You are on page 1of 14

GHANA TELECOM UNIVERSITY COLLEGE

Faculty of Engineering Department of Telecommunications

A Research Report on the Topic

Challenges Facing SMEs in Ghana

Done By;
Affo Alex (B010908017) Effah Onasis (B010908073) Ibrahim Iddris Fareed (B010908092)

Abstract
Small and Micro Enterprises (SMEs) play an important economic role in almost every country. In Ghana, for example the SME sector contributes a substantial number of new jobs. Despite their significance, SMEs are faced with the threat of failure with past statistics indicating that three out five fail within the first few months. This study sought to bring to light the challenges SMEs face. These challenges seem to change (evolve) according to different macro and micro conditions. This study was employed by acquiring useful literature comprising of surveys, studies, projects and journals. The analysis from these documents was what informed our analysis. The findings indicate that SMEs face the following challenges; Lack of financing, tax burden, unfavorable government policies and in some cases the capacity of SMEs themselves. This research has not totally brought to light all the challenges facing SMEs as they are vast and cannot be explored within the certain constrains we had to deal with during the study. The research concludes that business challenges cannot be total eradicated but can be brought to some limited control.

Table of Contents
Abstract ..................................................................................................................... 2 Table of Contents....................................................................................................... 3 Background to study...................................................................................................4 1.1 Introduction....................................................................................................... 4 1.2 Problem statement............................................................................................4 1.3 Objective of Study.............................................................................................4 1.4 Significance....................................................................................................... 5 Literature Review: Overview of SMEs.........................................................................5 2.1 Definition of SMEs.............................................................................................5 2.1.1 Local Definitions..........................................................................................5 2.1.2 International Definitions..............................................................................5 2.2 The Scope of SME Activities...............................................................................6 2.3 Importance of SMEs...........................................................................................7 2.4 Challenges of SMEs...........................................................................................7 2.4.1 Financing.....................................................................................................7 2.4.2 Government Policies....................................................................................8 2.4.3 Economic factors ........................................................................................8 2.4.4 Social Amenities..........................................................................................9 2.5 Methodology .....................................................................................................9 2.5.2 Reasons for internet literature....................................................................9 2.5.3 Scope of Study..........................................................................................10 3.0 Results................................................................................................................10 3.1 Recommendation............................................................................................11 3.1.1 Government..............................................................................................11 3.1.2 SMEs..........................................................................................................11 A look at Angel Investors....................................................................................12 4.0 Conclusion.......................................................................................................... 12 References ...............................................................................................................13

Background to study
1.1 Introduction Small and medium sized Enterprises (SMEs), as they are popularly referred to can simply be stated as any legitimate business started by one or more persons in any sector of the economy of any Nation. Though technical definitions exist, they vary from country to country and also from institution to institution. (As we shall see later) SMEs basically are run by Entrepreneurs who decide to set up a business in a particular industry of the economy with some/a limited amount of resource. With the virtual collapse of socialism, SMEs more than ever are becoming an integral part of any nations growth and Ghana is no exception. With the changing business environment in Ghana after the economic reforms of the mid 80s and early 90s, which saw a lot of state owned companies divestiture. The government of 2000 proclaimed the Golden age of business, with its popular slogan; the private sector as the engine of growth. This was all in an effort to whip up the spirit of entrepreneurship in the citizenry, which has brought to light the importance of SMEs. SMEs like any other institution, faces a number of challenges. It is these challenges that we seek to identify and explore in our project. In 2010, Ghana was ranked 92nd out of 183 countries in the ease of doing business category of world banks doing business report. [1].

1.2 Problem statement What are the challenges facing Small and Medium sized Enterprises (SMEs) in Ghana? 1.3 Objective of Study The objective of the study is to; Identify the various challenges facing SMEs in Ghana. Find and suggest possible solutions to these challenges.

1.4 Significance Our project will identify the numerous challenges SMEs face in Ghana and would serve as a guide to people who wish to setup business in the country.

Literature Review: Overview of SMEs


2.1 Definition of SMEs The definition of SMEs differ from economy to economy or institution to institution; whiles some definitions look at it from the number of employees, others consider the annual turnover of the business or better still the start-up capital of the business involved. It is the following are some of the definitions of SMEs within the Ghanaian context. We shall also review some definitions by some international institutions. 2.1.1 Local Definitions

The National Board for Small Scale Industries (NBSSI) defines an SME as a firm with not more than nine (9) workers, and has plant and machinery (land, buildings and vehicles not included), not exceeding GH1000 in value. [2]

The Ghana Statistical Service (GSS) considers firms with fewer than ten (10) employees as small scale enterprises, with medium size 10 or more employees. [2]

2.1.2 International Definitions

The European Commission qualifies an enterprise as micro, small and medium-sized enterprises (SMEs) only if they fulfill the criteria below: Enterprise category mediumsized small micro

Headcount Turnover

or

Balance sheet total

< 250 < 50 < 10

50 million 10 million 2 million

43 million 10 million 2 million

The World Bank defines an SME as a firm with fixed assets (excluding land) less than US$ 250,000 in value. [3]

The United Nations Industrial Development Organization (UNIDO) qualifies enterprises based on the information below; [3] For Developing Countries Enterprise category Large Medium Small Micro Headcount >100 20 99 5 -19 <5 For Industrialized Countries Enterprise category Large Medium Small Headcount >500 100 - 499 <= 99

2.2 The Scope of SME Activities SMEs are considered the seedbed for indigenous entrepreneurship as they create numerous job opportunities as well as generate a considerable number of investments. SMEs can be viewed from two sides, formal and informal. Formal business is that which is/are officially registered with the registrar generals department and is/are covered under the Tax net (i.e., they pay taxes), whiles the informal sector are those without any proper registration and avoid payment of taxes. [4] In Ghana it is estimated that 80% of SMEs operates in the informal sector. A large proportion of these are female owned businesses, and are most often home-based as compared to those owned by males and are more unlikely to be formally registered than male owned businesses. [5] SMEs in Ghana are known to face many obstacles in their developments and this can be linked to the absence of a clear vision of their roles in development, as well as a clear lack of credible policy frame work. It may be noted that local entrepreneurship was not seriously promoted in Ghana in the colonial period and in the early 1960s because they were seen as political threats. [6]

2.3 Importance of SMEs 90% of businesses worldwide are made of SMEs and account for between 50% - 60% of total employment (i.e. they act as seed-bed for indigenous entrepreneurship) They create wealth for the citizenry Promote indigenous technical know-how Use mainly local resources and therefore promote local development SMEs in their operations solve problems facing the country and therefore complement the efforts of the government. E.g. Real estates, Waste management etc. It is worthy of note that some of the big business we see today locally and internationally started as Small business. E.g. Kingdom bookshop, UT bank, Darko farms etc.

2.4 Challenges of SMEs As stated in the introduction, SMEs are faced with numerous challenges. In this section we will attempt to chronicle these various challenges in order of the frequencies we observed in the literatures we reviewed. 2.4.1 Financing Financing is the act of providing funds for business activities, making purchases or investing. [7]. Financial Institutions such as banks and other financial services provide funds for the startup or expansion of businesses. In a study by the Dalberg Global Development Advisors in four African countries including Ghana, they stated that nearly all the banks surveyed in this study concur that the SME market is strategic and important, but they differ in how much they are willing to adapt traditional approaches to reach the market. Meanwhile, SMEs express that they are not understood or valued by banks. This mismatch in perceptions can often be linked to the types of financing provided by the banks, in particular, banks are hesitant to provide both long term lending and working capital facilities that SMEs need for growth. [8]

2.4.2 Government Policies Government policies to a large extent can positively or negatively affect the growth and development of SMEs. Here are a few of these policies that negatively impacts on the growth of SMEs. a. Taxation: taxes are essential. They fund public amenities, infrastructure and services that are crucial to any properly functioning economy. In as much are taxes are important, the level of tax rates needs to be carefully chosen and needless complexity in tax rules avoided. According to Doing Business data Economies where it is more difficult and costly to pay taxes, lager shares of economic activity end up in the informal sector where businesses pay no taxes at all. [9] The local Government Act, 1993 (Act462) empowers all district assembles to levy rates, tolls, poll taxes and licenses on businesses and households. According to a study by NBSSI (2002) on taxation and small-scale business operation, there is hardly any uniformity in the rates applied by districts and the rates are seldom predictable, thus making SMEs extremely insecure. The commonest complaints from these SMEs where/was the overburden of taxes, prohibiting their growth. [6]
b. Trade liberalization policies of the 1980 have exposed many SMEs to greater external

competition such as importation of cheap goods, and therefore cannot cope. c. High start-up cost for small firms, including licensing and registration requirements. The cumbersome procedure for registering and commencing business are issues often cited in surveys. 2.4.3 Economic factors These are factors that could affect the profit and effective operations of the business. They include;

Land: land acquisition is very vital to the success of any business as its a factor of production. Unfortunately, in Ghana our land tenure systems are very problematic. Difficulty in acquiring land as well as leasing land, most leases are often paid as much as 3 years in advance and do not provide flexibility

Skilled labour: the lack of skilled labour can also affect some SMEs that require the skills highly specialized labour. E.g. A programmer. [10]

Access to market :

2.4.4 Social Amenities The provision and availability of social amenities such as electricity, good roads, clean water, appropriate office space, etc. all go a long way to pose a challenge to the development of SMEs. SMEs need first and foremost an appropriate infrastructure in a building. This consists of dependable and redundant power supply, appropriate electrical installation, power conditioning for sensitive equipment, and water. This is rarely available in the cheaper office rentals that most start-ups and small enterprises can afford. 2.5 Methodology In this section we outline the methods used in this research, as well as arriving at our results 2.5.1Internet literature Our information was sourced solely using literature on the internet. The literature we used was made up of; Books Reports Surveys Theses

2.5.2 Reasons for internet literature The time period for the research was very limited (2 weeks) and as such we could not use questionnaires either to facilitate our research since we needed a large sample size in order to get accurate results We were unable to find books or journals in the university library relevant to our study

2.5.3 Scope of Study The project topic did not limit us, and was vague. We decided not to focus on one particular challenge but explore a number of other challenges. The reason for this was because of the importance we attached to the topic. We felt that limiting our scope to just one challenge will not do adequate justice to the topic.

3.0 Results
Most SMEs find it difficult accessing funds to either start-up or expand their businesses due to a wide range of issues. Some of these issues include;
The inability of SMEs to meet bank and requirements such au collateral, company policy,

etc.
Banks lending rates are very high in Ghana. The average being20%. This makes it

unattractive for new start ups because repayment may be difficult. Banks also find it unwise to lend moneys to SMEs, because they consider it a risky sector to invest their moneys. This risk can be attributed well structure. The problem of SMEs having to pay taxes from income to excise tax can pose a challenge to them as it offers them no breathing space. It is for this reason that some SMEs refuse to register their businesses From our research we observed that a number of government policies and interventions such as Export Development Investment Fund (EDIF), Presidential Special Initiatives (PSI), the Investment code, Manufacturing Industries Act 1971 (Act 356), Microfinance and Small Loans Centre (MASLOC), National Youth Employment Program (NYEP), etc. all in a bid to help guide and provide assistance to SMEs.
Generally there is a direct correlation between the problems of 3rd world countries and the

to the fact that most SMEs are not

challenges these pose to their SMEs and they include: a. Illiteracy

b. Lack of skilled labour

c. Lack of technology d. Access to markets e. Economic instability (inflation, interest rates, etc.)

3.1 Recommendation Challenges as they say are part of life and at every point man will have to deal with them. In as much as the challenges facing SMEs cannot be completely, they can be minimized to create a more friendly business atmosphere. The following are some recommendations we came up with. 3.1.1 Government

Continual strengthening and introducing new policies to create a conducive atmosphere for SMEs. E.g. Consider giving tax holidays to SMEs for the first two years of their operations

Open up the country by providing social amenities such as roads, rails, as well as electricity and portable water to increase access to markets.

Intervene and support businesses especially SMEs that are facing bankruptcy.

3.1.2 SMEs
People going into business should study all relevant processes and procedures before starting a business Networking; this can be achieved by organizing SME forums that would build networks and foster synergies between the different stakeholders with an interest in SME development. SMEs can also consider sourcing their funds from Angel Investors rather than the traditional options of Banks and Venture Capitals.

A look at Angel Investors Angel investors are a term that refers to the people who are willing to invest their personal monies in a startup business. Angel capital fills the gap between start up financing between friends and families, who provide seed funding. The Harvard report by William R., Kerr, Josh Lerner, and Antoinette Schoar provides evidence to the fact that angelfunded startup companies are less likely to fail than companies that rely on other forms of initial finance. [11] In Ghana there is recently been a launch of the concept of Angel investing, dubbed Ghana Angel Investor Network (GAIN). Its made up of some top business executives in the country such as Prince Kofi Amoabeng, Kwame Banim, Frank Adu, Kwesi Twum, and Daniel Doku. [12]

4.0 Conclusion
To conclude we would like to state that from the extensive research we carried out, the importance of SMEs is very crucial to the forward drive of any economy and as such they must be taken seriously by governments especially in third world countries like Ghana. If we under a critical look at the cause of the now famous Arab spring, which states that we will all relize that the young man who was prevented from earing a decent income from selling vegetables in the streets, that eventually led to his commiting sucide. In the end some heads of state lost their. Unemployment especially among graduates is soaring daily and every year thousands are added to the job market. It is therefore incumbent on government to take very seriously, the nurturing of SMEs to provide employment opportunities in the country.

References
[1] PROF. ETHAN B. KAPSTEIN and DR. RENE KIM, The Social and Economic Impact of Standard Chartered Ghana, July 2010. [2] PETER MILFORD, Strengthening Business Development Services Provision in Ghana, July 2010. [3] JAPHETH KATTO, Financial Regulation of SMEs, October 2008. [4] WORLD BANK, Survey Report [5] JOSHUA ABOR and PETER QUARTEY, Issues in SME Development in Ghana and South Africa, 2010. [6] ERNEST ARYEETEY and AMA ASANTEWAH AHENE, Changing Regulatory Environment for Small-Medium sized Enterprises and their Performance in Ghana. [7] Financing - What Does Financing Mean? [Online] Available: http://www.investopedia.com/terms/f/financing.asp#axzz1eF0G4OFj [Accessed: 18 November 21, 2011] [8] DALBERG GLOBAL DEVELOPMENT ADVISORS, Accessing Credit Guarantee Schemes for SME Finance in Africa, July 2011. [9] THE WORLD BANK, Doing Business 2012, June 2011. [10] OMOBOLANLE OKIKI SANNI, Small Scale Industry, 2009. [11] Angel Investor [online]. Available: http://en.wikipedia.org/wiki/Angel_investor [Accessed: 21 November 2011] [12] Ghana Angel Investor Launched [online] Available: http://www.gbcghana.com/index.php?id=1.334927.1.553493 [Accessed: 21

November 2011]