SMEs turn to friends for financial support

The high interest rate regime in the country has forced a number of SMEs to turn to family and friends as their top source for acquiring finance, affirming the Association of Ghana Industries (AGI) findings that acquiring funds is difficult for small business in Ghana.

A number of budding SMEs have told the B&FT that they have shied away from accessing credit from finance firms, as borrowing from banks has now become virtually impossible due to the high interest rates -- hovering around 35 percent at the least -- which they consider to be a significant risk to their business growth.

Kwabena Danso, the Chief Executive Officer of Boomers International Ltd. -- a bamboo bicycle manufacturing company -- said any attempt to borrow from the banks or the other financial institutions is a high risk for SMEs, since it can lead to their possible collapse because of the exorbitant interest rates.

He said even though loans from the banks can be a very good finance facility for expanding their businesses, it has become increasingly risky to undertake such a transaction because of the rates attached to it, coupled with the harsh economic conditions businesses are surviving under.

“For me, I have just closed my mind; because right from the onset I know it is not going to help me, even though it would have been a very good facility for me to use.

“It is impossible for businesses like ours to borrow from the banks with the current interest rates at 36 percent and the like. The current economic situation is not working in our favour at all. If you go for the loan, then you are heading for a crash of your business. I think if SMEs can have something like 10-15 percent interest rates, we can manage,” he said.

The revelations come at a time many financial institutions have significantly increased allocations for loans and other financing packages for aspiring start-ups and small business owners, but there remains a need for a more SME-friendly support system that will provide easy access to funds for aspiring entrepreneurs and for supporting the growth aspirations of existing businesses.

Ghana’s Trade Ministry is now leading a campaign to force interest rates down, an advocacy that has received criticism from players in the financial services sector who have singled out weak management of the economy as the cause of making Ghana one of the country’s with the highest interest rates in the world.

According to the central bank, banks have over the past year kept tightening the credit conditions for SMEs whenever the central bank assesses the credit access situation in the country; as perceptions of increasing macro and micro risks as well as the firm-specific outlook, in particular of SMEs, have played an increasing role in the tightening of business credit standards and reduced availability of external financing, albeit policy support.

Mr. Danso said one of the major financing paths entrepreneurs of his like have to stay afloat is turning to friends for support as an alternate source of finance, because that is more flexible and less costly to operate with.

“So I sometimes borrow from friends even though they cannot get all the amount of money I need, but they give it to me at flexible terms. A friend from the US gave me a loan at 5 percent interest rate. If we are able to secure loans around this rate, we will definitely grow our businesses,” he added.

The owner of Abovo Concessionary Ltd., a chocolate firm, Priscilla Brookman Armissah- Imprain however noted that even though the current loan system in the country is not flexible, SMEs have their hands tied behind them since companies have no option other than going to the financial institutions for funds to support their businesses.

“I think we have no option than to go to them. Our hands are tied considering the fact that the microfinance and savings and loans companies who are supposed to help us have pegged their interest rates so high. And, comparatively, the banks are charging lower interest rates than the microfinance are doing even though they are high,” she said.

She said that even though the banks are charging high interest rates it is still difficult to access loans from them because of the requirements businesses must meet, which has resulted in some of them going to friends for financial assistance.

She said that she had received a grant from a foreign company, and that has helped her purchase some machines to expand her business.

Meanwhile, the Minister of Trade and Industry Ekwow Spio-Garbrah has launched a campaign against high interest rates in the country in a bid to promote the consumption of ‘Made in Ghana’ goods.

His initiative is shared by one of Ghana’s seasoned economists, Kwame Mpianim, who opines that the soaring interest rates come as a result of poor macroeconomic management.

“The elephant in the room is the bad macroeconomic management that we have had for so long…High cost of credit is bad economic management, it’s bad for growth; it leads to exchange rate depreciation,” he said

“Get steady macroeconomic management, good fiscals, so that government can contribute to domestic savings; so that the cost of credit can come down,” Mr. Pianim told the Forum. SMEs in the country are going through some challenges -- such as the erratic power supply that has resulted in the shutdown and downsizing of some companies.