Small and medium-sized enterprises (SMEs) play an important role in Ghana’s economy, accounting for around 90% of all businesses, according to a 2013 survey on the banking sector by PwC. A 2010 study by the University of Ghana reported that SMEs account for 70% of GDP, although PwC says this figure fell to around 49% by 2012, largely due to the commencement of oil and gas production in commercial quantities in the first quarter of 2011. The bulk of Ghana’s SMEs operate in trade and services, and to a lesser extent industry, meaning they are also a key source of job creation. According to the University of Ghana study, SMEs are responsible for roughly 85% of employment in manufacturing.

Lending Risks

SME lending is a hot topic in most emerging markets, and Ghana is no exception. Although exactly what constitutes an SME can vary significantly depending on the bank defining it – definitions range from a turnover of at least $50,000 at one institution to $25m at another – most of the banks surveyed by PwC said that the bulk of the customers they classify as SMEs in their loan portfolios had turnovers of between $2m and $3m.

While some banks do offer special loan products for small businesses, commercial banks as a whole – as with so many other economies across the continent – are hesitant to lend to the SME sector. One reason commonly cited for this is lack of credit history. Those that do lend to smaller firms are only willing to do so at interest rates that are even higher than Ghana’s already-elevated average.

A 2013 report by the Association of Ghana Bankers (AGB) found that the SME sector shows “significant economic and commercial potential”. However, it also noted “the high cost burden that the banking industry imposes on this promising economic group”. According to the PwC report, three main obstacles stand in the way of SME financing: lack of structure in corporate governance, opacity of financial circumstance and the segment’s high default rates.

In many ways, the risks of lending to SMEs are merely the more outsized examples of broader challenges in corporate lending. For example, the overall ratio of non-performing loans (NPLs) in Ghana dropped from 13.2% in 2012 to 12.0% in 2013 – a decline from 16.3% in 2004 and a significant drop from the banking crisis of the 1980s, when as many as 41% of all loans were non-performing. As for the source of NPLs, while loans to government institutions have occasionally turned sour, it is SMEs that have historically tended to have the higher levels of bad debt. This trend is exacerbated in part by poor bookkeeping and management.

Credit Building

As part of a push to reduce the NPL ratio more aggressively, Ghana passed the Credit Reporting Act in 2007 and now has three licensed credit bureaux: XDS Data, Dun and Bradstreet, and Hudson Price Data. The first of the agencies, XDS Data, began operations in 2010, while the others were licensed in quick succession in 2011 and 2012. By the end of December 2012 all of the country’s 26 universal banks, as well as its non-banking financial institutions (NBFIs), had signed up for credit reference services, although according to local press reports, implementation was spotty.

Despite such breadth of participation, the impact of this on SMEs has thus far been muted. To be sure, the roll-out of the credit bureaux had a significant impact on the overall credit environment in the country. In terms of headline access to credit, Ghana now fares quite well compared to the regional average, ranking 28th out of 189 countries in that category on the World Bank’s Doing Business index – far above Cote d’Ivoire (130th) and the average for sub-Saharan Africa (113). However, without a transferable collateral registry to allow the sharing of credit information, and with high-street lending rates still in excess of 20%, the hurdles remain high for all but the largest firms. At the end of 2012, the average bank lending rates in Ghana were around 25.7%.

New Fund

To promote the growth and diversification of small businesses in Ghana, a number of new initiatives have been established, including educational programmes and a specialised support fund for SMEs. More than $20m is expected to become available through the government’s SME fund, which has received financial backing from the Export Development and Agricultural Investment Fund (EDAIF), as well as from development partners, which have backed it with various loans and grants.

As the minister of finance, Seth Terkper, announced in November 2013, the SME fund will be linked to established institutions such as local credit guarantor EximGuaranty and the Venture Capital Trust Fund as well as rural banks and microfinance firms. According to Terkper, while earlier efforts to improve credit access have not been sustainable, the new fund will have a number of features to ensure its viability. For example, it will be overseen by a board of trustees and a professional fund management company – a structure that should improve the credit appraisal process and recovery rates. The EDAIF, which is providing financial and technical assistance, has itself been an active supporter SMEs. In 2012, it distributed approximately $190m worth of funds to some 90 institutions, with roughly one-tenth of that disbursed in the form of credit.

Additionally, Terkper said, the SME fund will work in close collaboration with the National Board for Small-Scale Industry to unify finance and capacitybuilding initiatives for SMEs. Various institutions, such as the Private Enterprise Foundation and several banks, already offer training courses to business owners on practices that in the long run can raise SMEs’ creditworthiness, such as bookkeeping. These types of programmes help improve financial transparency and corporate governance, which in turn can boost access to capital from banks and other lenders.

The fund could also go a long way towards promoting diversification among SMEs, which have traditionally been predominantly manufacturing or retail businesses. The government has been seeking to move more small firms into agro-processing and other fields – particularly given the new opportunities that have emerged for subcontracting in the energy sector in recent years, since the start of large-scale oil and gas production.

SME Growth

Some banks have opted to expand their proprietary SME loan book significantly in recent years. According to PwC, roughly half of the banks it surveyed had made a strategic decision to expand SME activity. Some 15% of these, moreover, had only just moved into the market in the past two to three years, boding well for future entries. “SME financing is more human-intensive,” Alhassan Andani, CEO of Stanbic, told OBG. “For most banks, this will require significant internal capacity building.”

The deliberate push is visible. Between 2010 and 2011, for example, the Agricultural Development Bank saw a nearly 40% increase in its SME lending, which accounted for a quarter of its total assets during that time. In 2011, uniBank also recorded significant growth in its lending on the back of strong increases in SME activity – SME loans in that year accounted for over 70% of its total loan portfolio. However, the higher levels of risk and smaller transaction volumes in those segments have also prompted lenders to expand links with established NBFIs.

Recent mergers and acquisitions could also boost the sector’s lending capacity. Fidelity Bank, the country’s seventh largest by assets, announced a deal in September 2014 which will see it acquire ProCredit Savings and Loans Company. In early 2012 Ecobank, the country’s largest bank in terms of assets, acquired The Trust Bank Ghana (TTB) in a share-swap transaction. TTB had a strong profile in the SME and local corporate business segments, and before the merger had been majority-owned by the Social Security and National Insurance Trust.

Ghana’s four-tier financial sector – comprised of banks, savings and loans companies, rural community banks and microfinance institutions – means that when banks acquire companies in the non-banking tiers, they can broaden and deepen their portfolios. This allows them to bring their branding, technology and expertise to bear on under-banked sectors. Indeed, with its 140 rural and community banks, 57 NBFIs and more than 200 microfinance companies, the market is ripe for consolidation.

Broader Blueprint

Though SMEs may continue to seem like risky investments, new initiatives from the public and private sectors are likely to make them more attractive targets. New training programmes in viable downstream industries, as well as a more unified national plan for SME financing, will be crucial to improving the structure and sustainability of the country’s smaller businesses. “In order to finance Ghana properly the market needs to see a plan,” Prince Sarpong, managing director at ASN Holdings, told OBG. “Policymakers must create a comprehensive strategy and vision for the country.”