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International Journal of Accounting and Financial Management Research (IJAFMR) ISSN 2249-6882 Vol. 3, Issue 4, Oct 2013, 97-106 © TJPRC Pvt. Ltd.

AN OVERVIEW OF SME LENDING CHARACTERISTICS IN THE GHANA BANKING INDUSTRY TODAY JOSEPH OSEI ASANTEY Banker, Standard Chartered Bank Limited, Greater Accra, Ghana

ABSTRACT The banking industry of Ghana has gone through impressive changes of progress with regards to lending to Small Scale and Medium-size Enterprises. This is attributable to various features or characteristics adopted by the industry. The purpose of this paper is to unfold the characteristics of lending to Small Scale and Medium-size Enterprises in Ghana. The content analysis research design was used to probe into the financial statements and lending policies of banks in Ghana. The study indicates that the banking sector is characterized of high Small Scale and Medium-size Enterprises lending interests of banks. Lending to Small Scale and Medium-size Enterprises is driven by policies of lending criteria, which SMEs must meet to become eligible for credits. Though there is much flexibility in the lending criteria of banks, lending criteria of local banks are more flexible. It is recommended that foreign banks make their lending criteria flexible by reducing the number of criteria Small Scale and Medium-size Enterprises need to meet to become eligible for loans from them.

KEYWORDS: Lending, Lending Characteristics, SMEs, Banking Industry INTRODUCTION The banking sector in Ghana presents compelling opportunities for growth and development, fueled by key reforms to rules and regulations which have in turn, encouraged new entrants to the sector and fuelled intense competition within the industry (Adade & Ahiawodzi, 2012; Addotei, 2012). The depth of importance of the sector to the economy cannot be underestimated. In 2000 the Asset to GDP ratio stood at 43.6 percent and by the end of 2008, the ratio had scaled upwards to 65.6 percent (Mensah, 2004). Over the same period (2000 – 2008), credit availability to the Private Sector saw a considerable expansion to 30 percent of GDP from 13 percent in 2000 (Addotei, 2012). Increasing banking competition has led to an extraordinary growth in branch network (Mensah, 2004), increased by 63% in the last two years leading to growths in deposits (Adade & Ahiawodzi, 2012), which increased by 41% in 2008, down from the 45% recorded in 2007 (Addotei, 2012). Net Interest Income for the industry has more than doubled over the five years to 2008 by 123% (Quainoo, 2011), while Net Profit for the industry has increased by approximately 120% over the same period (Adade & Ahiawodzi, 2012). Industry Net Profit Margin however has remained constant at 24.1% since 2003, while industry Return on Equity (ROE) decreased from 34.8% in 2003 to 26.5% in 2007 (Quaye, 2011). Return on Assets (ROA) dropped from 3.94% in 2003 to 2.9% in 2007 (Adade & Ahiawodzi, 2012, which is indicative of the increasing competitive nature of the Ghana banking industry. The consolidated balance sheet of the banking industry over the year 2008 expanded by 37.2% to GH¢10.7billion, from the GH¢7.8billion recorded in 2007 (Adade & Ahiawodzi, 2012, Addotei, 2012). The continuous growth of industry total assets was driven principally, by credit expansions and growth in the number of banks. As of December 2008, loans and advances outstanding, stood at GH¢5.6billion, a 42.7% year on year growth, even if down on the 67.9% growth


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recorded a year earlier in 2007 (Adade & Ahiawodzi, 2012). Banks’ investments in government paper amounted to GH¢1,547.9 million in December 2008. An annual growth of 12.8 per cent over the year, compared to the 13.6 per cent growth recorded in the 12-month period to December 2007 (Adade & Ahiawodzi, 2012). The banking system’s Foreign assets rose by 54.9 per cent over the year to GH¢978.8 million compared to the 27.3 per cent growth recorded during the same period in 2007 (Addotei, 2012). The growth in the banking industry asset size was funded mainly by deposits, which rose by 41.4 per cent over the year to GH¢6,949.0 million, compared to the 45.3 per cent growth recorded for year to December 2007 (Adade & Ahiawodzi, 2012). Growth in Total Borrowings however, slowed markedly to 29.5 percent at the end of December 2008 to GH¢1,360.0 million compared to a 78.9 per cent growth in the year to December 2007 (Addotei, 2012). Shareholders’ funds rose by 38.1 per cent to GH ¢1,112.8million over the year compared to 32.8 per cent growth in the corresponding period to December 2007 (Adade & Ahiawodzi, 2012). The share of deposit funds in the overall liabilities of the banking sector was 65 per centup from the 63 per cent share over the same period (Addotei, 2012). On the other hand, the share of total borrowings declined 0.8 percentage points to 12.7 per cent over the same period. The share of shareholders’ funds in overall liabilities remained at 10.4 per cent over the same period indicating that 10.4 per cent of the banking sector assets are backed by equity. The increasing share of deposits in banks’ liabilities coupled with the decline in the share of total borrowings is good for the profitability of the banking industry considering that deposits are a cheaper source of funds compared to borrowing. Going forward, banks’ ability to spot and manage high risk and high returns opportunities, effectively control costs, and introduce real differentiation in products and services would be key to their growth and profitability.

MATERIALS AND METHODS In this study, a content analysis research design was used. This design involved the examination of financial statements and banking policy statements of all banks in the banking sector of Ghana. The researcher’s rational for using this design was to have a better viewpoint of the characteristics of banks with regards to lending in Ghana.

FINDINGS The Ghanaian banking industry can be split into 3 distinct areas. Namely: Commercial/Universal Banks, the Central Bank and Rural/Community Banks. There are 26 Universal banks today in Ghana and over 50 rural banks spread all over the country. Banks are classified as universal banks because they have met the minimum capital requirement of Ghc60 million, for effective operation. Banks offer varied services, ranging from deposit mobilization, loans and advances and transactional servicesaccount operations, transfers etc. Our subsequent discussions will be on conducting analytical overviews on SME Lending within Foreign Banks and Local Banks. SME Lending by Foreign Banks The SME Policy requirements of foreign Banks have been drawn up to minimize losses yet support the delivery of long term shareholder value through the acceptance of credit risk in a controlled manner. The policy requirements are based on experience and analysis of losses incurred by these Banks in the past as it is clear that the level of actual losses could have been lower if a more disciplined approach is consistently adopted.


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Credit Discipline is Needed to Ensure that the Following takes Place 

Credit is not administered outside of defined targets, business strategies or product program criteria other than exceptionally and then with adequate mitigants and with requisite approvals in place.

Facilities or products are structured to meet customer’s needs and priced to provide adequate risk adjusted returns and not simply to beat the competition.

Secondary sources of repayment actually provide the level of comfort expected, should default occur, and this is not compromised by waiving documentation, allowing draw down before completion or inadequately monitoring changes in security values.

Action is taken quickly, preferably before competitors, where deterioration occurs whether this be withdrawing a product or tightening acceptance criteria, renegotiating or cancelling credit lines or simply increasing pricing.

Business and Risk Lending Limits/ Segments The SME Financing Business is primarily managed on a four distinct customer segments: 

Micro Small Businesses (Micro SB): Entities with turnover up to US$1M

Small Businesses (SB): Entities with turnover > US$1M and up to US$10M

Medium Enterprises (ME): Entities with turnover >US$10M and up to US$25M

Medium Enterprises Plus (ME+): Entities with turnover >US$25M and up to US$50M

SME Lending Approaches To ensure a risk based credit policy and process framework is effectively applied, the SME Business financing is managed along two distinct risk approaches: 

Discretionary Lending

Programmed Lending

Discretionary Lending The key characteristics that underlie this type of lending are: 

Credit decisions are based on experience and supplemented by credit grades

Policy serves as a guideline and permits flexibility

Credit decisions are also based on entity’s financials and supplemented by qualitative assessment of the borrower

Fraud checks are conducted.

Physical customer calls/ contacts are likewise conducted

Bureau and Behavior scores are used where available

Programmed Lending The key characteristics that underlie this type of lending are:


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It is based on objective assessment of the borrower supplemented by owner’s bank statement assessments and financials.

It is rule and system based and lower in cost.

It is homogenous and portfolio decisive.

Bureau and Account behavior feedback plays a key role.

Supplemented by customer calling program.

SME Banking Products SME Banking products are categorized and managed as follows: 

“Single Product” These are standalone products such as:

o

Mortgage Loans

o

Overdrafts

o

Revolving Loans

o

Business Installment Loans

o

Credit Cards

“Multi- Product” These are customer based managed products such as: o

Trade Finance

o

Working Capital Loans

SME- Risk Acceptance Lending Criteria- Foreign Banks The following criteria apply for SME lending transactions in a number of foreign banks within Ghana. These criteria are sometimes further tightened as and when, for example, imposing additional credit screening requirements, maximum customer gearing and/ or minimum profitability ratios. The criteria are as follows: 

Lending to Holding Firms Lending to holding firms is prohibited unless guarantees are held from major subsidiaries, which collectively

contribute at least 65% of consolidated net profit, and/ or more than 65% of consolidated assets. 

Personal Guarantees Personal Guarantees are required for all SME credit exposures from the key executive directors and / or

shareholders who together comprise more than 50% of the borrower’s paid up capital. 

Start up Financing Financing Start Ups carries additional risks. They may only be financed subject to the owner (s) having been in

the same line of business for the past 3 years (except for fully cash backed secured facilities)


An Overview of SME Lending Characteristics in the Ghana Banking Industry Today

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Lending to Firms with Negative Net Worth Lending to companies with negative net worth is permitted if all of the following criteria are met:-

o

Legal Jurisdiction permits lending to insolvent companies

o

Companies/ owners have the ability to repay

o

Facilities are secured

Lending to Foreign SME Firms Normally SME Banking does not target such companies given the high risk nature. Lending to foreign SME

companies is however permitted if the following criteria are met:For locally- incorporated companies majority (51%) owned by foreigners: o

Should be established for at least 3 years

o

Facilities being requested should be secured and self liquidating

o

Local guarantors should be obtained.

For Foreign Owned and Incorporated SME Companies: o 

Facilities must be cash secured.

Tenor and Repayment For SME mortgage loans, the maximum tenor allowable is 30 years. The maximum tenor for term lending is 5

years. Term facilities are to be repaid on a monthly basis. Trade finance tenors should be in line with working capital cycle subject to a maximum of 180 days. 

Credit Turnover SME’s should have a maximum turnover of USD 500,000 and a minimum turnover of USD 80,000 for existing,

borrowing and new-to-bank customers. The credit turnover is meant to assess the SME’s level of credible account operation. 

Legal Entity All SME businesses must be registered as:-

o

Sole Proprietorships (Registered Business)

o

Self-Employed Individual Professionals

o

Partnerships

o

Private Limited Companies

o

Individuals trading under their personal names are not supported.

Vintage SME Businesses should be in existence for not less than three (3) years. Businesses that are less than three years

must be part of a bigger group company, (established more than three years ago), with at least three years of financials


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available. Professional SME Firms registered with a local professional association, and in existence for not less than five (5) years can as well access SME finance. 

Age of Owners/ Directors The minimum age of the main shareholders (>51%) should be over 25 years. The maximum age of the main

shareholders (>51%) should be no more than 65 years at the maturity of the SME loan/ facility. 

Debt Burden Ratio The debt burden ratio of existing customers should be within the range of 45%-60% whilst the debt burden of

new-to-business (new customers) should also fall within 35%-60%. Each facility application is considered on its own merit. 

Cheque Return Criteria Irrespective of the SME customer type, (existing or new), not more than three (3) cheques issued by the customer

should be returned/ dud cheques. 

Security/ Collateral Properties, Investment properties, Cash or near Cash, Government Bills, Bank Guarantees are the accepted forms

of security. Unencumbered residential properties are well considered. Properties under construction are not allowed. 

Fees/ Commission Arrangement fee of between 1% to 2% is to be paid on all facilities. A verification fee of between GHC 100 and

GHC 200 is also required to be paid by the SME borrower. This is used in conducting confirmations on proposed security documentations, credibility of the existence of the SME firm. 

Focus Areas SME financial assistance is given to businesses that fall within the areas where these foreign banks have branch

presence and collections capability. SME Lending by Local Banks Local Banks provide credit products for legitimate and productive business and for personal purposes. Local Banks also enter into businesses with other counter parties such as banks for syndicated loans. In so doing, local banks have to comply with all applicable laws and regulations. Sound credit judgment is exercised and a reasonable financial return is earned.

Types of SME Credit Facilities Offered 

Overdrafts Overdraft facilities are granted to customers whose businesses involve regular cash flow generation, lodgment and

withdrawal. Under certain circumstances, personal overdrafts are offered/ considered for the SME business owners. 

Short Term Loan Local Banks do grant short- term loans to customers whose businesses do not involve regular generation and

lodgment of cash on daily to weekly basis.


An Overview of SME Lending Characteristics in the Ghana Banking Industry Today

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Medium Term Loan Local Banks also grant schedule loans to customers who require credit facilities to purchase fixed assets such as

plant and machinery, vehicles. 

Agro-Business Financing Credit facilities to businesses engaged in farming is usually in the form of loans to customers to be repaid by

installments or by bullet payments to coincide with harvesting or maturity period. 

Guarantees and Bonds Local Banks do also provide non-funded credit facilities to its customers.

Temporary Overdraft and Excess These are facilities against uncollected funds. The Managing Director exercises his discretion in the approval of

temporary overdrafts and excesses. Business and Risk Lending Limits/ Segments Table 1: The SME Lending Limits/ Segments in Most Local Banks are as Follows Secured (Ghc) Unsecured (Ghc) Fully Secured (Ghc) Board of Directors Unlimited Unlimited Unlimited Board Credit Committee 500,000 300,000 Unlimited Board Chairman and Management 250,000 100,000 Unlimited Management Credit Committee 100,000 50,000 250,000 Managing Director 60,000 25,000 100,000 Deputy Managing Director 30,000 10,000 50,000 General Manager, Client Services 20,000 10,000 50,000 Source: Information gathered by talking to Credit Heads of Five Local Banks- 2012 SME- Risk Acceptance Lending Criteria- Local Banks 

Account Operation Business entities, which are customers of the Bank and have operated accounts with the local Bank for a period of

at least 3 months, shall be eligible for credit facility. In special cases, such as new businesses with less than 3 months relationship may be considered. 

Repayment Period The maximum payment period for business loans shall be up to 36 months, whilst over draft facilities shall be up

to 12 months. 

Managerial Capacity An evaluation of the businesses management capacity is conducted and reviewed to determine experience and

knowledge capability levels. 

Financial Analysis SME Facility Applicants would have to provide the appropriate financial statements/ records to be used in

conducting viability and profitability analysis before a credit decision is taken.


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

SME Credit Approval Limits Approval of Credit facility is the sole responsibility of the Board of Directors. However the board at its discretion

delegates some of its responsibilities to the following for credit assessment and approval:-



o

The Board Sub- Committee on Credit

o

Management Credit Committee

o

Managing Director

o

Deputy Managing Director

o

General Manager Client Services.

Security Local Banks require all SME credit facilities granted to customers be adequately secured. A security margin of

100% or more is desirable. The Bank at the discretion of the Board Sub- Committee on Credit, may lend clean to well established corporate bodies and or multinational companies.

CONCLUSIONS In conclusion these are the major risk acceptance lending criteria of both local and foreign banks in Ghana. There are differences in both criteria being used by the banks. Each bank and the level of risk it wants to carry, but they are all operating within the same market and economy, handling virtually the same type of customers. The next chapter deals with the field work data analysis and findings that seeks to provide the true picture on the ground, with respect to the variances in the lending criteria of both local and foreign banks, establishing the most competitive lending criteria that should spur the SME lending business in Ghana.

REFERENCES 1.

Adade, T. C., Ahiawodzi, A. K., (2012). Access to credit and growth of small and medium scale enterprises in the Ho municipality of Ghana, British Journal of Economics, Finance and Management Sciences, 6 (2): 34-51.

2.

Addotei, C. A. (2012). The Challenge of Financing Small and Medium-scale Enterprises (SMEs) in the Ashanti Region, Masters Dissertation, Institute of Distance Learning, Kwame Nkrumah University of Science and Technology, Kumasi, Ghana, pp. 22-55.

3.

Antoine, M., McAndrews, J., Skeie, D., (2013). Bank Lending in Times of Large Bank Reserves, Bank of New York, Staff Report, No. 497, pp. 3-19.

4.

De la Torre, A., Peria, M. S. N., Schmukler, S. L. (2008). Bank involvement with SMEs: Beyond relationship lending, Policy Research Working Paper, 4649, pp. 10-67.

5.

European Central Bank (2013). Collateral Eligibility Requirements: A Comparative Study Across Specific Frameworks, pp. 45-67.

6.

Gambacorta, L., Marques-Ibanez, D., (2011). The bank lending channel: Lessons from the crisis, BIS Working Papers, 345, pp. 4-26.

7.

Kapstein, E. B., Kim, R. (2010). The social and economic impact of Standard Chartered Ghana, pp. 32-43.


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Kashyap, A. K., Stein, J. C. (1994). Monetary Policy and Bank Lending, The University of Chicago Press, Chicago, USA, pp. 221-261.

9.

Kumbirai, M., Webb, R. (2010). A financial ratio analysis of commercial bank performance in South Africa, African Review of Economics and Finance, 2 (1): 30-53.

10. Kutsienyo, L. (2011). The Determiners of Profitability of Banks in Ghana, Masters Dissertation, Institute of Distance Learning, Kwame Nkrumah University of Science and Technology, Kumasi, Ghana, pp. 56-71. 11. Mensah, S., (2004). A Review of SME Financing Schemes in Ghana, UNIDO Regional Workshop of Financing Small and Medium-scale Enterprises, pp. 3-20. 12. Neu, C. R. (1998). International Trade in Banking Services, University of Chicago Press, Chicago, USA, pp. 247284. 13. Quainoo, T. K. (2011). The Impact of Loans on SMEs in Ghana, Masters Dissertation, Institute of Distance Learning, Kwame Nkrumah University of Science and Technology, Kumasi, Ghana, pp. 64-73. 14. Quaye, D. N. (2011). The Impact Of Microfinance Institutions On The Growth Of Small And Medium-Scale Enterprises (SMEs), Masters Dissertation, Institute of Distance Learning, Kwame Nkrumah University of Science and Technology, Kumasis, Ghana, pp. 44-56. 15. Tawiah, S., Ennin, S., Fosu, K., Ghansah, L. (2013). The Impact of Microfinance on Small and Medium Size Enterprises in Ghana, Bachelor’s Dissertation, Christian Service University College, Kumasis, Ghana, pp. 34-54.


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