The effect of savings and loans companies on the operations of small and medium enterprises (SMEs) in Kumasi Metropolis

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Savings and Loans industry has become a major backbone in the sustenance and survival of SMEs in Ghana. The incapability of SMEs to meet the credit requirement of the formal banking sector provides an avenue for SLCs to fill the gap. Nonetheless, the interest rates of the SLCs are higher than the traditional banks. It is against these backdrops that the current study seeks to assess the effect of SLCs on the performance of SMEs in the Kumasi Metropolis. The study employed both qualitative and qualitative approaches to survey 95 SMEs owners/managers and 20 Credit Officers of SLCs in an attempt to employ a questionnaire investigate the adequacy of loans given by SLCs, identify the challenges of SMEs in accessing credit facilities, determine the credit utilisation of SMEs and assess the influence of SMEs access to credit on performance. The result of the study shows that SMEs in the Kumasi metropolis sourced start-up capital from personal savings, friends and relatives. The operational credit of the SMEs is also sourced from personal savings, friend and family, and SLCs. The average maximum annual credit facility of GH¢77,500 was obtained in 2014 at a high average interest rate of 6.3% per month. This interest rate partly contributed to the default rate of 6.28% per annum among the SLCs. Another major factor for the high default rate was credit diversion among the SMEs. Basically the amount of credit accessed from the SLCs was inadequate and so such efforts needed to be complemented by personal savings. The SMEs predominantly utilized the accessed credit facilities for the payment of labour wages, purchase of raw materials, the purchase of production machine and the purchase of new technology. The sourced credit facilities led to the growth of SMEs through improved assets, investment, employee size, profits, production and sales. However, SMEs were confronted by several challenges in accessing credit facilities including bureaucracy and huge volume of paper work, lack of opportunity to take second loan, high risk and uncertainty, high level of interest rate on credit, low level of knowledge about credit sourcing, high cost of financing, non-availability of start-up capital, shorter repayment period, and others. Based on these findings, the study makes several recommendations including reduction in the credit accessing process and paper work, reduction in the interest rate charges, provide a negotiable repayment period, and educate SMEs on credit sourcing and the need for government to expand its assistance to SMEs.
Thesis submitted to the school of business, Kwame Nkrumah University of Science and Technology in partial fulfillment of the requirements for the degree of Master of Business Administration ( Finance).