This article discusses the effects of financial institutions like Banks and especially Microfinance Institutions (MFIs) on the growth of Small and Medium Scale Enterprises (SMEs) in Ghana. The study examined the contribution of MFIs to entrepreneurial growth, the challenges encountered by SMEs in accessing credit and the rate of credit utilization by SMEs. The paper also highlights the positive effect of MFIs on the growth of SMEs like enhancing saving habits of SME business operators and individuals, instituting business, financial and managerial training activities by MFIs, etc. Irrespective of the contributions of MFIs to SMEs, there are challenges that affect their operations of both SMEs and MFIs, like high interest rate on the part of MFIs, the inability to provide the collateral securities in cases where they were demanded from SMEs, problems in the repayment of loans from individuals who have been granted financial support, etc. The article was concluded with some recommendations to help improve the activities of MFIs in order to ensure a proper growth of SME businesses.
INTRODUCTION Throughout the world, poor people are excluded from formal financial systems. Exclusion ranges from partial exclusion in developed countries to full or nearly full exclusion in lesser developed countries (LDCs). Absent access to formal financial services, the poor have developed a wide variety of informal, community-based financial arrangements to meet their financial needs. In addition, over the last two decades, an increasing number of formal sector organizations (non-government, government, and private) have been created for the purpose of meeting those same needs. Microfinance is the term that has come to refer generally to such informal and formal arrangements offering financial services to the poor (Brau & Woller, 2004, p. 2). Microfinance encompasses the provision of financial services and the management of small amounts of money through a range of products and a system of intermediary functions that are targeted at low income clients. Microfinance refers to provision of small loans and other facilities like savings, insurance, transfer services to poor low-income household and microenterprises, as cited by Asiama and Osei (2007). Microenterprises are normally family businesses or self-employed persons operating in the semi-formal and informal sectors; most have little chance of growing into larger scale firms, accessing bank finance, or becoming internationally competitive. Serving them often requires distinct institutions and instruments, such as the group based lending methodologies used by some microfinance institutions. In contrast, SMEs usually operate in the formal sector of the economy, employ mainly wage-earning workers, and participate more fully in organized markets. SME access to formal finance is a desirable possibility, and SMEs are more likely than microenterprises to grow and become competitive in domestic and international markets (Hallberg, 1999). Microfinance has several benefits for developing nations. Microfinance institutions (MFIs) have become the main source of funding micro enterprises in Africa and in other developing countries, as stated by Quaye (2011). Access to financial services is imperative for the development of the informal sector and also helps to mop up excess liquidity through savings that can be made available as investment capital for national development (World Bank Africa Region, 1999), as cited by The Ministry of Finance and Economic Planning (2012). As pointed out by the former UN Secretary General Kofi Annan during the launch of the International Year of Micro Credit (2005), "Sustainable access to microfinance helps alleviate poverty by generating income, creating jobs, allowing children to go to school, enabling families to obtain health care, and empowering people to make the choices that best serve their needs" (Kofi Annan, December 2003), as cited by Quaye (2011, p. 11).
LITERATURE REVIEW In most African countries, the bulk of manufacturing employment is in self-employment and enterprises of fewer than 10 workers, while most output is generally produced in large firms of more than 100 workers (Liedholm and Mead 1987), as cited by Steele & Webster (1992, p. 426). The development of small and medium sized companies has often been regarded as a "missing link" in development strategies of African countries, as several import-substitution policies have favoured large corporations at the expense of SMEs (Santos, 2003, p. 6). According to Afrane (2002, p. 38), Small and Medium Enterprises (SMEs) are the backbone of many economies in Sub-Saharan Africa (SSA) and hold the key to possible revival of economic growth and the elimination of poverty on a sustainable basis. Despite the substantial role of the SMEs in SSA's economies, they are denied official support, particularly credit, from institutionalized financial service organizations that provide funds to businesses, as cited by Afrane (2002). Small and Medium Enterprises (SMEs) are commonly believed to have very limited access to deposits, credit facilities and other financial support services provided by Formal Financial Institutions (FFIs). This is because these SMEs cannot provide the necessary collateral security demanded by these formal institutions and also, the banks find it difficult to recover the high cost involved in dealing with small firms. In addition to this, the associated risks involved in lending to MSEs make it unattractive to the banks to deal with micro and small enterprises (World Bank,1994), as stated by Quaye (2011, p. 11). Statistically, small enterprises are reported to have high failure rates making it difficult for lenders to assess accurately the viability of their enterprises, the abilities of the entrepreneur, and the likelihood of repayment, as cited by Quaye (2011). According to Quaye (2011), SMEs in Ghana have the tendency to serve as sources of livelihood to the poor, create employment opportunities, generate income and contribute to economic growth. Micro-finance, on the other hand, according to Otero (1999) as cited by Quaye (2011) is not just about providing capital to the poor to combat poverty on an individual level, it also has a role at an institutional level. It seeks to create institutions that deliver financial services to the poor, who are continuously ignored by the formal banking sector. Asiama and Osei (2007) stated that Microcredit is one of the critical dimensions of the broad range of financial tools for the poor, and its increasing role in development. Microcredit also refers to a small loan to a client made by a bank or other institutions. Microcredit is most often extended without traditional collateral. If physical collateral were a requirement for borrowing, most MFI clientele would be unable to participate due to their extreme poverty level. Because borrowers do not have physical capital, MFIs focus on using social collateral, via group lending. Group lending encompasses a variety of methodologies, but all are based on the principal of joint liability. In essence, the group takes over the underwriting, monitoring, and enforcement of loan contracts from the lending institution (Wenner, 1995), as cited by Brau & Woller (2004, p. ). Under joint liability each group member is made responsible for the loans of other group members. If one member defaults, the other group members are required to cover the loan from their own resources, and if they do not, they lose access to future loans. It is thus in each member's interest to ensure that the other members pay, as stated by Brau & Woller (2004). Lending to SMME or even poor individuals when compared to standard commercial banking involves: (i) a greater level of risk (due to the lack of collateral, business plan and other) and (ii) higher costs (to select and monitor clients), especially given the small amount of the loans. One of the characteristics of microfinance operations, and in particular financially sustainable ones, is to charge high interest rates. These vary from MFI to MFI, depending on the type of operations, target clients and the economic environment among other factors, as stated by Santos (2003, p. 16). Quaye (2011) stated that the Microfinance industry has become a major backbone in the sustenance and survival of SMEs in Ghana. Microfinance Institutions (MFIs), as part of their core business, provide credit to SMEs. In addition to these financial services, MFIs also provide non-financial services like business training, financial and business management to help improve the capacity of their clients in managing the loan resources granted them. Governments in both industrialized and developing countries provide a wide variety of programs to assist small- and medium-scale enterprises (SMEs). Despite the success of SME strategies in a few countries (e.g., Taiwan, northern Italy, Ireland), the majority of developing countries have found that the impact of their SME development programs on enterprise performance has been less than satisfactory (Hallberg, 1999, p. 1). Traditionally, government intervention to promote SMEs has focused on the provision of credit through various means -- direct lending through first-tier development banks, second-tier credit facilities channeled through banks and other financial institutions, and portfolio requirements - often supplemented by credit guarantee schemes. Subsidized interest rates and guarantees were common in the past and continue to be used in many countries, reflecting the (likely erroneous) view that the high cost of credit is the main constraint facing SMEs (Hallberg, 1999, p. 9). Today there are thousands of MFIs providing financial services to an estimated 100 - 200 million of the world's poor (Christen et al., (1995), as cited by Brau & Woller (2004, p. 2).
METHODOLOGY In this research article, neither the qualitative or quantitative analysis would be adopted because it doesn't involve the collection of first hand information. This research was conducted through the use of secondary materials in the form of research articles and journals. This paper focused on areas related to topics in micro-financing and financing of Small and Medium Enterprises. This research provides a comprehensive review of over 10 articles (including dissertations and articles from the World Bank) and addresses the issues of MFI sustainability, products and services, management practices, clientele targeting, regulation and policy, and impact assessment.
CONCLUSION The various research findings showed that MFIs have contributed enormously to the growth of the SME sector through several activities. The MFIs have provided SMEs a greater access to credit than the traditional banks. Since most of these SMEs are Micro, their credit needs are very small and their credit needs are most of the times meet. Most SMEs were found to be dealing with more than one MFI, and the credits granted helped to boost their capital and expand their businesses. Microfinance Institutions have enhanced saving habits of SME business operators and individuals. The traditional banking sector is unable to introduce saving products that will attract Micro businesses. MFIs have been able to create a platform that enables Micro businesses to save the little income they earn on daily basis with little cost. For most MFIs, the saving accumulated is the basis for the amount of loan to be granted. The habit of saving has been enhanced through the activities of MFIs. A review of previous researches indicated that SMEs have benefited from Business, Financial and Managerial Training activities by MFIs. Knowing that most entrepreneurs lack or have very little knowledge in financial management, these support services have gone a long way to make them more competitive and very alert to the implications of their financial decisions. The findings from the reviewed research articles also revealed a majority of respondents indicating that the operations of MFIs had had a positive effect on their businesses. Despite the contribution of MFIs in the activities of SMEs, some of the researches indicated that there were some challenges faced by SMEs in the process of accessing credit. Some of the SME respondents found the process of accessing credit as cumbersome. Some these challenges were the inability to provide the collateral securities in cases where they were demanded. High interest rate was also mentioned as one of the challenges faced in accessing credit. The high interest rates in most cases make clients unable to repay their loans. Even though SMEs encountered some challenges in assessing assistance for the improvement and development of their businesses, the MFIs on their part also provided some of the challenges they also face in granting credit. They encountered problems in the repayment of loans from individuals who have been granted financial support. Most of these clients either delay in their loan repayments or don't follow the agreed loan repayment schedules made available to them by these financial institutions. Lack of proper documentation in terms of business registration and a permanent business address makes it difficult for MFIs to make the necessary follow up on prospective SMEs who want to do business with them. Some of these companies are not properly registered and thus makes it difficult to grant them loans because there is a high tendency of them not paying back these loans upon granted to them. They can easily relocate to a new place since they don't have a permanent business address and the right business registration papers from the authorities. These MFI also highlighted the lack of collateral security on the part of SMEs when applying for financial support. MFIs try to give out secured loans to its clients by collecting some form of collaterals in the form of non-movable items especially when these SMEs are not clients of theirs. They insist on these collaterals so that during times of default in the repayments of the loan, they would have a substantial replacement which would be equivalent to the amount loaned out to them. High interest rates on loans being given out to SMEs was stated as one of the major setbacks. A lot of SME operators struggle with the high interest rates on some of the loans they apply for. Because these businesses are normally acquire some substantial amount as loan to run their businesses, it is difficult for them to go for loans which have high repayments because it would be hard for them to gain any profits to continue running the operations of the business even after servicing these loan repayments. It would be more of doing a business and gaining nothing in return due to the interest rates accompanying them. Poor records keeping on the part of the SMEs were also pointed out as a challenge for the MFIs. Some of these SMEs have an improper way of keeping track of their repayment schedules on their loans. Some also have a poor way of making inventory on the items which have been purchased with loaned money in their businesses. They find it difficult to notice the growth of their business because of lack of proper records keeping. Keeping an up-to-date record on inventory which was purchased from loaned money should help the business operators on whether they are making a profitable venture or not because it would go a long way on how they make their loan repayments. Another challenge was the lack of transparency in the business accounts and related business information.
RECOMMENDATION In other to enhance a sustained and accelerated growth in the operations of SMEs credits should be client-oriented and not product-oriented. Microfinance Institutions and other financial institutions like Banks should provide services that satisfy the needs and wants identified by clients. To provide client-oriented services, staffers listen to and learn about their clients through regular conversations, surveys and feedback. Proper and extensive monitoring activities should be provided for clients who are granted loans. MFIs should make a good assessment of prospective clients before granting them loans. They should make sure that SMEs have the necessary documentations to facilitate their loan applications. MFIs should also make regular visitations to clients who are defaulting with their repayment of loans or make regular calls to remind them on their loan repayment schedules. In order to encourage technology acquisition for SME expansion, MFIs and Banks can categorize their loans into low and high interest loans. The conventional loans to clients can be maintained as high interest loans, while loans for capital assets or technology acquisition should be low interest loans, which can be secured by a mortgage over the fixed asset so acquired by the micro-borrower. To achieve this, the Microfinance Banks should be recapitalized to enable the banks to support MSEs growth expansion adequately, as suggested by Babajide (2012). There should also be appropriate institutional arrangement linkages between the formal and informal financial institutions. MFIs should be able to liaise with other Commercial banks especially in the modification of services and loan products to SME operators. Because SMEs may need lesser amounts to run their businesses as compared to huge amounts needed by other bigger firms or manufacturing companies, these banks can partner with MFIs so that clients who are SME operators would be able to access such small amount of cash loans through them in order to grow their business with the needed financial support. There should be an integration and coordination of Microfinance Institutions by establishing a central regulatory body for all microfinance institutions in the country which could be compared to the way banks are regulated by the Central Bank. If MFI are governed and monitored by this central body, there would be uniformity in the way things are done in this sector especially with the way interest rates are disbursed on loans to SMEs and other prospective clients.