Access to finance remains a major hurdle for SMEs
Financial inclusion vital for transformation
Summary of paper: Access to Finance for SMEs by the World Bank, Ghana office
There are several aspects of financial inclusion, but to accelerate economic transformation and reduce poverty, access to affordable finance for SMEs and smallholders is central.
SMEs form 95% of businesses in Africa and account for the majority of new jobs in the non-agricultural sectors. Smallholders account for over 80% of farmers in Africa (about 40% of the total population).
For these groups, accessing credit remains a major constraint to growth. Data from Zambia shows that while 95% of SMEs have bank accounts, only 16% had loans or lines of credit. In addition, virtually all loans required collateral amounting to around 146% of loan amounts. Banks are also generally unwilling to lend to the agriculture sector. In Ghana, the share of agricultural loans in the total portfolio of commercial banks was 6.1% in 2010.
Constraining factors include: lack of credit and registration information, difficulties in verification of documents, identification and enforcement of collateral in addition to low levels of business skills and training.
Microfinance institutions tend to focus on payroll based lending and leasing companies lend to SMEs, but for both the scope is often hampered by a lack of funds.
Smallholders face all the systemic credit market biases against SMEs and more. They are unable to offer their land as collateral because of communal land tenure systems, they are often poorly educated, the agricultural cycle tends to be long and the risks of failure are higher in agriculture.
Women bear the brunt of the systemic biases due to cultural and historical barriers. Increasingly, the youth are also feeling the pinch as formal sector jobs fail to expand sufficiently to absorb them.
- Strengthening Credit Information Bureaus: Banks do not have enough information to assess SME credit-worthiness. Can training SMEs on financial management and credit information systems help?
- Secured Transactions Registries: Most SMEs do not have fixed assets collateral. Can Secured Transaction Laws and Registries for Moveable Property help?
- Bias against women in credit markets: What can be done to reduce or eliminate this bias?
- Leasing requires no collateral as the underlying leased good becomes the collateral. How can it be made to work better for SMEs?
- Warehouse Receipt Systems: The discounting of bills receivable can be a very effective way to facilitate the flow of money along value chains. How can these be made to work better?
- Partial Credit Guarantee Schemes: How can they work better for SMEs?
- Lines of Credit. How can the amounts be increased and utilization by SMEs and smallholders made more effective?