Tough times for SME’s …as cost of borrowing surge

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The contribution of Small and Medium Enterprises (SME’s) to creation of jobs and increasing aggregate output continue to dwindle as banks put in stringent measures at releasing credit to small business owners.

Providing about 85 percent of manufacturing employment, SMEs contribute greatly to the development of the private sector and account for a large share of new jobs in the country.

Presently, most banks in the country lend to small business owners at over 30 percent interest rate, even though the banks have officially pegged the cost of borrowing at 25.5 percent.

Deputy Managing Director of Societe General Ghana, Monsieur Francois Marchal explained to the Business Day in an interview that cost of funds to SME’s are particularly high because of the risks associated with their operations.

He stated that the risks are further compounded by the unstable macro-economic indicators, which bankers use to assess the environmental viability of enterprises before funds are advanced.

“Generally, the interest environment in Ghana is very high because on the cedi it is at 25.5 percent. If you take the risks involved, your interest calculation will be over 30 percent”, he stressed.

In recent times, the European Investment Bank—the EU’s long-term lending institution budgeted an 80 million euro credit facility to some banks in the country to improve access to finance, however, Monsieur Marchal revealed that small business owners have barely taken advantage of the facility.

SG Ghana and Unibank received 20 and 10 million euro respectively, but with Ghana’s interest rate hovering around 25.5 percent and inflation at 17.1 percent, some experts say banks will be risk-adverse in lending money to SME’s.

Some financial experts have also blamed the situation on government’s domestic borrowing which is said to have caused crowding-out of the private sector.

However, Finance Minister, Mr. Seth Terkper recently assured parliament that, government will use part of  a 1.5 billion Eurobond scheduled to be issued in September to clear all domestic short-term loans to create adequate funds for the private sector.

Mr. Terkper was also optimistic the move will create enough circulation of the local currency in the economy, triggering a reduction in the cost of borrowing.

On the Monetary front, the Managing Director of Fidelity Bank, Mr. Edward Effah, is reported to have predicted hard times for SMEs due to the Bank of Ghana’s policy rate which was further maintained at 22 percent.

According to him, “with the energy crisis continuing into the second half of the year, Treasury bill rates averaging 25 per cent, inflation at a year-high of 17.1 per cent and the Bank of Ghana’s policy rate pegged at 22 per cent, banks would generally be discouraged from lending to businesses for fear of defaults”.

Government has however assured that it is working around the clock to develop the infrastructural needs of Ghanaians to improve living conditions of the citizenry.

By LAWRENCE SEGBEFIA

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