Challenges of Services Sector SMEs in a Developing Country: A Case of Ghana

Apr 7, 2022 | The Latest

Challenges of Services Sector SMEs in a Developing Country: A Case of Ghana

Thursday, April 7, 2022, by Afia Serwaa Attrams & Makgopa Tshehla

School of Business Leadership, University of South Africa, College of Graduate Studies

Abstract

Small and medium-sized enterprises (SMEs) face diverse challenges that require solutions to enable the sector to thrive. The study used a sector-based approach to assess the challenges of SMEs from the financial institutions’ and SMEs’ points of view and suggested solutions to the challenges with a focus on the service sector in Ghana. The findings revealed that diversion of funds, inconsistencies in business, and lack of documentation prevail and are curbed by using mobile banking, improving relationship banking, and monitoring. From the analysis of 688 SMEs, high taxes and informal competitions are the highest-ranked challenges, while access to finance is ranked tenth. The policy recommendation is to reduce SME taxes and ban the importation of inferior goods.

Background

Small and medium-sized enterprises (SMEs) are the engines of economic growth in most developing countries. They contribute significantly to employment and the country’s Gross Domestic Product (GDP) and create incomes for individuals and households (Abor & Biekpe, 2006; Abor & Quartey, Abor and Quartey, 2010a). Due to their significant contributions to employment in most economies, they have proven that small businesses do really matter and developing economies especially cannot be without them (Radic, 2020). The service sector in Ghana is the largest of the three sectors (including manufacturing and agriculture). The trading (wholesale and retail trade) subsector constitutes the majority of business engagements in the services subsector according to the Ghana Statistical Service (GSS, 2018). The other subsectors include transport, information technology, hospitality, health, and education (among others). SMEs face diverse challenges (Asare, 2014; Ayyagari et al., 2017) that hinder their growth potentials (Abor & Quartey, 2010b; Ayandibu & Houghton, 2017). Although these challenges have been discussed in the literature extensively with diverse solutions (Donbesuur et al., 2020; Mamman et al., 2019; Quartey et al., 2017), they have mostly covered SMEs in general, but Seidel-Sterzik et al. (2018) have suggested a sector-based approach in tackling SME challenges. Some of the challenges identified include high cost of renting premises, high cost of income and property taxes, low investment capital (Mabe et al., 2013), access to credit (Brixiová et al., 2020), and the need for SMEs to improve on their internal ability to source for resources (Rita & Huruta, 2020). Oppong et al. (2014) contributes to the debate on SME challenges and suggests that there is a gap on how to plan, direct, control, and effectively market and strategize for their business on the part of SMEs which requires training interventions from government and non-governmental organizations.

SME owners are characterized with low capacity to manage their businesses, among other constraints (Abor & Quartey, Abor and Quartey, 2010a), and this requires the ability to understand their intellectual capital to enhance their performance (Demartini & Beretta, 2020) and invest in resources to build and maintain their networks to enhance their scope of business (Masiello & Izzo, 2019). They are further characterized by their owners who tend to lead their business operations when they are small family businesses but, as the business grows, the capacity to manage it by the family diminishes and reverts to nonfamily managers, depending on their intellectual orientation (Bauweraerts et al., 2021). Moreover, their financing decisions in terms of reinvesting in the business are affected by the local governance environment and the source of external financing (Nguyen, 2018). They are mostly financed by external sources (Beck & Demirgüç-kunt, 2008), mainly financial institutions (FIs) who, although challenged by SMEs information asymmetry, tend to use a relationship banking approach to still extend credit to them even in challenging situations (Calabrese et al., 2020). The challenges of SMEs presents an opportunity for research leading to policy directives especially for the benefit of developing economies.

Methodology

For the qualitative aspect of the study, seven FIs were interviewed using a semistructured interview guide to obtain information on their challenges in lending to SMEs and how they have been able to overcome those challenges. The qualitative study was followed by a quantitative study where data were collected from 688 SMEs, the majority of whom were in the service sector in the Accra and Kumasi localities in Ghana. The questionnaire was divided into sections, with section A on the demographics of the participants. To address the objective of the study, participants had to select from a list of 16 challenges the degree to which each was an obstacle to their business, using a five-point Likert scale from no obstacle to very severe obstacle. The views on how the challenges can be overcome were also obtained.

Findings

The FIs discussed the challenges they encounter when they grant credit to SMEs, and these have been outlined in this section. Furthermore, the challenges of SMEs in the service sector have been weighted and discussed with implications for theory and/or policy.

FIs’ challenges and way out with SMEs

The FIs identified six main challenges they encounter in their dealings with SMEs in the service sector. Diversion of funds has been identified as one challenge. According to FIs, SMEs easily change their minds about the purpose of credit facilities granted them once the funds have been disbursed and especially if it is in the form of working capital or overdraft. They further engage in multiple banking, where they borrow from one bank and move the funds into another bank for another purpose. Another challenge that leads to the diversion of funds is inconsistencies in business dealings by SMEs in the service sector. Because these businesses are small and the ownership is vested in mostly one man with little structure in place, they tend to make business decisions in an ad-hoc manner without recourse to their FIs who have extended credit facilities to them. They tend to acquire assets and enter into business deals with little consideration of the implications for their business. Furthermore, FIs are challenged by the lack of succession planning of SMEs such that in the absence of the main promoter of the business, the activities come to a halt and in some cases where death occurs, the business closes down with loans not being repaid. In addition, FIs are challenged by the lack of documentation by the SMEs, which tends to affect the financing decisions to extend or renew existing credit to these SMEs. Poor management capacity and the informal structure of SMEs in the service sector also pose a challenge to FIs as, in their financial inclusion approach, SMEs who can access banking services are those who have registered their businesses, have proof of addresses, and can be reached via mobile phones or e-mails. This, therefore, excludes some of the SMEs from being banked.

Despite the challenges FIs encounter with SMEs, they intimated that they do find SMEs profitable, as a majority of their bank portfolio is made up of SMEs. Hence, FIs have adopted some techniques in being able to lend to SMEs. These include the use of mobile banking, especially for traders who tend not to leave their shops. The mobile bankers visit them in their locations to both collect deposits or give credit. The use of insurance cover as part of securities when they lend to opaque SMEs, building closer relationships with their SME customers to reduce information asymmetry challenges, and developing basic financial information for the SMEs using their bank account operations to JOURNAL OF THE INTERNATIONAL COUNCIL FOR SMALL BUSINESS 3 determine ability to repay a credit are all approaches used by FIs to lend to SMEs. Finally, FIs have concluded that improving due diligence and bank account monitoring is one of the ways they can lend to SMEs successfully.

Service-sector SMEs challenges and the way out

For the quantitative aspect of the study, participants were given a list of 16 obstacles that SMEs face and asked to select their perceived level of severity of the obstacles to their businesses on a five-point Likert scale from no obstacle to very severe obstacle. The obstacles and the level of severity are listed in Table 1. The researchers then combined the percentage of participants who selected severe obstacle and very severe obstacle for each item and ranked the obstacles in Table 2 to determine how the obstacles had been rated by SMEs and the implications thereon. From Table 2, the highest-rated obstacle was tax rates and government laws with 46.65 percent of participants perceiving this as the biggest challenge to their businesses. Practices of informal competitors was the second most rated obstacle, perceived by 37 percent of the participants as either a severe or very severe obstacle to their business. Uncertainty about government policies and competition from cheap imports were ranked third and fourth respectively. Political instability due to changes in government and electricity were fifth and sixth, while crime, theft, and disorder and access to land followed. Access to finance was ranked 10th. Court delays (5.78 percent), followed by labor regulations (7.18 percent) and business licenses and permits (8.23 percent) were the least rated perceived obstacle to service-sector SMEs. The suggested solutions to the challenges by the participants as outlined in a word cloud in Figure 1 includes government’s reduction in taxes, consistent policies, control of the importation of inferior goods, government to deal with the inflation rate, stability of the Cedi, access to cheap sources of funds, ability to market goods and services, the need for trained personnel, and ensuring regular power supply, among others.

Implications for theory and practice

Governments and institutions are making an effort to ensure there is financial inclusion of businesses and individuals through innovative approaches (Senyo & Osabutey, 2020), the availability of credit to SMEs (Lu et al., 2020), and development of entrepreneurship ecosystems as a mechanism to enhance development in the wake of a global health pandemic (Liguori & Bendickson, 2020). This study has helped to identify the challenges faced by service-sector SMEs. The implication is that policies and solutions to SMEs’ challenges should be tackled from the top down according to the rankings of the challenges identified in this study. Figure 2 outlines the challenges and solutions of service-sector SMEs from both FIs’ and SMEs’ point of view and provides implications if tackled by the responsible institutions. For service-sector SMEs to be sustainable and continue to be the engines of economic growth, it is recommended that government and other stakeholders use the challenges identified and the solutions as part of their development of the service-sector SMEs. This will have diverse implications on ease of doing business, growth of SMEs, improved access to funding, and growth in the GDP.

Disclosure statement

No potential conflict of interest was reported by the author(s).

References

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Abor, J., & P. Quartey. (2010a). Issues in SME development in Ghana and South Africa. International Research Journal of Finance and Economics, 39(January), 218–228. https:// www.smallbusinessinstitute.co.za/wp-content/uploads/2019/12/ IssuesinSMEdevelopmentinGhanaandSA.pd f

Abor, J., & P. Quartey. (2010b). Issues in SME development in Ghana and South Africa. International Research Journal of Finance and Economics, 39(39), 218–228. Asare, A. O. (2014). Challenges affecting SME’s growth in Ghana.

Asare/OIDA International Journal of Sustainable Development, 7(6), 23–28. http://www.ssrn.com/link/OIDA

Ayandibu, A. O., & J. Houghton. (2017). The role of small and medium scale enterprise in local economic development (LED). Journal of Business and Retail Management Research, 11(2), 133–139. https://www.proquest.com/scholarly-journals/external-forces-affecting-small-busi nesses-south/docview/2028982053/se-2?accountid=14648

Ayyagari, M., V. Maksimovic, & A. Demirgüç-Kunt. (2017, November 14). SME finance. World Bank Policy Research Working Paper No. 8241. SSRN.

Bauweraerts, J., C. Pongelli, S. Sciascia, P. Mazzola, & A. Minichilli. (2021). Transforming entrepreneurial orientation into performance in family SMEs: Are nonfamily CEOs better than family CEOs? Journal of Small Business Management, 1–32. https://doi.org/10.1080/ 00472778.2020.1866763

Beck, T., & A. Demirgüç-kunt. (2008). Access to finance : An unfinished Agenda. The World Bank Economic Review, 22(3), 383–396. https://doi.org/10.1093/wber/lhn021

Brixiová, Z., T. Kangoye, & T. U. Yogo. (2020). Access to finance among small and medium[1]sized enterprises and job creation in Africa. Structural Change and Economic Dynamics, 55 (December): pp 177–189 .

Calabrese, R., M. Degl’Innocenti, & S. Zhou. (2020). Expectations of access to debt finance for SMEs in times of uncertainty. Journal of Small Business Management, 1–28. https://doi.org/ 10.1080/00472778.2020.1756309

Demartini, M. C., & V. Beretta. (2020). Intellectual capital and SMEs’ performance: A structured literature review. Journal of Small Business Management, 58(2), 288–332. https://doi.org/10.1080/00472778.2019.1659680

Donbesuur, F., G. O. A. Ampong, D. Owusu-Yirenkyi, & I. Chu. (2020). Technological innovation, organizational innovation and international performance of SMEs: The moderating role of domestic institutional environment. Technological Forecasting and Social Change, 161(February), 120252. https://doi.org/10.1016/j.techfore.2020.120252

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Lu, Z., J. Wu, & J. Liu. (2020). Bank concentration and SME financing availability: The impact of promotion of financial inclusion in China. International Journal of Bank Marketing, 38(6), 1329–1349. https://doi.org/10.1108/IJBM-01-2020-0007

Mabe, D. M. K., F. N. Mabe, & F. Y. N. Codjoe. (2013). Constraints facing new and existing small and medium-scale enterprises (SMES) in greater accra region of GHANA. International Journal of Economics, Finance and Management, 2(1), 160–168.

Mamman, A., J. Bawole, M. Agbebi, & A. R. Alhassan. (2019). SME policy formulation and implementation in Africa: Unpacking assumptions as opportunity for research direction. Journal of Business Research, 97(April), 304–315. https://doi.org/10.1016/j.jbusres.2018.01. 044

Masiello, B., & F. Izzo. (2019). Interpersonal social networks and internationalization of traditional SMEs. Journal of Small Business Management, 57(S2), 658–691. https://doi.org/ 10.1111/jsbm.12536

Nguyen, B. (2018). Entrepreneurial reinvestment: Local governance, ownership, and financing matter. Academy of Management Proceedings, 2018(1), 13097. https://doi.org/10.5465/ AMBPP.2018.13097abstract

Oppong, M., A. Owiredu, & R. Q. Churchill. (2014). Micro and small scale enterprises development in Ghana. European Journal of Accounting Auditing and Finance Research, 2 (6), 84–97. https://www.eajournals.org/wp-content/uploads/Micro-and-Small-Scale[1]Enterprises-Development-in-Ghana1.pdf

Quartey, P., E. Turkson, J. Y. Abor, & A. M. Iddrisu. (2017). Financing the growth of SMEs in Africa: What are the contraints to SME financing within ECOWAS? Review of Development Finance, 7(1), 18–28. https://doi.org/10.1016/j.rdf.2017.03.001

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Rita, M. R., & A. D. Huruta. (2020). Financing access SME performance: A case study from batik SME in Indonesia. International Journal of Innovation, Creativity and Change,12(12), 203–224.

Seidel-Sterzik, H., S. McLaren, & E. Garnevska. (2018). Effective life cycle management in SMEs: Use of a sector-based approach to overcome barriers. Sustainability (Switzerland), 10 (2), 1–22. https://doi.org/10.3390/su10020359

Senyo, P. K., & E. L. C. Osabutey. (2020). Unearthing antecedents to financial inclusion through FinTech innovations. Technovation, 98, 102155. https://doi.org/10.1016/j.technova tion.2020.102155

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De Montfort University Kazakhstan is Recruiting Lecturers!

Mar 1, 2022 | The Latest

Corporate Entrepreneurship: The Power of Creativity and Passion in a Crisis

Feb 11, 2022 | Ayman Site, Gazette, Small Business Horizon Site

Corporate Entrepreneurship: The Power of Creativity and Passion in a Crisis

Friday, February 11, 2021, by Dr. Alex F. DeNoble, Ph.D

Executive Director, Lavin Entrepreneurship Center San Diego State University

Let’s not pretend that things will change if we keep doing the same things. A crisis can be a real blessing to any person, to any nation. For all crises bring progress.

Albert Einstein

I recently attended the 2022 annual meetings of the United States Association for Small Business and Entrepreneurship (USASBE) in Raleigh North Carolina. A number of years ago, USASBE developed a new program innovation called Learning Journeys. Each year, the conference is held in a different city and the local hosts would organize a number of outings to give conference participants an overview of local entrepreneurship points of interest. This year, I happened to go on the Arts and Entrepreneurship Learning Journey. It was during this tour that we made a stop at the Raleigh Little Theatre. During the visit, our group had the opportunity to hear from Executive Director, Heather Strickland.

Heather explained that the “Little Theatre” movement began in the early 1900’s as a way to broaden the reach of theatre as an artform to all segments of society. Little Theatres then began to crop up in communities throughout the country. The Raleigh Little Theatre began operations in 1936 and has been running ever since. The Raleigh Little Theatre operates through financial support from public and private grants. philanthropy and a cadre of community volunteers involved in all facets of the production process.

During her presentation, Heather discussed the crisis that the group experienced at the onset of the COVID-19 pandemic. As one can imagine, the city ordinance requirements hit the Raleigh Little Theatre pretty hard. They could not hold in person events and hence had no way of continuing their traditional operations. This is when the leadership team unleashed their creativity and passion to imagine a way forward. Their solution: old time radio productions! During the 1940’s and 1950’s, this is how large segments of the population received their entertainment. Families would gather around the radio at predetermined times to listen to stories such as Orson Wells’ epic tome “The War of the Worlds”. A suggestion was made by one of the directors to stage our own version of “old time radio”. It was during the September / October timeframe leading up to Halloween. So the group made a commitment to produce a series of shows based around Edgar Allen Poe’s stories and poems. Using this approach, actors could lend their voice and other production specialists could work remotely. People within the community and even around the country could subscribe on a “pay as you can” basis. Even the education sub-group within the Raleigh Little Theatre community was able to get involved. The bottom line to this story is that the program was so successful that they are now considering radio show productions as a permanent addition to their portfolio of programs.

So why would I share this story in a featured monthly article series devoted to corporate entrepreneurship? In my first article in this series, I underscored the urgency for corporate entrepreneurship, especially in today’s environment. I talked about a punctuated equilibrium situation where an exogenous factor can suddenly impact an ecosystem. For the Raleigh Little Theatre, the impact of COVID-19 and the ensuing social distancing mandates was profound. They simply could not conduct business as usual. But their solution, originally intended as a stop gap measure, was innovative and inspirational. The community embraced it. People from outside of the Raleigh geographic area subscribed to the streaming broadcasts. But best of all, the Raleigh Little Theatre now has a new program to add to their portfolio. Thank you Heather for sharing such an inspirational story of how dreaming and behaving like an entrepreneur can lead to amazing new business opportunities.

#Women2030: Sustainable Career Development

Feb 4, 2022 | The Latest

#Women2030: Sustainable Career Development

Friday, February 4, 2022, by Prof. Analia Pastran and Evangelina Colli

When you are a woman it becomes complex to define the professional development you would like to achieve, since in some way the family, the traditions and customs were preparing us mainly for family assistance tasks. In these times, we are experiencing a global paradigm shift in which the proposal that is promoted with expansive force is to abandon that role for another that puts the core of beliefs in tension.

In this context, being able to see yourself as an economically independent professional woman who can express her own thoughts but at the same time strengthen the foundations of a society by thinking in community, it requires an effort that you must be willing to make, but also of a boldness that is achieved through alliances.

From the observation and experience of the Urban Thinkers Campus (UTCs) in Mexico and Ecuador carried out since 2019 to date, we can point out that when innovating and advancing in issues that concern humanity, such as life in cities, women have been the most tenacious allies. Women face challenges that are replicated regardless of the region, country, culture or belief, and whose solutions are global given that local problems are global.

The Urban Thinkers Campus (UTC) model is an initiative of the UN-Habitat World Urban Campaign, conceived as an open space that includes a series of plenary sessions with debates at the level of international experts, with the aim of bringing together governments, civil society, researchers and personalities from academia, local authorities, professional organizations and youth groups, to propose solutions to urban challenges and achieve green, productive and more inclusive cities.

From this logical framework, we can analyze the real and effective possibilities that women have to access knowledge and power, to apply technology to personal and community development, and to generate alliances during and after these urban thought encounters.

On the other hand, we observe then that the generation and escalation of alliances represent a great challenge to be addressed, since there is a vocation and intention to carry them out but the routines of the organizations and personal objectives make them a difficult and harsh matter to specify and to hold.

Women 2030, a Smartly initiative, comes to propose a scheme of alliances between women to achieve sustainable career development. During the campuses we emphasize the importance of Women Promoting Women, aware that the model of women that we propose is resisted by society and by the women themselves who are already in decision-making positions.

The analysis postulated so far will be under the scrutiny of the social, economic and environmental model that the political systems of the region propose for our democracies.

This series of articles is based on the experience of the Smartly #Women2030 program, and the conclusions published in the UTC online Reports: Vibrant and Inclusive Urban Life First and Second Edition.

*Article written by: Prof. Analia Pastran and Evangelina Colli, Executive Director and Director of Localizing the SDGs of Smartly, Social Entrepreneurship on the SDGs, Partner of the UN Habitat’ World Urban Campaign. #Mujer2030 desarrollo de carrera sostenible

The Entrepreneurial Leopard

Jan 28, 2022 | Gazette

The Entrepreneurial Leopard

Friday, January 28, 2022, by David A Kirby

Professor David A Kirby

Used as a title for a recent essay in this ICSB series (Dana and Salamzadeh, 2022), the idiom “A leopard cannot change its spots” is thousands of years old. It means people and things cannot change their innate nature. But this is exactly what MSMEs will need to do.

Ever since the work of Cantillon (1680-1734 ) wealth creation and the generation of profit has been a central theme of entrepreneurship and in his articulate essay on the topic Friedman (1970) argued that “The Social Responsibility of Business is to increase its profits” – to make as much money as possible. Since then, this doctrine has dominated business thinking and while the entrepreneurial pursuit of wealth has brought about change and improvement, particularly in the world’s developed economies, often it has been at the expense of people and the planet. Accordingly, despite the introduction of such new approaches as ecopreneurship, humane entrepreneurship and social enterprise, entrepreneurship has had little impact on the sustainability challenge and may, indeed, be regarded as having contributed significantly to the plight of the planet. Hence, questions have been raised about its compatibility with sustainability (Gawel, 2012) and both academics and practitioners have been actively seeking new business models to address the challenge (Schaltegger, et. al. 2016).

The problem is that the planet is a system which means it is not possible to address one element without disturbing the other connected elements – solving one problem often creates other problems elsewhere in the system. To address the sustainability challenge, therefore, requires a systemic approach to entrepreneurship that integrates or harmonises the traditional economic, eco, humane and social approaches and brings profit, people and planet into harmony. (Kirby and el-Kaffass, 2021).

While this appears to contradict Friedman’s doctrine what he actually said was that the social responsibility of business is “to make as much money as possible while conforming to the basic rules of society, both those embedded in the law and these embedded in ethical custom”. Rarely, however, has this been articulated or acted upon, yet all of the major world religions address such ethical issues. Indeed in Islam, for example, the Quran explains explicitly how ethical business should be conducted while the Prophet MOHAMED pronounced that “The world is green and verdant and verily God, the exalted, has made you the stewards of it”.

To save the planet MSMEs will need to change. Profit and shareholder satisfaction will no longer be the primary objective. Rather a more blended, systemic approach that harmonises profit, people and planet is needed. The entrepreneurial leopard needs to change its spots!

References

Dana, L-P and Salamzadeh, A., (2022), A leopard never changes its spots! ICSB Entrepreneurship around the globe. 23 January. (news@icsb.org)

Friedman, M., (1970) The Social and Ethical Responsibility of Business is to increase its profits. New York Times. September 13. 122-126

Gawel, A. (2012). Entrepreneurship and sustainability: do they have anything in common? Poznan University of Economics Review. 12 (1) 5-16.

Kirby, D.A. and El-Kaffass, I., (2021), Harmonious Entrepreneurship – a new approach to the challenges of global sustainability. The World Journal of Entrepreneurship, Management and Sustainable Development. .17(4), 846-855. First online 12th July.(https://doi.org/10.1108/WJEMSD-09-2020-0126).

Schaltegger, S., Hansen, E.G., & Ludeke-Freund, F. (2016). Business Models for Sustainability: Origins, Present Research and Future Avenues. Organization & Environment. 29 (1) 3-10.

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