CHAPTER ONE
INTRODUCTION
Background to the Study
The role of Household Enterprises (HEs) in the overall development of a nation cannot be exaggerated. They play an important part in poverty reduction and are vital to higher consumption. Haggblade et al. (2010) observed considerable evidence on the role HEs play in raising incomes in households through increased employment, and diversification of household income. The HE sector is responsible for many new non-farm jobs in many of the SSA countries, even in periods of high economic growth (Fox & Gaal, 2008). Employment in HEs is the rapid growing aspect of the economies in SSA countries undergoing growth and poverty reduction. These enterprises have been the solution to diversification by transforming labour from subsistence agriculture to non-agriculture activities (World Bank, 2012).
Despite the small scale nature of the operations of HEs, they continually have a significant role in poverty alleviation since they help poor people become less poor. According to Abor and Quartey (2010), HEs contributes immensely to employment generation, poverty alleviation and economic growth in most African countries. In addition, Bakeine (2009) acknowledged that the presence of a HE is a key element in lifting households out of poverty. The case of Ghana is not an exception. From 1991 to 2006, about 1 million new jobs were created by HEs out of the total of 2.8 million new jobs (World Bank, 2009). The HEs in Ghana are very important since they are viewed as a means of livelihood for households and are often seen as a complement to family farming.
Amidst all these contributions of HEs to developing countries, they face a lot of challenges of which numerous studies such as Bakeine (2009) and Quainoo (2011) indicated lack of start-up capital as a major bottleneck.
Finance serves as the core of every business and regulates its growth and survival (Aryeetey et al., 1994; Abor and Quartey, 2010). Loans are a major source of finance for enterprises, and they serve as a start-up capital to new businesses and an investment and working capital for already existing businesses. The HEs need loans to acquire assets and to cover for daily and operational expenses as well as the payment of remuneration (Quainoo, 2011). Improved access to loans gives HEs the capability and opportunities to expand and increase productivity since growth in employment and expansion in this sector tends to come from new enterprises springing up but not from the already existing ones (Fox & Sohnesen, 2012).
Most empirical studies have shown that inaccessibility of loans is a major impediment to HEs and MSEs in general, in both developed and developing countries particularly SSA countries (Beck and Cull, 2014; Aryeetey et al., 1994; Baah-Nuakoh, 2003). For instance, the National Bureau of Statistics (NBS) of Nigeria in partnership with the World Bank from its General Household Survey in 2010/2011 asserted that HEs in Nigeria have low capital stock, with more than 50 percent of these enterprises having a capital below 13,000 Naira ($87) and only a few of them have access to loans (NBS, 2011). In addition, a World Bank study revealed that 90 percent of HEs and MSEs surveyed stated loan acquisition to be the paramount setback to new investment (Parker et al., 1995). It has also been established that the reason for low growth and development of small enterprises is limited access to financial resources (Abor & Biekpe, 2006).
The major challenges HEs face in accessing loans include high interest rates, cumbersome paperwork and requirement of collateral to qualify for loans by formal financial institutions (Stephanou & Rodriguez, 2008; Bakeine, 2009; Quainoo, 2011; Alhassan & Sakara, 2014). These impediments have led to HEs resorting to informal lenders such as traditional money lenders, relatives and friends, ‘susu’ lenders and, savings and loans companies (Beck & Demirgüç-Kunt, 2005; Nkuah et al., 2013). Though the above challenges are faced by most enterprises, HEs are usually ignored and more attention is given to larger enterprises, and HEs tend to be more constrained. In addition, Fox and Sohnesen (2012) stated that:
“Household enterprises are usually ignored in low-income Sub-Saharan African development strategies” (p.1).
This persistent inability to access loans among HEs has attracted many researchers, policymakers, and governments to make recommendations and put policies in place to finance HEs (Kayanula & Quartey, 2000). Regardless of the World Bank enterprise financing policies to eradicate the problem of access to loans, many of these enterprises in developing countries still face this challenge, because of poor coordination and the quality of existing structures in support of informal enterprises (Quainoo, 2011; World Bank, 2018).
Some of the policies are the formulation of the Credit Guarantee Scheme to help firms who are without collateral to secure loans from financial institutions (Kayanula & Quartey, 2000). Also, impositions of interest rate ceilings and direct credit policies were geared toward reducing the interest rates (Nkuah et al., 2013). But these policies usually fail because they lead to high reserve requirements and artificially low interest rates causing financial market distortion. This will cause the breakdown of formal financial institutions’ ability to offer loans hence HEs will turn to informal agencies for assistance.
Moreover, policies such as the introduction of Banking Regulation (Credit Bureau) as was implemented in Kenya on 11th July 2010 to make lenders (bankers) more confident and to prevent borrowers from taking loans at multiple financial institutions have made credit risk management easier (Mole & Namusonge, 2016).
In the case of Ghana, institutions such as the Microfinance and Small Loans Centre established in 2006 are to address and standardize the approval of loans and to provide training programs and financial advisory services for small scale businesses (MASLOC, 2006).
Theoretically, lack of access to loans has been expounded through the credit rationing hypothesis put forward by Stiglitz and Weiss (1981), which postulates that the problem is the result of information asymmetry resulting in financial market distortions. Adverse selection and moral hazard problems in loan agreement are the reason for inadequacies in the financial market.
Loan acquisition is subject to information asymmetry, not only on the side of the borrower but also that of the lender. Financial institutions are unable to ascertain the faithfulness of the borrower or to keep track of the money borrowed if it was used for the intended purpose. On the flip side, lenders (HEs) are unable to signal the financial institutions that they possess the desired characteristics that improve their probability of fulfilling their loan obligations (Gariba, 2015). This leads to a failure of the financial market.
Financial institutions provide loans to HEs based on their capability to calculate the probability that they would be repaid and this is hugely dependent on the profitability of the enterprise (Stiglitz & Weiss, 1981). Furthermore, supervisory weaknesses, market failures, regulatory constraints, financial structure insufficiencies, and financial institution inadequacies determine the supply of loans to enterprises (Malhotra et al., 2007).
Nonetheless, financial institutions are able to approximate the creditworthiness of HEs and their ability to repay the loans based on information they are able to obtain from owners of the enterprises such as experience, association to business society, level of education, size of the enterprise, the value of assets and possession of financial statements (Deakins et al., 2010; Kumah, 2011; Pandula, 2011)
Problem Statement
Ghana’s sustained GDP growth from 1991 to 2006 created an average of 8 percent per year of substantial self-employment and private wage employment. Notwithstanding the rapid growth in wage employment during that period, agriculture remained Ghana’s leading primary employment sector, with HEs a close second (Quainoo, 2011).
Despite all the success, the problems of access to loans, lack of managerial expertise, inappropriate equipment and technology, and regulatory concerns of HEs still exist (Aryeetey et al., 1994; Gockel & Akoena, 2002; Quainoo, 2011). Concerning managerial skills, most of the entrepreneurs do not see the need for training and skill acquisition and the few who see it to be needful do not have the means and cannot afford it, in the face of the many training and advisory institutions available (Kayanula & Quartey, 2000).
However, several policy initiatives have been implemented by the government to assist HEs such as the credit guarantee scheme. The Non-Bank Financial Institutions (NBFIs) were also established to attend to the financial needs of HEs (Gockel, 2003). Also, there has been substantial backing from international donor institutions like the United Nations Industrial Development Organisation (UNIDO) and the African Business Angel Network (ABAN), which
is a Pan-African non-profit organisation founded to help the survival of infant businesses across Africa and to encourage many more investors about the prospects in Africa (Gariba, 2015). In recent times, the Business Development Minister, Mr Ibrahim Mohammed Awal, made mention of some $10 million the government has made available under the National Entrepreneurship and Innovation Plan (NEIP) and also added that this amount is not enough, therefore the government has embarked on policy to add GH20 million by March 2018 (NEIP, 2018). These funds are to support start-up businesses in both the formal and informal sector.
Access to loans from commercial banks by HEs has been a concern for entrepreneurs, policymakers and government since most financial institutions in Ghana are hesitant to grant loans to HEs because of the apparent high risk of the enterprises in this sector but are willing to expand loans to large firms (Alhassan & Sakara, 2014). Many of the HE entrepreneurs are considered not creditworthy by most of the financial institutions because they are not able to satisfy rigid banking terms and conditions such as secured collateral, unfavourable maturity period, burdensome loan repayments process and complex loan applications and disbursement procedure (Abor & Quartey, 2010). These cause most of the HEs to turn to the informal credit sector for loans. This is because most the entrepreneurs do not know the dynamics of accessing loans from both formal and informal sources. Also, the financing of HEs may vary from country to country depending on the nature and structure of the HE sector (World Bank, 2018).
Also, there are policies undertaken by governments and other NGOs to close the HEs financing gap but they cannot do it alone and the gap also keeps widening overtime (World Bank, 2018). According to the World Bank (2018) over 70% of MSMEs lack access to credit and this financial gap is particularly wide in Asia and Africa. The current financial gaps in the formal and informal enterprise sector are estimated to be $1.2 trillion and $1.4 trillion respectively (World Bank,
2018). Hence there is the need for the entrepreneurs to know the available financial assistance and understand the dynamics of access to loans.
This brings the issue of how HEs can access loans and what new strategies can be employed to finance HEs in Ghana. Also borrowing from an informal source comes at a high cost. The interests are often high whilst the loan amount may be small. Therefore, there is the need to assess both the formal and informal financial sector closely. This raises the question of not only the determinants of total loans in general but to explicitly take a keen look at the factors that determine access to loans by HEs from both formal and informal credit sectors. Finally, the financing of HEs is based on the nature of the HEs, therefore there is the need to also look at some ways of financing HEs in Ghana.
