News & Events

VENTURES AFRICA – Small- to medium-sized enterprises, or SMEs, are invaluable to any economy. They can help catalyse job creation, reduce poverty, provide basic goods and services, and generate the export and tax revenues that help societies develop.They can even help to provide infrastructure and facilities like water, roads and electricity, and to diversify the country’s economy, making societies more stable.

 

Ghana’s economy has reaped many of these social and economic benefits from its high percentage of SMEs. Making up 92 percent of the country’s firms, they employ about 85 percent of the country’s manufacturing workers. Until 2011, the manufacturing sector, which is dominated by SMEs, had been contributing about 70 percent to Ghana’s GDP. (This figure then dropped to 49 percent, mainly thanks to the commercial natural gas and oil production that began in the first quarter of 2011.) With the exception of a few privatised state- owned enterprises or natural-resource monopolies, most of the large, successful firms in Ghana evolved from SMEs.

 

Realising the value of SMEs, Ghana’s government has taken steps to promote them. In 2004, the Venture Capital Trust Fund Act created a federally administered fund for such firms in Ghana. To date, it has dispensed $17 million, financing 48 SMEs through five intermediary funds, while also providing technical assistance to local entrepreneurs and investors.

 

The act defines an SME as an industry, project undertaking or economic activity whose total asset base, excluding land and building, does not exceed the Ghanaian cedi equivalent of $1 million in value. Other definitions of SME focus on revenue: Ghana’s National Board for Small Scale Industries considers enterprises with annual turnover greater than $200,000 but not more than $5 million to be SMEs. While some of Ghana’s SMEs succeed, many do not. One of the main reasons for failure is a lack of training.

 

Many of the people running SMEs could improve both their entrepreneurial skills and their ability to manage finances. But there are also circumstantial problems. Ghanaian small-businesspeople have limited or no access to high-quality and affordable business-development services, technical services, and management-support services. They face an erratic power supply, technology gaps, and problems with access to both markets and information about them.

 

Challenges, Regulation and Reformation

 

The problems for SMEs start with a lack of access to capital. Banks and financial institutions tend to assess them as inherently risky because of their insufficient assets and low level of capitalisation, their relative vulnerability to market fluctuations and their high mortality rates. SMEs thus suffer frequent credit rationing be- cause of a lack of reliable collateral of the type required by banks.

 

When SMEs are granted credit, they access it at comparatively high interest rates, sometimes coupled with delayed disbursements. A lack of available credit has crippled many SMEs in Ghana despite efforts by government and private institutions to offer financial support to businesses. With microfinance institutions and savings-and-loans companies proliferating in Ghana, it seems possible that the barriers of inadequate capital and limited financial support will fall. But so far the inverse seems to be true. Given how much SMEs contribute to Ghana’s economy, one would expect government regulation to support their development.

 

Unfortunately, at times, government has done just the opposite. For example, after the 2007 discovery of oil in the western region of Ghana, many local oil and gas businesses tried to enter the market. Yet the legal regulation until November 2013 made the business environment more favourable for international companies, which already had an advantage of capital and know-how in the oil and gas sector. The SMEs received inadequate information on contracts, and the bidding process for access seemed to favour foreign companies. The tilted playing field made it difficult for local SMEs to even compete. After strong complaints from many

 

SMEs, Ghana’s parliament passed the Petroleum (Local Content and Local Participation) Regulation on 20 November 2013, in an attempt to ensure that Ghanaians benefit from the country’s new resource. Among its other goals, the law seeks to create jobs for Ghanaians by setting minimum local employment levels and minimum in-country expenditures for firms accessing its petroleum re- sources. Education, skills transfer, transfer of technology, and active research and development programmes will help develop local capacities.

 

The incident showed how important it is for Ghana’s government to take the country’s home-grown business sector into account. Yet despite the training and advisory services that the country’s universities and government make available, many small business owners and managers still have limited managerial knowledge and skills in their fields of work, as well as low financial literacy, inadequate operational skills, and insufficient business planning experience.

 

Poor training restricts the ability of managers to make sound decisions, and makes it more difficult for them to compete. While globalisation and trade liberalisation have brought possibilities as well as challenges to Ghana’s SMEs, few firms have identified and exploited the opportunities. The majority of Ghana’s SMEs have fallen further behind due to a lack of literacy in new technologies.

 

To make matters worse, local SMEs often find themselves competing with foreign firms and cheap imports in local markets. The high costs of formalisation, including licensing and registration requirements, pose another obstacle for SMEs. While efforts have been made to streamline business registration processes in Ghana, they have only partly succeeded. Many businesses have chosen to stay in the informal sector rather than struggle to enter the formal sector – which means they do not contribute to national growth. Issues processing export documents and clearing goods from ports are also a concern for many businesses, due to the cost and time involved. Despite all of this, the sector’s future in Ghana looks bright.

 

In a move towards bridging the persistent gap between financing for SMEs and other businesses, Ghana’s government, together with development partners including the International Finance Corporation and the government of Italy, has launched several financial schemes to accelerate the flow of financing to SMEs. The latest of these is the Ghana SME Fund, launched by the Ministry of Finance with the country’s 2014 budget. The fund is expected to make more than $20 million available to SMEs. Financing skill-deficient businesses and entrepreneurs who do not know how to make the best of funding is, however, an exercise in futility.

 

It is prudent to en- sure that SMEs have skilled labourers in their ranks and knowledgeable managers at their helm. Several new institutions and initiatives have been established recently in Ghana to serve these education- al and training goals.

 

Among these initiatives are the Enterprise Development Centre (EDC) and the Private Enterprise Foundation. The EDC, launched in May 2013 with a start-up fund of $5 million, is a five- year project jointly sponsored by the Jubilee Partners – Tullow Oil, Ghana, Cosmos Ghana, Anadarko, Petro SA and the Ghana National Petroleum Corporation (GNPC).

 

The fund, which is jointly super- vised by the Ministry of Energy and Petroleum and the Ministry of Trade and Industry, aims to support to Ghanaian SMEs trying to enter the oil and gas sector. The EDC provides a range of services such as business training, capacity-building programmes, advisory services, and access to markets and information. The Private Enterprise Foundation was established as an autonomous, non-profit institution, comprised of Ghanaian business interest groups like the Ghanaian National Chamber of Commerce. The goal is to create a fertile environment for private sector businesses by lobbying for favourable policies and legislation.

 

Technology, banking and Finance

 

Today’s businesses must continuously incorporate new technologies into their production processes, marketing strategies and management functions in order to stay competitive.

 

Many SMEs in Ghana have been unable to take advantage of such advancements, however, often because they lack access to and knowledge of the Internet, technology-literate managers and workers and sufficient financial resources.

 

The Ghana Regional Appropriate Technology Industrial Service (GRA- TIS) Project was established in response to these basic staffing and information needs. GRATIS has set up Intermediate Technology Transfer Units (now called Regional Technology Transfer Centres) in nine regions of Ghana to train small manufacturers and supply them with tools and equipment.

 

The evolution of SME banking in Ghana is expected to boost SME performance in the near future as businesses take advantage of the growing sector to find funding and credit support.

 

Financial institutions that previously focused only on corporate clients and large organisations now have SME departments dedicated to small enterprise financing, and several banks have started developing innovative products specifically aimed at SMEs. Among these products are term loans for acquisition of capital goods (fixed assets like equipment and land); and working capital, by way of cash credit or overdrafts.

 

Looking to solve the collateral issue many Ghanaian businesses face, microfinance companies and banks are moving towards accepting more flexible forms of collateral, particularly for SMEs with few fixed assets. They are also embracing the use of group guarantees for SMEs and placing more emphasis on cash flow than on balance sheets when assessing borrowing capacity. They also have simplified loan application assessment procedures. With these developments and other campaigns geared towards developing SMEs in years to come, the SME sector in Ghana is expected to grow significantly in the future.

 

Moving Towards the Future

 

The persistent fall of the cedi against major international currencies like the US dollar, the pound and the euro, together with the current high import rate of goods and services into the country, stand as major threats to SME development. But, as the country tries to reduce its imports and increase local production and consumption, it is expected that the government’s commitment to SMEs, which hold great prospects for manufacturing and agriculture, will increase.

 

To fully exploit the latent opportunities in the SME segment of Ghana’s economy, the government should focus on building up suitable infrastructure, education and training facilities, capable public and private institutions, simplified legal and regulatory frameworks, and good governance.