Review on the Impact of Financial Institutions’ Systems on SMEs’ Access to Finance

Abstract

The importance of Small and Medium Enterprises (SMEs) in economic growth is becoming increasingly acknowledged. In Ghana, 85% of manufacturing jobs are provided by SME's, making up 92 percent of firms and contributing 70% of the country's GDP. Funding is a major barrier for many SMEs, particularly in Sub-Saharan African nations. The formal financial sector in Ghana comprises commercial banks, rural and community banks, savings and loan companies, and non-bank financial institutions. Legislative efforts have been put in place to help SMEs, but financial institutions have been cautious with lending to SMEs due to high default rates and risks associated with the sector. This paper seeks to review the impact of financial institution systems on SMEs access to finance in Ghana. A systematic review of literatures related to requirements and systems of financial institutions on SMEs access to finance in Ghana was conducted with the aid of online research journal websites. Seven articles were identified to be useful to the study, and six factors were identified to impact SMEs access to finance: collateral pledges, conditions attached to bank loans, high transaction costs, inadequate information about SMEs, Commercial Bank’s Profits Orientation and short period for repayment. SMEs in Ghana are not able to access funds due to their small size and lack of assets and capital, and lack the capacity to meet financial institutions. SMEs are important for the growth and development of a nation, but their access to finance is hindered by financial institutions. To address this, policy makers, government officials and legislators should make laws that favour SMEs in accessing finance to reduce requirements and increase access to finance.