The lack of support services or their relatively


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higher unit cost can hamper SMEs efforts to improve their management, because

consulting firms are often not equipped with appropriate cost-effective

management solutions for SMEs. Besides, despite the numerous institutions

providing training and advisory services, there is still a skills gap in the SME

sector as a whole (Kayanula and Quartey, 2000). This is because entrepreneurs

cannot afford the high cost of training and advisory services while others do not

see the need to upgrade their skills due to complacency. In terms of technology,

SMEs often have difficulties in gaining access to appropriate technologies and

information on available techniques (Aryeetey et al., 1994). In most cases, SMEs

utilize foreign technology with a scarce percentage of shared ownership or leasing.

They usually acquire foreign licenses, because local patents are difficult to obtain.

Regulatory constraints also pose serious challenges to SME development and

although wide ranging structural reforms have led to some improvements,

prospects for enterprise development remain to be addressed at the firm-level. The

high start-up costs for firms, including licensing and registration requirements, can

impose excessive and unnecessary burdens on SMEs. The high cost of settling

legal claims, and excessive delays in court proceedings adversely affect SME

operations. In the case of Ghana, the cumbersome procedure for registering and

commencing business are key issues often cited. The World Bank Doing Business

Report (2006) indicated that it takes 127 days to deal with licensing issues and


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there are 16 procedures involved in licensing a business in Ghana. It takes longer

(176 days) in South Africa and there were 18 procedures involved in dealing with

licensing issues. Meanwhile, the absence of antitrust legislation favours larger

firms, while the lack of protection for property rights limits SMEs access to

foreign technologies (Kayanula and Quartey, 2000).

Previously insulated from international competition, many SMEs are now faced

with greater external competition and the need to expand market share. However,

their limited international marketing experience, poor quality control and product

standardisation, and little access to international partners, continue to impede

SMEs expansion into international markets (Aryeetey et al., 1994). They also lack

the necessary information about foreign markets.

One important problem that SMEs often face is access to capital (Lader, 1996).

Lack of adequate financial resources places significant constraints on SME

development. Cook and Nixson (2000) observe that, notwithstanding the

recognition of the role of SMEs in the development process in many developing

countries, SMEs development is always constrained by the limited availability of

financial resources to meet a variety of operational and investment needs. A World

Bank study found that about 90% of small enterprises surveyed, stated that credit

was a major constraint to new investment (Parker et al., 1995). Levy (1993) also

found that there is limited access to financial resources available to smaller


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enterprises compared to larger organisations and the consequences for their growth

and development. The role of finance has been viewed as a critical element for the

development of SMEs (Cook and Nixson, 2000). A large portion of the SME

sector does not have access to adequate and appropriate forms of credit and equity,

or indeed to financial services more generally (Parker et al., 1995). In competing

for the corporate market, formal financial institutions have structured their

products to serve the needs of large corporates.

A cursory analysis of survey and research results of SMEs in South Africa, for

instance, reveals common reactions from SME owners interviewed. When asked

what they perceive as constraints in their businesses and especially in establishing

or expanding their businesses, they answered that access to funds is a major

constraint. This is reflected in perception questions answered by SME owners in

many surveys (see BEES, 1995; Graham and Quattara, 1996; Rwingema and

Karungu, 1999). This situation is not different in the case of Ghana (see Sowa et

al., 1992; Aryeetey, 1998; Bigsten et al., 2000, Abor and Biekpe 2006, 2007;

Quartey, 2002). A priori, it might seem surprising that finance should be so

important. Requirements such as identifying a product and a market, acquiring any

necessary property rights or licenses, and keeping proper records are all in some

sense more fundamental to running a small enterprise than is finance (Green et al.,

2002). Some studies have consequently shown that a large number of small


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enterprises fail because of non-financial reasons. Other constraints SMEs face

include: lack of access to appropriate technology; the existence of laws, regulations

and rules that impede the development of the sector; weak institutional capacity

and lack of management skills and training (see Sowa et al., 1992; Aryeetey et al.,

1994; Parker et al., 1995; Kayanula and Quartey, 2000). However, potential

providers of finance, whether formal or informal, are unlikely to commit funds to a

business which they view as not being on a sound footing, irrespective of the exact

nature of the unsoundness. Lack of funds may be the immediate reason for a

business failing to start or to progress, even when the more fundamental reason lies

elsewhere. Finance is said to be the glue that holds together all the diverse

aspects involved in small business start-up and development (Green et al., 2002).

2.5 WHY COMMERCIAL BANKS ENTER MICROFINANCE

Studies show that in the last couple of years, a number of commercial banks

have engaged themselves in the niche which was once ignored. According to a

data recently gathered by Marulanda and Otero (2005); cited by Westley (2006)

on 120 micro lending institutions in Latin America, at the end of year 2004

banks were serving nearly one million microloan clients and providing over

US$1 billion in credit to these microenterprises. They also revealed that, the

banks share of the micro lending market was 26 percent to total microloan clients


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and providing 35 percent of microcredit. Again by the end of 2005, 30

downscaling banks in Latin America and the Caribbean were serving over one

million microenterprise clients with US$1.8 billion in loans; accounting for 21

percent of microenterprise borrowers in the region and 33 percent of microcredit

market with a substantial growth rate (Westley, 2007).

Many reasons have been given for this current trend which have been

categorised into internal and external factors.

2.6.1 Internal factors

Banks are drawn into micro lending business for many reasons but mostly for the

profit that they expect to generate from the business. According to Westley (2007:

1) Micro Rate report that in December 2004, the average return on asset (ROA)

and return on equity (ROE) values of the 30 leading MFIs they tracked in

Latin America was 4.4% and 17.7% respectively while the maximum was

17.5% and 48.7% for ROA and ROE respectively. Other internal factors

include risk diversification; excess liquidity; enhance public image; make use

of underutilized capacity such as branches in rural and peri-urban areas;

social responsibility; cross marketing opportunities; bank leadership interest

and commitment to serve the microenterprise and low income market

(Young and Drake, 2005). For example, the Financial Bank of Benin (FBB)

group entered into micro lending business in the 1990s because of the CEOs


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vision to develop the entire financial system for clients who have been neglected

by the traditional commercial banks hence the establishment of Finadev in Benin

(Harper and Arora, 2005: 169). Also the Bank of Khyber (BoK) of Pakistan

decision to enter the micro and small business segment and to scale down the

commercial banking operations was primarily from the top management, some of

whom had rich experience and orientation in agriculture and development

financing prior to joining BoK (Harper and Arora, 2005).

Still other reasons include corporate policies, inheritance due to mergers or

acquisitions and so on. According to Harper and Arora, (2005) one of the

reasons for ICICI Bank of India, the second largest bank in India, to enter

into microfinance was its merger with the Bank of Madura, a private sector

commercial bank in the southern state of Tamil Nadu in 2001. The Bank of

Madura had a corporate policy to promote and serve the poor women of India. The

bank therefore trained its staff to assist in the promotion of self-help group (SHG)

in terms of formation of groups and identification of income generating

activities and monitoring. The bank was able to promote, nurture and finance

the groups activities and managed it so much well to maintain a very good

repayment rate. So when ICICI bank acquired the Bank of Madura it also

inherited its vast SHG network and portfolio and was compelled to learn this new

business.


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2.6.2 External factors

Externally, commercial banks have chosen to enter the micro business

because of stiff competition facing the large commercial banks in their traditional

deposit taking and lending to the traditional clients. For example, Producers

Rural Banking Corporation in Philippines was established in 1995 in San Jos City

(Nueva Ecija). Among other reasons, the founder and management realised that

one way for the bank to survive and prosper was to expand to the clients who

have been ignored by the formal financial institutions (Harper and Arora,

2005). In addition to the above, other reasons that have contributed to banks

entering into micro lending business are government regulations directing

commercial banks to allocate a

percentage of their lending to microenterprises to help eradicate poverty

levels in an economy; donor initiatives and programmes; and realisation of

opportunities in the large unserved market. Harper and Arora (2005) also cited the

reason for the State Bank of India

(SBI) to enter into microfinance was as a result of social lending responsibility

prescribed by the government of India. This responsibility obliges all public

sector banks to commit a percentage of their total lending to a priority

sector which includes agriculture, small industries, small transport, small


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businesses, professionals and self employed and other similar groups. Other

commercial banks also downscale because of the general legal and

regulatory environment whiles others join the trend or fad in the banking sector.

2.7 DIFFERENT MODELS OF MICROFINANCE DELIVERY BY

COMMERCIAL BANKS

Different strategic models exist for commercial banks that are entering into the

microfinance business. The choice however could depend on the business

strategic goal and/or the competitive and regulatory environment the new

entrants might be operating. According to Jennifer Isern and David Porteous,

(CGAP Focus Note, no. 28 June, 2005) the chosen

approach that fits both the bank and the circumstances even at the outset is

an important factor for the future success of the microfinance business. This is

because each approach has its own peculiar rationale, risk profile, success factors

and costs. Jennifer Isern and David Porteous (2005) are of the view that the

current structural models can be divided in two main categories, i.e. direct and

indirect approaches based on how the bank makes contact with the clients. The

direct approach is basically an expansion of the banks operations to reach the

micro clients by creating an internal unit, or the setting up of a separate specialised

financial company (MFI), or the creation of a service company. On the other


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hand, the indirect approach is whereby the bank works with an existing

microfinance provider by outsourcing retail operations of the banks

microfinance business, or providing commercial loans to the MFI, or providing

infrastructure or systems for the MFI.

Although Westley (2006 and 2007), and Young and Drake (2005) have similar

opinions to Isern and Porteous, they nevertheless suggested that the two

models of downscaling should be categorised into internal units and external

organisations (explained below). This paper agree more with these later

opinions because choosing an external organisation through which to do

micro lending business could take any form from creating a MFI or service

company to outsourcing retail operations and / or providing wholesaling funds to

MFIs. These also embrace the approaches suggested by Isern and Porteous. In

addition, the choice of an external provider can be an informal institution such as

womens self-help groups (WSHG) as the delivery channel to retail funds to

microfinance clients. However, the paper is of divergent opinion from Westley,

Young and Drake by limiting the external provider to only four. This is because

the use of an external provider can take more than four approaches

including informal institutions as stated above.

2.7.1 Internal unit


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The use of an internal unit to provide microfinance means that the bank

operates micro lending within the existing institutional structure of the bank as a

division, department, unit or a new product line. The unit may be integrated

with the other bank systems but would be responsible for all microloan

processes and other microfinance related operations. This approach is

considered to be the lowest cost and fastest way to start microfinance operations

because no separate organization or structures need to be established outside

the bank premises with separate overhead costs.

2.7.2 External organizations

Unlike the internal unit, an external organization is where the bank uses a

stand-alone company in the form of a separate legal entity or informal

organisation to undertake microfinance activities. These may include the

creation of a specialised MFI whose shareholders include the bank which

may or may not include outside investors such as international NGOs,

donors, and local private investors or in collaboration with existing MFI and / or

organisations. The external organisation has its own board of directors,

management and staff that are focus on offering microloans and other

products for microenterprises (Westley, 2007).


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Chapter 3

3.0 Methodology of study

3.1 Introduction

The focus of my research is on understanding the various ways in which the

financing activities of Unibank Ghana is impacting on small and medium

enterprises. In line with this, this chapter of the research deals with the

methodology of the research under the following sub-headings: Research Design,

Data Collection, Population and Sample Size, Sample Distribution, Data

Collection Method, Data Handling and Analysis.

3.1.1 Research Design


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To be able to measure and achieve the above stated objectives, this study adopted

suitable method. The emphasis of the research is on both qualitative and

quantitative design. The study focused on case study methodology as this provides

an in-depth understanding on the multiple evidences that supports the research

problem. The method utilized was able to identify through interviews and

observation, empirical findings based on companys historical performance. By the

use of this approach, the method has provided valuable insight for problem

solving, evaluation and strategy which allows evidence to be verified and avoid

bias.

3.1.2 Data Collection

The study focused on both qualitative and quantitative data. In the process of

collecting data, the researcher employed tools such as field notes as well as

interview devices that would enhance the collection process. In terms of the

interview, the researcher collected data on the unit of analysis which typically

entails looking at collecting both primary and secondary information on the

variables under study. Typically, the researcher collected data from the companys

records such as company manuals, documents as well as interviewing participants

through the administration of questionnaires. In ensuring the quality of the

research, the researcher needs to be able to gain significant access to the data. In

this respect, permission was sought from those in authority to ensure that

permission is granted for access. Moreover, other participants in the process may

want to gain confidentiality and anonymity in the research. In this respect, the

researcher designed the questionnaire in a way to keep the anonymity of the

participants.


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3.1.3 Population and sample Size

The population of study was focused on staff participants of Unibank .

Specifically, the study focused on the on clients and middle level personnel

including management members, as well as Company Journals, annual reports and

trade patterns of the Companys brand. Out of the population of study, the study

selected a sample size of 50 workers of GRA and 80 people from the list of

businesses selected to be part of the study.

3.1.4 Sampling Techniques

In collecting data on the field, the study used purposive sampling method

(Creswell, 2007), that deliberately identifies a case, events or processes from the

site. The study therefore using non-probability sampling technique chose the

company in question as well as which journal or articles that will fit the research

context and expected outcome. In terms of the primary data, the study used the

simple random sampling method..

3.1.5 Sample distribution

In terms of the sampling distribution, the researcher focused on key members of

the company with specific emphasis on middle level managers and staff of the

company as well as clients. Moreover, in terms of the secondary data, the research

focused on specific journals and companys annual report to be able to comfortably

elicit responses that are relevant to the outcome of the research problem in

question.


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3.1.6 Data Collection Method

As a case base, the researcher focused on collecting secondary sources of data from

respondents by recording all the findings from the organizational manual, journals

and annual reports. Moreover, in collecting the primary data, the researcher

employed questionnaire in eliciting responses from participants.

3.1.7 Data Handling and Analysis

Data collected from the field was edited so as to identify incomplete statements,

mistakes and all other errors which could distort the research outcome. Information

collected from the field was categorized through the assistance of field notes and

computer aided database system. The statistical tool used in the data analysis was

excel. The use of the SPSS software was justified on the basis of its ability to use

current software packages that could generate reliable data to suit the objective of

the study.


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4.0 Data analysis and Presentation

4.1 Introduction

This chapter is used to represent the data of the researcher as well as its analysis.

This research interviewed 100 participants from Unibank, to find out the role of

their financing activities on small and medium scale enterprises. The analysis and

interpretation was done with the help of Microsoft Office Package; Excel to

analyze the responses collected.

4.1.1 Analysis of the Primary Data

PERSONAL INFORMATION

Table 4.1: How old are you?

AGE FREQUENCY PERCENTAGE

15-25 8 8%

25-35 32 32%35-45 50 50%

45+ 10 10%

Figure 4. 1: Age distribution of respondent


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Based on the data analyzed 50% of respondents are within the age bracket of 35-45

years, 32% falls within the area 25-35, 8% between 15-25 years and 10% within 45

years and above. The indication of this is that, significant number of participant

who were part of the entire survey process fell within the age bracket of 35-45

years.

Table 4. 2: Sex of Respondents

Sex FREQUENCY PERCENTAGE

Male 21 21%

Female 79 79%

Figure 4.2: Sex of Respondents


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From this responses provided, 21% of respondents were men and 79% of

respondents who participated in the survey were women. This shows that more

women engaged in the survey than men.

Table 4.3: Civil Status of Respondents

Civil Status FREQUENCY PERCENTAGE

Single 11 11%

Married 49 49%

Separated 38 38%

Widowed 2 2%


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Figure 4.3: Civil Status of Respondents

Based on the responses provided above, 49% of respondents indicated that they

were married, 11% indicated single, 38% indicated that they were separated and

2% indicate that they were widowed.

Table 4..4 : Religious Status of respondents

Religious FREQUENCY PERCENTAGE

Christian 39 39%

Moslem 54 54%

Others 7 7%


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With respect to the issue of religion, 39% of respondents indicated that they were

christians, 54% indicated that they were Moslems and 7% indicated other religion.

Therefore more Moslems participated in the survey than any other religion. The

raeson for the disparity may tehrefore be attributed to the sample collected in the

process.

Part B: To find out whether small and medium enterprises have benefited

from the bank

Table 4.5 What Business are you involved in?

Business Type FREQUENCY PERCENTAGE

Trading 65 65%

Manufacturing 8 8%

Services 23 23%Others 4 4%


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On the question of the type of business the respondent is involved in, 65% of

reposndents indicated trading, 8% inicated manufacturing, 23% indicated services

and 4% indicated other businesses. The implicationof tyhis is that, majority of

Ghanaians are into trading of goods and services and therefore the rseponses

provided have shown a similar trend. These persons might therefore be so

interested in the dealing with the banks, as ushered and shown by the responses

provided.

Table 4.6.How long have been in the business?

Length of time FREQUENCY PERCENTAGE

1-3 years 8 8%

3-5 years 24 24%

5-10 years 38 38%

10 years and above 30 30%


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Based on the question above, 8% of respondents indicated that they have been in

the business in between one and three years, 24% indicated that between three and

five years, 38% indicated between five and ten years, and 30% indicated 10 years

and above. The implication of the question is that, when naccess to loans are

available, it tends to support these small and medium scale enterprises in the quest

to offer products to the market.

Table 4.7 Total Number of Employees

Number of employees FREQUENCY PERCENTAGE

1-5 68 68%

5-10 19 19%

10-15 12 12%

15 and above 1 1%


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With respect to the question of number of employees, 68% of respondents

indicated that they have employed up to 5 workers, 19% indicated up to 10

workers, 12% indicated up to 15% and 1% indicated having employees above 15

workers. In relation to this question, the number of workers employed has an

implicationfor the definition of a smalla nd medium scale enterprise. In relationto

this, it could be seen that most of the respondents indicated positively that they

have relatively few number of workers, which goes on to show that, micro-

enterpries often employ minimum num of employees ranging between 2 and 50.

Table 4.8. How was your Business Financed?

Profitability FREQUENCY PERCENTAGE

Personal Savings 30 30%

Loan from friends and

Family

6 6%

Loan from the bank

Institution

57 57%

Loan from Commercial

Banks

7 7%


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Figure 4.8 How was your Business Financed

With respect to how the business was financed, 30% of respondents indiated

Personal savings, 6% indicated loan from friends and family, 57% indicated loan

from micro-finance Institution and 7% indicated loan from Commercial Banks. In

relation to the question, the responbdents have indicated that they deal with banks

more often in the financiong activities of their business. This goes on to confirm

that, the small scale enterpries and the banks are complematray and supporting

industries in the grwoth process of small and medium scale enterprises.

Table 4.9 What was the amount of Starting Capital? Please choose the any of the

ranges given.

Starting Capital GHC FREQUENCY PERCENTAGE

Less than Ghc1000 29 29%

Between 1000 and 2000 24 24%Between 2000 and 3000 32 32%

Between 3000 and 4000 9 9%

Between 4000 and 5000 2 2%

5000 and above 4 4%


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Figure 4.9: What was the amount of Starting Capital? Please choose the any of the

ranges given.

In terms of the starting capital, 29% had a start-up capital of less than Ghc1000,

24% up to 2000, 32% up to 3000, 9% up to 4000, 2% up to 5000 and 4% at 5000

and over. Based on the responses provided, it could be seen that small and micro-

enterpries are ussually constrained in terms of raising capital to finance thei

business. The implication of this is that, they ussuallyt start the business with

minimal funding requirement.

Table 4.10. Apart from your start up capital, have you raised any loan from your

finance Institution?

FREQUENCY PERCENTAGE

Yes 75 75%No 15 15%

Figure 4.10: Apart from your start up capital, have you raised any loan from

your finance Institution?


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From the question, 42% of respondents indicated that the loans as raised for

business expansion, 55% indicated that for working capital and 3% indicated as

personal loans. The working capital requirement of the firm is usually the amount

raised to acquire the various components of the current asset like stocks, debtors

and cash. The implication is that, it provides an opportunity for the institution to

run smoothly as availability of funds for working capital needs are very crucial in

the process.

13. What were the bases for determining the amount to borrow?


The extent of Business

Expansion

41 41%

The amount Working

Capital

54 54%

Extent of Personal

expenses

4 4%

Interest rate 1 1%


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On the issue of the bases for determining the amount of loan, 41% indicated

that due to the extent of business expansion, 54% indicated amount of

working capital, 4% indicated the extent of personal expenses and 1%

indicated interest rate.

How often do you take a loan from the Finance Institution?


Very often 4 4%

Often 49 49%

Not often 46 46%

Not at al 1 1%


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On how often a perso takes a loan, 4% indicate very often, 49% indicated often,

46% indicated not often and 1% indicatednot all. In rsepect to this question, it has

been able to comnfirm the frequency with which the enterpries deals with the bank.

8.What can you say about the Peformance of your business in terms of

Profitability?

Profitability FREQUENCY PERCENTAGE

Very Profitable 1 1%

Profitable 46 46%

Break Even 48 22%

Making losses 5 31%


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On the issue of the profitability of the Micro-enterprise, 46% of respondents

indicated that the Enterprise is profitable, 1% indicated very profitable, 22%

indicated break-even and 31% indicated that they were making losses.

4.1.2: To find out the challenges small and medium enterprises face in

assessing finance

9. What are the problems you encounter in running the Enterprise?

Problems FREQUENCY PERCENTAGE

Lack of capital 18 18%

Access to loans 12 12%

Weak demand for product 5 5%

Lack of Management

Capacity

8 8%

Lack of Basic Book-

keeping

12 12%

Combination of all 45 45%


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Under this particular question, 18% of respondents indicated that the problem they

are facing is lack of capital, 12% indicated access to loans, 5% indicated weak

demand for the product, 8% indicated lack of management capacity, 12% indicated

lack of basic bookkeeping and 45% indicated a combination of all the problems.

This question tend to look into the various challenges faced by micro-enterprises in

general.

16. How easy is it to access a loan facility from a Finance Institution?


Very easy 16 16%

Easy 79 79%

Not easy 5 5%

Not at al 0 0%


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On this question, 16% indicated that it is very easy to assess, 79% indicated

easy, 5% indicated not easy. In this case, it could be seen that respondents

have it easy in assessing the loans facilities from UT. The implication of thisis that, once they area able to assess these facilities with ease, it builds the

relationship between the banks and the enterprise and tends to satisfy the

objective of the firm in terms of raising capital to finance its operation.

17. What is the extent of interest rate charged at the micro-finance

Institutions?


Very High 42 42%High 57 57%

not high 1 1%

Not vey high 0 0%


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On this question, 42% indicated that the interest rate is very high, 57% indicated

that it is and 1% indicated otherwise. Whilst assessing the loan facilities from

Unibank seems to be easy, the intesret charge on the se facilities seems to be

expensive for the customers. This high trend in interest rates have been confirmed

to be as a result of the high default rate associateed with these micro-enterprises.

19. What are the major Challenges you face in assessing credit?

(i) Collateral

Big

challenge

Medium

Challenge

Small

Challenge

No

Challenge

Collateral 75% 20% 4% 1%


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With regards to collateral ,75% of respondent said it was a big challenge when

required to provide collateral for the loans,20% said it is not a big challenge,4%

said it was a small challenge and 1% said it is no challenge. The degree and

amount of collateral determined by the bank is as as a result of the the default rate

exhibited. Whilst this may pose a sense of security to the banks, it may play a key

role in hampering the liquidity needs of the enterprise.

(ii) Delays in Processing

Big

challenge

Medium

Challenge

Small

Challenge

No

ChallengeDelays in

Processing

60% 30% 8% 2%

Delays in processing is one issue raised by the clients.60% said it is a big

challenge,30% said it is a medium challenge, 8% said it is a small challenge and

2%said it is no challenge .

(iii) Documentation


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Big

challenge

Medium

Challenge

Small

Challenge

No

Challenge

Documentation 35% 50% 5% 10%

50 % of the respondent said documentation is a big challenge,35% said it is a

medium challenge, 10% said it is a small challenge and 5% said it is no challenge

to them.

iv) Customer Service

Big

challenge

Medium

Challenge

Small

Challenge

No

Challenge

Customer

service

8% 20% 32% 40%


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Customer service was another challenge respondents raised. 40% said it is a big

challenge, 32% said is it a medium challenge, 20% said it is a small challenge and

8% said it is no challenge.

4.1.2 Analysis of the Secondary Data

Part D: To find out the various program put in place by Unibank Ghana Ltd

in support of small and medium enterprises in Ghana

The Banks commitment to the SME industry remains paramount, with a focus on

identifying visionary entrepreneurs to nurture into business giants. A premium is

placed on ensuring the customers total satisfaction with a variety of credit

facilities for their different needs, which include the following

(www.unibankghana.com, 2012). In line with this, the bank has offered a number

of facilities to meet the expectation of the Small and Medium scale enterprises.The bank has also designed an SME loan facility system. It is basically a facility

for small and medium enterprises that need funding to replenish stocks, payment of

customs duties, supply goods in normal course of business preferably against local

purchase order (LPO).
http://www.unibankghana.com/http://www.unibankghana.com/


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Purpose

- Loan for business expansion

- Trade Finance

- Working Capital Finance

- To replenish stock

- Payment of custom duties

b) Financing Working capital:

Working capital credit facilities may also be used to

Purchase of raw material, components, stores, spares and maintenance of

stock of these items at minimum level and stock in process and finished

goods.

Finance against receivables including receipted invoices.

Meeting marketing expenses where the units have to incur large-scale

expenditure towards marketing of their products.

Bills Purchase / Discounting under L/C or outside L/C

Export Credit Facilities

Letter of Credit on sight basis for purchase of raw material/capital goods

Bank Guarantees for Performance, Advance Payment, Tender Security

Deposit, Guarantees for getting orders, for procurement of raw materials etc.

UniBank offers the above and other tailor-made products to SMEs at competitive

interest rates that are commensurate with the clients credit rating. UniBank Ghana

Limited's SME loan policy is framed to provide hassle-free credit for working

capital needs as well as long-term requirements, taking into account the nature of


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business, cyclical trends, cash flow projections, peak time requirements and any

eventuality of unforeseen spurt in the SME business (www.unibankghana.com,

2012).

In order to provide better customer service and ensure that loan applications are

dealt with expeditiously, uniBank has put in place an efficient structure of loan

processing, appraisal and approval to give the clients quality, timely service.
http://www.unibankghana.com/http://www.unibankghana.com/


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Chapter 5:

5.1 Conclusion and Recommendation

The Small and Medium Enterprise (SME) Sector in Ghana includes Micro

Enterprises, Small Enterprises, Artisans & Village Industries, Medium Enterprises,

Service Sector units & individual sub-sector units. SME is fast-growing sector in

the local economy, with an increasing number of universal banks creating

innovative products to give highest importance to financing SMEs as part of their

strategic growth plan. Growth resulting from globalization and liberalization is

most visible and profound in the SME segment, making SMEs growth engines for

economic development in Ghana. Thus, the relationship between the banker and

the SME customer has also become most crucial and competitive. This chapter

consists of recommendations to assist solve problems that were discovered in the

findings and conclusion regarding the study. Assisting small and medium- scale

enterprises owned and run by women have a fundamental impact on the

development and growth of the economy.

In developing Nations delivery of microcredit to operators of small and micro

enterprises (SMEs) is increasingly being viewed as a strategic means of assisting

the so-called "working poor" (ILO, 1973). Small enterprises, new or existing, often


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face certain problems when they approach finance providers for both enterprise

fixed capital investment and working capital. This insufficient supply of

microloans is a major issue, particularly where business creators are not having the

requisite collateral. Supporting the supply of microloans is therefore not only an

issue of entrepreneurship and economic growth, but also of social inclusion

(Burritt, 2003). In recognition of this, the traditional banks such as Unibank have

recognized the role played by these micro-enterprises in national development, by

providing small scale enterprise with loan facilities to suit their working capital

requirement needs as well as other project financing. Moreover, the degree of

competition in the market has therefore made the banks to make their loan facilities

more accessible to ensure that micro-enterprises are able to gain access. Whilst this

is the case, the demand for collateral and the high borrowing cost associated is

putting significant pressure on the capability of small and medium enterprises to be

able to assess the loan facilities to assist the companys operations.

Recommendation

The banks should learn to understand the characteristic of the small and micro

enterprise in order to review their current loan portfolio that will be more in tuned

with the small enterprises especially those within the informal sector of the society

mainly those which are micro, small and medium enterprises as they are faced with

the inaccessibility to loans. Additionally, banks should have portfolios specifically

for these entrepreneurs within the micro, small and medium scale enterprises in

order to increase access to credit as well as have a certain amount of interest

charged on their loans. For example, to have special interest rates targeted towards

different levels of entrepreneurs within SMEs. Likewise, they should provide


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specific information to borrowers regarding loans and the specific requirements

needed in obtaining the loan.

Secondly, the interest cost associated with the loan facilities should be relaxed to

make it easier for these micro and medium enterprises to be able to borrow since

they depend significantly on the bank to support their working capital requirement.

Also, it is important for these banks to provide support services to these small

enterprises to ensure their growth and sustainability in the long term.

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