THE EFFECT OF BUSINESS CREDIT AVAILABILITY ON SMALL AND MEDIUM SCALE ENTERPRISES IN GHANA
CHAPTER I
1.0 INTRODUCTION
For both developing and developed countries, small and medium scale firms play important roles in the process of industrialization and economic growth. Apart from increasing per capita income and output, Small Medium businesses create employment opportunities, enhance regional economic balance through industrial dispersal and generally promote effective resource utilization considered critical to engineering economic development and growth. However, the seminal role played by Small Medium businesses notwithstanding its development is everywhere constrained by inadequate funding and poor management. The unfavourable macro economic environment has also been identified as one of the major constraints which most times encourage financial institutions to be risk-averse in funding small and medium scale businesses. The reluctance on the part of financial institution to fund Small Medium businesses can be explained by the insufficient capital base of banks and information asymmetry that often exists between Small Medium businesses and lending institutions.
This study critically examines the availability of business credit to small business in Nigeria, and how more funding can be made to support small businesses. However, this chapter, forms the basic foundation for this study as it presents the objectives of the study, and the statement of problem that motivated the researcher to undertake the study.
1.2Â BACKGROUND OF THE STUDY AND ORGANIZATIONAL PROFILE
During the 1990s, a number of studies documented that lending to small businesses and the economic activity of small businesses were affected by financial sector disruptions, such as the widespread merging of banks of all sizes and the capital shortfalls occasioned by large loan losses.
Although not much previous research has examined discrimination in small business credit markets, there has been an active debate on the question of whether banks discriminate against minority applicants for mortgages. In an influential study in that area, researchers at the Federal Reserve Bank of Boston tried to collect any information that might be deemed economically relevant to whether a loan would be approved along with the borrower’s race andf financial status (Munnell et al., 1996). In the raw data larger firms had 10 percent of their loans rejected versus rejection rates of 28 percent for small scale businesses. After controlling for the large number of variables collected to establish the credit-worthiness of the borrowers (including, the amount of the debt, debt/income ratio, credit history, loan characteristics, etc.) small scale businesses were still percentage points less likely to be granted the loan.
A variety of criticisms have been launched at this study (see, for example, Horne 1994; Day and Liebowitz, 1998; Harrison, 1998); responses to these criticisms are found in Browne and Tootell (1996). The most common critique indicates that we cannot make a determination of discrimination unless those small businesses whose loans are approved have a greater likelihood of repayment. This argument rests critically upon an implied assumption that the distribution of repayment probabilities for large companies and small businesses is identical. His figure indicates that if this assumption is met and if firms discriminate against small businesses by setting a higher bar for loan approval, then the mean rate of repayment among small businesses conditional upon loan approvalwill be higher for large and smaller firms.
