Banks in the country are enthusiastic about financing micro, small and medium-sized enterprises (MSMEs), as they believe this segment represents a comparatively unexploited market, engenders fierce loyalty from customers, provides a better rate of return, and has rapid growth potential.

This is a principal takeaway from the 2023 MSME Survey conducted by the Chartered Institute of Bankers (CIB) that saw participation by MSME heads from 19 of the 23 commercial banks – 7 of which were indigenous and 12 foreign.

“The intention was to see how banks interact with and understand the MSME space. This is the first in a series of such thought-leadership initiatives and is from the perspective of the banks; we will proceed to seek the view of businesses and other stakeholders moving forward,” the Institute’s Chief Executive, Robert Dzato, said during a virtual roundtable session organised by the CIB themed ‘Banking the Real Economy’.

“The desirability and viability of MSMEs is not in doubt, but stakeholders need to crack the feasibility code,” he added.

The conversation has attained increased significance owing to the limited Treasury options for banks – because over 30 percent of domestic government securities were swapped during the Domestic Debt Exchange Programme (DDEP) first phase – as well as a need to finance the sector, which conservative estimates say employs more than 80 percent of the workforce and generates over 70 percent of Gross Domestic Product (GDP).

The survey further revealed that the top needs of these businesses are credit – working capital support and trade finance; and advisory support – business planning and payment services.

Additionally, manufacturing, commerce and finance, as well as services emerged as the top three MSME sectors that responding bankers said they interact with – Relationship Managers being the foremost way banks help the businesses.

Interestingly, 58 percent of the MSME heads who participated in the survey said small businesses are “more likely” to default on credit relative to other businesses; with 26 percent and 11 percent stating they were equally likely and less likely, respectively.

Defining MSMEs

The survey showed an increasing convergence in the criteria which various institutions use in evaluating what businesses fall into that category, with turnover – or revenue – as the primary metric, followed by assets and number of employees.

The International Finance Corporation of the World Bank defines businesses with an annual turnover of less than US$100,000 as Micro; those between US$100,000 and US$300,000 as Small; and US$300,000 to US$1,500,000 as Medium.

The Ghana MSME Policy however places Micro businesses at under US$25,000; Small between US$25,001 and US$100,000; and Medium-sized enterprises at US$100,001 and US$3,000,000.

The effects of exchange rate fluctuations and different criteria have had implications for reporting on credit to the segment, explained the CIB CEO.

“What we are noting is that, typically, banks wilil say that anything below GH¢5million is a micro business and below GH¢37.5million is a small business, and anything above that and below GH¢300million is a medium-sized business,” Mr. Dzato said.

“So, what we are seeing is that while there is convergence around the criteria, there are inconsistencies around the threshold; and this presents some statistical challenges when we are reporting to the central bank, because different banks have different thresholds,” he further noted – adding that the disparity in definition is witnessed along the line of indigenous and foreign-owned banks.

Policy Direction

On her part, the CEO-Ghana Enterprises Agency, Kosi Yankey-Ayeh, shed light on measures being taken to de-risk MSMEs and make them more appealing to potential funders.

She stated that the absence of a comprehensive framework led to formulation of the national MSME and entrepreneurship policy in 2021 – aimed at technical assistance, enhancing information flow and other forms of support.

“We also began working closely with the credit bureaus, because if we are to de-risk these businesses, banks need to understand their credit history; and for a lot of these MSMEs, their info was not on the bureau, “she said.

She further stressed the importance of strong partnerships, and revealed the agency’s efforts to establish new regulations and engage stakeholders to incentivise banks into lending MSMEs funds. Additionally, there was a hint of creating a dedicated fund for lending to MSMEs in partnership with banks.

Credit culture

CEO-Ghana Association of Banks (GAB), John Awuah, repeated calls for an improvement in the credit culture if MSMEs are to see increased financing.

He said loopholes within the financial and legal ecosystem continue to be exploited, which puts banks at a disadvantage and in turn makes them reluctant to extend credit that could undermine their fiduciary responsibility to depositors.

Demanding the participation of all relevant stakeholders, he said: “The law courts, the Lands’ Commission and even the Environmental Protection Agency are all, unfortunately, complicit in these matters; and if we are to make any sensible progress, they must all play their part”.

The GAB CEO argued that the work will be incomplete if stringent measures are not put in place to ensure that ethics between lenders and borrowers are improved and standardised.

“We must also emphasise ethics; because when we look at many instances of bad credit, the customers, unfortunately, have co-conspirators from within the bank and it is something we must look at with all seriousness,” he said, continuing a theme the CIB is looking to amplify.