Demand for collateral security by financial institutions stifles growth of SMEs

Demand for collateral security by financial institutions stifles growth of SMEs
By Masahudu Ankiilu Kunateh, Ghanadot

The Vice President of Ghana, John Dramani Mahama has observed that the demand for collateral security by banks and other financial institutions stifled the growth of the Small and Medium Enterprises (SMEs) in the country.

In Ghana, most SMEs require modest credit to purchase simple machinery and equipment or as working capital to enhance their operations.

However, such credit is hard to come by, Mr. Mahama said, adding that the need to get credit and financing to this sector right for SMEs if our economy is to achieve the growth required to achieve middle income status by 2015

The Vice President lamented the credit situation at the launch of FirstBank SME Centre in Accra, yesterday.

The government admittedly must take part of the blame for the lack of sustained growth in the SME sector.

SMEs unlike the large scale enterprises are less able to withstand shocks created by the perennial loss of macro economic stability.

The government’s handling of the economy is therefore critical in creating an enabling environment in which the SMEs can thrive and multiply.

The recent world recession and lack of prudence in economic management which created the economic tsunami are still having negative effects on the SMEs.

Mr. Mahama noted that most SMEs could not survive in this adverse environment where rates were above 30% and interplay of foreign exchange and slump in local production push up interest rates.

Other bottlenecks that have impeded the growth of SMEs are inadequate infrastructural development, cruel trade liberalization policies which have also resulted in an influx of cheap products into the country.

These have crippled the Ghanaian local manufacturing companies and other sectors of the Ghanaian economy.

He however stated that these challenges would be better handled by the government policies which the National Democratic Congress (NDC) regime is working hard to address.

Indeed, over the years, the SMEs have been the engine of growth for many economies of which Ghana is no exception. As it forms over 90% of the country’s total industrial sector and also contributes about 58% of employment in the country.

This notwithstanding, most businesses in the private sector have been unable to grow and realize their full potential mostly due to the high cost of finance, inadequate skills, information asymmetry and poor record management.

Comparatively, the growth of SMEs is a phenomenon, which has facilitated the development of many economies in the world, notably in China, economic growth has been spurred on by over forty million SMEs, which constitutes about 99.8% of companies in that country.

Additionally, India adopted the capacity building strategy on realizing that key factor for the development of SMEs will depend upon how effectively and efficiently that country’s human capacity is built.

Ghanadot