The MSME maze

SMEs! SMEs! SMEs! “They form an integral part of our economy,” some say. “They contribute a lot to Ghana’s GDP and employment numbers.”

“Banks to establish SME desks….” “Government committed to SMEs.”

Above are some of the headlines captured by different media outlets on SMEs.

But what exactly are they? What does the acronym even mean? What are their specific contributions and the fuss about them? I would assume with all this buzz there will be some challenges. So what are they? Is there a way out for them? Has anything been done for them?

Let’s walk through the maze together, shall we?

The General Assembly of the United Nations has set aside the 27th of June every year to observe micro, small and medium enterprises (MSMEs) and raise awareness about their contribution to sustainable development. I guess if the UN is doing this then they are really important, no? What do you think? Or just another international fugazi? I’ll let you decide.

On the UN website it reads, “According to the data provided by the International Council for Small Business (ICSB), formal and informal Micro-, Small and Medium-sized Enterprises (MSMEs) make up over 90% of all firms and account on average for 60-70% of total employment and 50% of GDP.”

Interesting statistics! Our work on their importance is done! N’est pas?

But what does this look like in the Ghanaian context? I fall on the works of one of the greatest minds to ever research and disseminate findings on SMEs in Ghana; Professor Joshua Y. Abor, Dean of the University of Ghana Business School, Legon. One of his books, “Finance & Small & Medium Enterprises Development” is deeply rich in findings on SMEs.

SMEs-the Ghanaian landscape

Their definition is not cast in stone. Not as simple as 2+2=4. However we will rely on the works of the Regional Program on Enterprise Development (RPED) for a definition. A survey conducted by the World Bank in Ghana over a period of about 12 years. They categorized SMEs in Ghana according to what is found below:

1). micro enterprise: less than 5 employees

2). small enterprise: 5 – 29 employees

3). medium enterprise: 30 – 99 employees

4). large enterprise: 100 and more employees          

In South Africa, their definition is given by the Small Business Act based on parameters such as number of employees, annual turnover and gross assets excluding property.

Other definitions for SMEs are given by the United Nations Industrial Development Organization.

The story is not so different from the international scene. They account for 92% of businesses in Ghana, contribute 70% to Ghana’s GDP and over 80% to employment.

So from the data on their contributions to our economy we can then assume that any problems they encounter will have a rippling effect on our economic prospects, thus it is important to understand the challenges they face and the way forward.

If you are an MSME operator/owner, ask yourself the following questions:

  1. Are you competent enough to handle your business or have you undergone any training to boost your managerial skills to oversee your business? Do you have any training or experience on dealing with people from a multiplicity of cultures and backgrounds? Would you handle a client from Japan differently from a Mexican client? Or you would treat them all the same? Do you understand the tax environment in Ghana? Are you familiar with our laws, compliance and others? If I gave you a spreadsheet can you tell me where the assets can be found and where the liabilities are? If you employ workers would you ensure their pension contributions are paid and all? Can you handle the targets, pressures and deadlines? Basically can you run the business as a manager? Think on these because lack of managerial skills is often cited as one of the problems of SMEs.
  2. Do you have a business page on social media? Do you employ methods that will quicken your rate of production? During the period when our country was reeling from rolling black outs, did you have a backup power source? Or when the power is cut you sit idle and lose money? Have you invested in any technology that is specific to your business that can boost growth and production? Lack of equipment and technology is an albatross on the necks of operators/owners.
  3. Have you tried registering a business in Ghana? If you have was it smooth? Had to grease someone’s palm to get things done? When you are interacting with the authorities are they business-friendly? Regulatory issues also bedevil the growth of SMEs.
  4. Have you tried to borrow from a bank? Looked for capital in Ghana? Easy peasy lemon squeezy? Or is it like a needle in a haystack? What did the banks tell you? Did you bring a plethora of documents only to reject your application? Did you fund your business with your own funds, friends, family? An angel investor? Financing has been documented as the critical challenge of MSMEs.

Financing still persists as a key challenge in contemporary discussions on the bane of MSME development in the country. But if MSMEs are big contributors to GDP and employment in Ghana, then why is financing still a challenge? It beats my imagination.

Or is there something I am failing to see? Shouldn’t financial institutions be pulling out all the stops to woo these owners/operators of MSMEs and increase their revenue? When I even think about the number of financial institutions we have I am even more surprised.

Let me give you an idea of how many. Want to take a guess? This is just the debt financiers or institutions that provide loans and other lending facilities.


There are a whopping 721 financial institutions and/or lenders across the banking and non-bank space! One would ask how on earth could Ghana have this number (and there are more) and yet MSMEs still face the challenge of financing? I highlight some possible reasons within the Ghanaian context.

  1. High interest rates charged by financial institutions are perhaps the biggest threat to MSME/SME development. According to the Bank of Ghana’s Summary of Economic and Financial Data, average lending rates stood at 27.5% as at June 2018.

Some would argue the rates are still on the high and smaller businesses may not be able to cope with repayments all things being equal if there is a slight headwind in the economy or their business model such as depreciation of the cedi which will result in them using more of their funds to import materials.

The Bank of Ghana in consultation with the Ghana Association of Bankers came together to review the base rate formula that was used to calculate lending rates by banks and came out with the Ghana Reference Rate (GRR) which was supposed to address some of the gaps identified in the former base rate model and make lending rates more “market-friendly” (reflect what holds on the ground such as the declining treasury bill rates, monetary policy rate etc.)

  1. Improper book-keeping and accounting practices. Anecdotal evidence has shown that some SMEs do not keep records on their finances, stock etc. and as such are not able to keep track of key issues and present this as evidence to banks to secure loans etc.

This hinders their ability to grow by securing any type of facility and from a financial institutions perspective such owners or operators pose a threat or risk to the financial strength of lenders.

But let’s face it, if you can’t get your own records and finances right, how then do you expect a financial institution to give you depositor’s funds? Or is that harsh?

  1. Lack of adequate or acceptable collateral. Age-old problem, no? But what exactly are they looking for in order for them to grant you a loan? I heard through the grapevines that some are no longer accepting landed property/land documents etc. as this process if they have to fall on the property to defray what you owe them is terribly cumbersome.

Some are relying on cash deposits or investments you have with the institution you seek to borrow from or another institution as a means to clear a possible default.

So you must basically have money to cover a possible default of the money you are seeking! Ingenious? If I had the money why wouldn’t I just use that? Or I’m looking at it the wrong way?

  1. Unawareness of the various financing schemes. MSME operators/owners are sometimes – for a variety of reasons – out of the frame of different financing schemes available in the country to them. These financing schemes may be private or government financing schemes.
  2. Bureaucracy and long processing lead time by finance providers. Tried opening an account? Some find it so burdensome so can you imagine the loan application or facility processes.
  3. Unwillingness of entrepreneurs to share ownership and control: Is that a cultural thing? Or what? We just aren’t willing to open up our businesses to new opportunities or new investors. Yes control of your firm may reduce but if structured properly you’d still be at the helm of affairs.
  4. What then can we do to assist SMEs grow in a sustainable and efficient manner? Let’s look at it from three main angles. The regulatory environment, the provision of financial services and the provision of business development services. I’ll discuss these in the subsequent paragaraphs.

With an enabling (regulatory) environment, a congenial environment or atmosphere must be provided for entrepreneurs and entrepreneurial ventures to allow for growth. How? Example, in Ghana, the registrar general’s department (reg. gen.) is the first point of call for all business registration activities.

A key feature of such an enabling environment will be reducing red-tape/bureaucracy associated with such departments/agencies and their likes. the reg. gen. about a year or so ago began the online business registration portal. What’s the outcome now? Any impact assessment carried out? Issues of usage, accessibility etc. need to be properly looked at.

Another key feature of such a policy under enabling regulatory environment will be information about start-ups. Bridging the information about starting a business will need to be looked at. E.g. the Reg. Gen. dept. may through media outlets occasionally put forth jingles, adverts, flyers etc. on how to start a business.

Already existing business may assist through the following channels; Whatsapp broadcast, Facebook posts, Twitter feeds, word of mouth etc. This will help in bridging information asymmetry in such transactions.

With regards to provision of financial services, a mix of approaches can be employed. The private & public sectors have roles to play here public interventions such as the microfinance and small loans center (MASLOC), venture capital trust fund etc. need to be properly aligned to provide the much needed help to entrepreneurs (

Other areas such as deepening the role of venture capital and private equity firms (VC& PE) are critical.

The Ghana Stock Exchange and Ghana Alternative Exchange (GAX) are also critical ways to raise funding for start-ups and SMEs which demonstrate a high potential for growth.

Friends, family and ‘fools’ should also provide funding at the initial stages of growth.

Avoid taking on debt in the early stages of your business.

The pecking order theory in corporate finance posits that small scale businesses will go through a sequential stage of financing; internal funds, debt & finally equity. As the venture grows, cash flows generated will be enough to service debt in the latter parts of business development, all other things being equal.

Also, on the broad macroeconomic front, stability (lower inflation, lower government borrowing) will prevail, which will provide the much needed funds, at lower rates to businesses in the latter parts of growth of the venture when it is mature to take in debt.

Also pension funds, life insurance companies will need to be tapped into as these institutions have longer liabilities and thus more room for long-term investments.

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With regards to business development services; key features such as entrepreneurship education and networking services, highlighting role of entrepreneurs as role models will need to be promoted. The Ministry of Business Development has been making strides with example the Presidential Pitch and other programmes. All these go to develop the businesses and skills of entrepreneurs as well as increase their network.

Other factors (non-policy related) include but are not limited to;

1. Entrepreneurship is about having “cojones.” RISK IT to get the BISCUIT. That I regretfully say it cannot be taught. It requires a zeal and in-built propensity to take risk.

2. The ability to think outside the box, spot an opportunity and take advantage of it.

In conclusion, entrepreneurship must be looked at from a multiplicity of angles in order for a more sustained growth trajectory. What I have listed is by no means exhaustive but just gives an indication where policy should be driven.

The views expressed in this piece are the personal opinions of the writer and do not reflect, in any way, shape or form those of The Multimedia Group, where he works.