Developing sustainable credit scheme for small scale enterprises; a case study of the Kumasi Metropolis
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Date
1998-02-22
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Abstract
Many Small Scale Enterprises (SSEs) Credit Support Schemes in the developing countries have not proven sustainable in the long run. The implication is that the issue of SSE limited access to credit for working and fixed capital would become a protracted one as the days go by if there is no strategically conceived intervention. This is all the more so as regards Ghana the country in which the study was conducted. Consequently, there has been a strong quest of late for a way out of this financial predicament confronting SSEs.
This research was carried out in the Kumasi metropolis where four credit schemes namely; the Business Assistant Fund (BAF), EMPRETEC Credit line, the Women’s World Banking Credit and Saving Schemes and the SINAPI ABA TRUST (SAT) were examined to determine how sustainable their operations were in providing credit to SSEs. The study identified a range of factors and problems including, ineffective loan administrative and management practices leading to high operational cost, unrealistically low lending interest rates (BAF) and too high interest rates (WWB), inability to increase stock of loanable fund among others as hindering the sustainability of SSEs credit schemes. The study also developed some credit scheme sustainability determinants/criteria which were applied on the selected schemes to determine their level of sustainability.
The sustainability determinants include;
• High operational effectiveness — earned income of schemes should be more than operational cost.
• Positive and market price lending interest rates.
• High loan recovery rates; minimum default and;
• Regular inflow of loanable fund
The study found out that the Operational Effectiveness of schemes was low as were Profit margins. Some schemes were in fact making losses. On lending interest rates were generally low though some schemes were charging competitive rates (quite high). The loan recovery rates were very high for all the schemes (72 - 96 percent) but the high operational costs tend to deplete their profit levels. This would lead to difficulties in ensuring regular inflow of funds to re-capitalize schemes.
The result is that the examined credit schemes were not likely to survive deep into the future if their present modes of operations — (the status scenario) continue. The way forward as recommended by the study is to re-structure these schemes to ensure their sustained credit delivery to small businesses. The preferred alternative strategy by which this is to be achieved is through the Integrated Credit and Savings Schemes (ICSS) which emphasizes group, loans, savings mobilization, training of credit beneficiaries as well as building the capacity of credit institutions among others to operate more effectively and efficiently.
The study concluded by providing policy related and other specific recommendations including for need for public education for clients to change their perceptions about loan (loans are not free but had to be repaid). Also the government’s attention was drawn to the need to control inflation and create a conductive environment that would facilitate the sustainable operation of SSE credit schemes. In this way the acute problem of limited finance confronting SSEs would be alleviated.
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A thesis submitted to the Board of Postgraduate Studies, Kwame Nkrumah University of Science and Technology, Kumasi, in partial fulfilment of the requirement for the award of the Degree of Master of Science in Development Planning and Management, 1998