Financial Liberalization and Small Enterprise Finance in Ghana 1) INTRODUCTION: The dynamic role of small and medium scale enterprises (SMEs) in developing countries have been highly emphasised. These enterprises have been identified as the means through which the rapid industrialisation and other developmental goals of these countries can be realised. However, Small enterprises in developing countries typically cite lack of access to finance as an important constraint on their operations. This lack of access is often associated with financial policies and bank practices that make it hard for banks to cover the high costs and risks involved in lending to small firms. The purpose of this study is to find out whether lack of access to finance is a constraint on the operations of small and medium scale enterprises in Ghana and the extent to which financial liberalisation has helped in eradicating or mitigating this problem. There paper is structured by considering few previous study on the subject under consideration in the second section. The third section considers the financial system in Ghana, looking at the period before and after the financial liberalisation. We make analysis of the response from the firms sampled and the fifth section concludes the study with some recommendations. 2) LITERATURE REVIEW: Access to finance remained a dominant constraint to small scale enterprises in Ghana. Credit constraints pertaining to working capital and raw materials were cited by respondents in a survey conducted by Parker. ( Parker et al, 1995). Aryeetey et al (1994) reported that 38% of the SMEs surveyed mention credit as a constraint. In the case of Malawi, it accounted for 17.5% of the total sample (Daniels & Ngwira, 1993:30-31). This stems from the fact that SMEs have limited access to
capital markets, locally and internationally, in part because of the perception of higher risk, informational barriers, and the higher costs of intermediation for smaller firms. As a result, SMEs often cannot obtain long-term finance in the form of debt and equity. 3) FINANCIAL SYSTEM IN GHANA: The financial system in Ghana includes commercial banks, insurance companies, discount houses, finance houses, leasing company’s savings and loans associations, credit unions and a stock exchange. Added to this are several rural banks widely dispersed throughout the country. Before 1983 the formal banking system of the Ghanaian economy was dominated by the state owned banks. In fact they had a monopoly over the entire banking sector as regards their spread and operations. With the exception of two banks – Barclays and Standard Chartered, the country could not boast of any other foreign banks in the entire financial system. The number of branches of these foreign banks were limited to about four cities as opposed to the numerous branches of the state owned banks particularly the Ghana Commercial Bank which operated at least three branches in each of the ten regions of the country. With the exception of the State Insurance Corporation (SIC) and the Great African Insurance Company there was no other non-bank financial institution. The SIC was wholly government owned. Brokerage houses were simply non-existent. There were several policy interventions which made it virtually impossible for business dealings to be as fluid as it should, for instance a currency conversion was undertaken in 1979, where individual households were made to send their foreign currencies to the central bank for local currency. This was followed in 1982 by a demonitization of the 50 Cedi note (the highest denomination of the Ghanaian currency at that time). There was also the freezing of bank deposits in excess of 50,000 cedis, whiles bank loans for financing trade inventories and business deals of more than 1,000 cedis was required to be conducted by cheque, all in an attempt to reduce money supply and hence inflation.(Bank of Ghana and Quarterly Digest of Statistics).
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