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Reflex Eco Group – Ghana news
by Charles Yeboah Frimpong (Ghanaian Financial Analyst)
SMEs contribute greatly to the development of any nation. They account for a large share of new jobs in countries which have a strong employment record and are known as a primary driver for GDP growth in most countries.
Empirical studies have shown that SMEs contribute over 55 percent of gross domestic product (GDP) and over 65 percent of total employment in high-income countries and also have contribute immensely to the economic growth of emerging markets.
In India for instance, studies indicate that the SME sector comprises of about 30 million operators, and have been the primary source of several innovations in the country’s manufacturing and service sectors. They also serve as the major link in the supply chain to corporate entities and public sector enterprises. In India, SMEs contribute about 20 per cent to GDP, 45 per cent of industrial output, 40 per cent of exports, employ 60 million people, create 1.3 million jobs every year and produce more than 8,000 quality products for the Indian and international markets.
Here in Ghana, it is estimated that SMEs provide about 85 percent of manufacturing employment, contribute about 70 percent to the country’s GDP and account for about 92 percent of businesses in Ghana. They contribute to employment creation, provision of basic goods and services, and generation of export and tax revenues for national socio-economic development.
SMEs also contribute greatly to economic diversification, exports, social stability, and also serve as a feeder line for the corporations of the future as it is from among them that most Multi-national companies (MNCS) and large corporations emerge. As such, SMEs capacity development emerges as a key instrument in poverty reduction and sustainable economic development efforts.
In spite of the commendable contributions of SMEs to the country, the sector still faces some challenges that seriously needs to be addressed if the full potentials of the sector is to be fully unleashed and tapped.
Full benefits of SMEs have not been realized in Ghana largely due to the difficulty SMEs have in accessing capital, lack of entrepreneurial skills, lack of access to high quality and affordable business development services, erratic power supply, lack of adequate technical and management support services and limited access to information on market opportunities.
As a matter of fact, SMEs in Ghana have not always obtained the required amount of support from concerned Ministries, Departments and Agencies as well as the Banks, Financial Institutions and other bigger corporate entities. This lack of support has been a major hindrance to the development of SMEs to become locally and globally competitive. This challenge is partially attributed to the fact that Banks and financial institutions assess SMEs as being inherently more risky to do business with because of their insufficient assets and low level of capitalization, vulnerability to market fluctuations and high mortality rates. SMEs also suffer credit rationing from financial institutions due to their lack of reliable collateral or collateral mismatch between the type of assets held by SMEs and the type of assets required by banks for collateral.
Even in cases where SMEs are given these credit facilities, they access them at comparatively high interest rates.
To strengthen SMEs and ensure that they have enhanced level of access to credit facilities so they can expand their operations and grow to contribute greatly to economic development, the government and the Central Bank of the country have an important role to play by setting out a policy framework for channeling adequate funds to the SME sector. There is a strong need for government to elaborate and implement policies and strategies for financing SMEs as well as for developing and improving financial institutions and financial instruments, and also the need to harmonize those policies and strategies as well as the instruments for implementing them.
On the other hand, SMEs need to be more transparent while representing their businesses and future plans before bankers and financial institutions so they can gain the trust and confidence of these creditors to extend finance to them.
It must also be mentioned that in most cases, the lack of financial literacy, operational skills, including accounting and finance, business planning among others are formidable challenges for SMEs. To lessen the risk in borrowing to SMEs, banks and financial institutions need to play a more proactive role in the affairs of their SME clients by providing them with financial literacy and consultancy support.
Providing finance to businesses and entrepreneurs who do not have the skills and right know-how to make the best out of these funds will be of no benefit to the country. Since eons, most economies have not done as well as they could be doing for the reason that they have only put themselves in a position to depend on capital instead of putting themselves in a position to create it. It is therefore prudent to ensure that SMEs in Ghana have skilled manpower and possess good managerial skills to help skyrocket the performance of the sector through efficient and effective utilization of the resources available to them. Human resource development issues are fundamental in improving SME performance and competitiveness. The ability of Small and Medium scale Enterprises to adjust to the competitive pressures that come with globalization and trade liberalization will depend greatly on the level of skills available domestically.
We need to capitalize on our demographic dividend( a large and young workforce) to promote SME growth and development and to do that successfully, there should be schemes and programs to educate/train and develop the entrepreneurship skills of the people ( especially the population engaged in SME activities). It is unfortunate that small firms tend to invest very less in training their staff and rely relatively more on external recruitment for raising competence. To strengthen the sector, staff of SMEs should be given the needed training to help them increase their productivity and efficiency in carrying out their various professional duties.
In this regard, investment needs to be made in a very big way on skill and entrepreneurship development if the SMEs sector is to be strengthened for full benefits of the sector to be realized.
Another major step towards strengthening SMEs is improving SMEs’ access to technology. With the existing high level of competition, globalization and market uncertainties due to global downturn, it is important for SMEs to embrace technology and continuously incorporate the latest in the field (technology) into their production processes as well as in their marketing and management functions so as to gain efficiency, cut costs and ensure consistency in the kind of products and services they deliver. Innovation and technology are the two tools SMEs have with them that need to be capitalized fully to grow and strengthen the SME sector.
Furthermore, there is need to build and strengthen the innovation capacity of SMEs. SME entrepreneurs have to appreciate the necessity of creating a competent management teams to handle the affairs of their businesses as the businesses grow. Entrepreneurs have to employ the services of professionals to handle their businesses when the need arises. This encourages innovation, enhances the business’ capacity and ability to seize opportunities that open up, and also helps to develop a strategic plan for sustainable growth and development. In a system where there is a high influx of low-cost goods from China and other western countries and as a result making the competition more keener even in the local market, there should be greater innovation and adoption of smart business strategies to be able to cut down costs, remain competitive and at the same time increase profitability. And all these require a management with the needed expertise to be able to achieve.
The current economic situation, with political and economic integration and technological improvements warrants the need to strengthen our SMEs so they can improve their productivity, to further contribute to sustainable social and economic growth in the country.
The potentials of SMEs in Ghana are yet to be fully harnessed and to do so, requires that pragmatic steps be taken to strengthen the sector and remove the various bottlenecks that SMEs encounter in their operations so as to make them more competitive and efficient in playing a key role in social and economic development of the country.
Charles Yeboah Frimpong
University of Ghana
Member, The Institute of Chartered Accountants (Ghana)
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