As is the case in many emerging markets, small and medium-sized enterprises (SMEs) play a crucial role in Ghana’s economy, driving both activity and employment. Still, their impact is lower than it could be due to a challenging operating environment.

IMPACT: The full impact of SMEs on Ghana’s economy is difficult to measure accurately as many small enterprises form part of the informal sector of the economy. However, a study by the University of Ghana published in 2010 – the same year the government re-based its GDP – reported that 92% of all businesses registered in Ghana are SMEs, accounting for 85% of manufacturing employment and contributing approximately 70% of Ghana’s GDP. In 2013 Ghana Statistical Service (GSS) employment sector data showed that 93% of respondents questioned in 2010 regarded themselves as working in the private sector, with 85.5% reportedly in the formal economy and just 7.2% in the formal private sector. The survey did not indicate how many of these private sector employees were working for SMEs.

DEFINITIONS: It is also clear that a broad range of definitions for SMEs is used by those in government agencies and the financial sector. The GSS and the National Board for Small Scale Industry (NBSSI) use definitions based around employee numbers to define small companies, while most banks in Ghana base their sector definitions on annual turnover. The GSS defines a firm with fewer than 10 employees as a small-scale enterprise and any business with more employees than that as medium or large scale. The NBSSI suggests a small-scale enterprise is one with a maximum of nine employees, adding it would not expect it to have plant and machinery worth more than GHS10m ($5.14m). A recent survey conducted for the Association of Ghana Bankers (AGB) found that most banks in the country categorise businesses with an annual turnover of $2m-3m as SMEs. For its part, the Ghana Stock Exchange is targeting its new Ghana Alternative Market (GAX) at firms with a minimum capital requirement of between GHS250,000 ($128,525) and GHS1m ($514,100) and referring to these businesses as small and medium-sized entities.

LOAN GROWTH: The AGB survey acknowledged that loans to SMEs, even though they carried greater risk, played a significant part in the success the banking sector has enjoyed in Ghana in the past 12 months.

The survey estimated that SME loans contributed between GHS167m ($85.85m) and GHS836.5m ($430.04m) to operating income for the country’s 26 banks in 2012. The report noted these figures showed “the significant economic and commercial potential that lies with the SME sector, as well as the high cost burden that the banking industry imposes on this promising economic group”.

However, the BoG’s Monetary Policy Committee (MPC) “Financial Stability Report”, which was published in February 2013, said that while banks’ credit stance on loans to enterprises in general improved in January 2013, the picture for SMEs was different.

“Credit stance on loans to SMEs was, however, tightened,” noted the MPC.

In the same month, Ghana’s vice-president, Kwesi Amissah-Arthur, met bankers and called for more credit terms for SMEs to aid “effective business growth across the country”. However, many banks and lending institutions may shy away from smaller enterprises to reduce exposure to non-performing loans. “In late 2008 we did our own indebtedness survey among borrowers,” Sarah Tsien Zetterli, managing director of ProCredit Ghana, told OBG. “In Makoloa market we found that businesses there had up to eight loans with different institutions and we just realised that it was too risky because we were not able to do credit checks.” ProCredit’s minimum loan currently is for $5000 and it is seeking new customers among Ghana’s burgeoning middle class.

POOLING RESOURCES: According to a study carried out by two academics from the University of Cape Coast that was published in October 2012, small companies in Ghana could form networks to pool financial resources under an appointed fund manager as a way to raise finance without having to deal with the banks. The study acknowledged that banks offering credit to smaller companies had experienced problems with business owners using the fund for personal expenses, with inaccurate information about business location exacerbated by an inadequate address system in Ghana and with small firms’ high tendency to default.

However, the report by Patrick Akorsu and David Agyapong also cited earlier academic studies highlighting SMEs’ strengths in efficient use of resources, developing entrepreneurship and utilisation of otherwise dormant resources such as family savings.

NEW FIELDS: Although many SMEs in Ghana have been based around manufacturing and retail, the government has been looking for ways that Ghanaian businesses can innovate with regards to agro-processing and benefit from downstream opportunities in the oil and gas industry.

To underpin these activities, training initiatives are being adopted. In September 2013 a new $6m technical training centre at Takoradi Polytechnic will open to local students. It has been funded by the Jubilee partners: Tullow Ghana, Andarko, Kosmos Energy, Ghana National Petroleum Company and Sabre Oil/Gas Holding. The training centre will have courses in mechanical, electrical and process engineering, as well as health and safety awareness. In addition, the government has reported that Tullow Ghana has spent $194m on SMEs, with 1035 local companies benefitting from their support and employing over 1000 workers in the country.

LATE PAYMENTS: However, despite these initiatives, the business environment for small companies in Ghana remains challenging on the whole, with late payment for contracts a particular concern for small business owners trying to control their cash flow.

“It takes between 30 and 60 days to get paid from delivery on paper. However, actual payments could potentially take months, depending on the availability of funds,” John Bohr, the head of retail banking at the Bank of Africa, told OBG. “The impact is that it drains the resources of the contractors and it creates a lot of financial hardship.”

ROOM FOR IMPROVEMENT: The AGB report on SMEs published in 2013 suggests that banks see the top three obstacles mitigating against SME financial inclusion as: unstructured corporate governance, opacity of financial circumstance and high default rates. Some financial institutions are beginning to offer training and education to clients to help them overcome these obstacles.

“We offer training on bookkeeping and succession planning to promote business continuity,” John Bohr, the head of retail banking at the Bank of Africa, told OBG. “In addition, we encourage customers to see the business as separate from the owner, to see the business as an entity in its own right. In this way we are adding value to their businesses and helping them to build a business culture.”

Similar advice is offered by the Private Enterprise Foundation, which has organised workshops on subjects like bookkeeping and financial planning for groups of around 15 to 20 people. The organisation is now embarking on advice sessions that are more tailor-made for specific businesses. “They need good corporate governance so they can access capital,” said Moses Agyeman, senior economist at the Private Enterprise Foundation.

If these training initiatives prove successful, then more growing business may begin to migrate from the informal sector of the economy and thus qualify for credit that will enable them to expand and take advantage of the opportunities generated by the country’s macro-economic success story. For their part financial institutions may also have to consider lowering their lending rates to attract creditworthy commercial customers from the SME sector.