Editorial: De-risk credit ecosystem to create more room for SMEs 

A nationwide study has found that more than half of MSMEs remain shut out of formal credit despite their central role in the economy.

The study, jointly conducted by Development Bank Ghana, University of Ghana Business School and Bank of Ghana, shows that only about 35 percent of MSMEs currently have access to bank financing.

This is because high interest rates, steep collateral requirements and short loan tenors continue to limit borrowing, even though the sector accounts for more than 70 percent of gross domestic product and the bulk of employment.

However, Professor Vera Fiador, Head of UGBS’s Finance Department, notes that the financing gap is being reinforced by weaknesses on both sides of the credit market.

For instance, while SMEs complain about limited access to credit, banks equally face persistent challenges with poor record-keeping, unreliable data and diversion of loan funds. Indeed, these governance gaps and weak transparency undermine lenders’ confidence.

Therefore, some capacity building in financial literacy, risk management and ethical conduct becomes essential if credit flows are to improve.

Professor Eric Osei-Assibey, Chief Economist-Development Bank Ghana, admits that credit to the MSME sector has shrunk significantly.

He attributes this to the cumulative impact of macroeconomic shocks over the past few years, from the financial sector cleanup and Covid-19 pandemic to domestic debt restructuring and tight monetary conditions.

These have together compressed liquidity and elevated risk perception across the banking system.

According to him, however, the study confirmed strong links between financing and growth outcomes – noting that MSMEs with access to credit typically expand employment by about 12 percent and grow sales by roughly 18 percent.

World Bank evidence also shows productivity gains of up to 86 percent when firms are financed. The research found that interest rates remain the top concern for MSMEs, followed closely by collateral demands and lack of medium- to long-term financing.

Meanwhile, on the supply side, banks reported that weak formalisation, poor accounting systems and low management capacity among many MSMEs continue to raise default risks.

The study recommends scaling up risk-sharing arrangements including partial credit guarantees that would allow lenders to share losses with public or development finance institutions, to reduce banks’ downside risk and improve credit pricing for smaller firms.

 

The post  Editorial: De-risk credit ecosystem to create more room for SMEs  appeared first on The Business & Financial Times.

Read Full Story