LITERATURE REVIEW

Introduction
At this point, empirical views are going to be provided on how SME’s get access to credit
facilities to aid carry out their work. Also, this chapter seeks to enumerate the processes SME’s
go through in acquiring credit from institutions, the demand and supply levels of the credit and
its determinants. This chapter also reviews the challenges of the credit institutions.
Definition of access to credit
Access to credit is a practical necessity in today’s economy. Much more than a means to make
purchases, credit enables individuals and businesses to meet everyday needs. It’s a sad reality
that many people and businesses do not realize the importance of credit until their access
becomes limited. Access to credit can be defined in different dimensions. Access to credit can
be defined as the ‘absence of price and non-price barriers in the use of financial services’
(World Bank, 2008). It can also be defined as the availability of financial aid or support at cost.
Therefore, it makes it very important to differentiate between usage of credit and access to
credit. Usage of credit is how businesses and individuals customize the credit given to them but
access to credit is provision of credit to businesses or SME’s.
Theoretical framework
Theoreticians have long reasoned that financial market frictions can be the critical mechanism
for generating persistent income inequality or poverty traps. Without inclusive financial
systems, small enterprises need to rely on their personal wealth or internal resources to invest
in projects or take advantage of promising growth opportunities.
Determinants of credit access
Credit access is influenced by several factors. Below are some of factors that influence credit
access among SME’s.
1. Interest charged
Interest rates as a cost of the loan have a significant effect on a company’s growth plans.
They do not only affect payments but also have an impact on an enterprise funding
(Ogolla, 2013). High interest rates reduce business earnings which ultimately hinders the
business capacity to grow. High interest rates also affect the business cash flow. This in
turn reduces its disposable income hence affecting ability to pay its other creditors.
2. Collateral security
Collateral is property or other assets that a borrower offers a lender to secure a loan
(Investopedia, 2018). The day all the loan is paid off by the borrower is the day the
assets will no longer be collateral, and the lender won’t have any right to the assets.
 Most SME’s do not have tangible assets to that they can use to secure their loans hence
their borrowing is limited.
3. Number of financial institutions
The number of financial institutions offering credit in an economy has an impact on the
overall growth of an economy. As observed by Schoof (2006) an adequate number of
financial institutions to offering credit services to SME’s would constrain development
of the industries. When number of small scale traders is many whilst the financial
institutions with the services customized to them are few (demand exceeds supply), the
price of the loan will be high therefore not affordable and hence low uptake by SME’s.

Empirical review of the literature

Kira and He (2012) examined the impact of a firm’s characteristics on accessing finance by
SME’s in Tanzania. Nevertheless, this can be linked to Ghana’s SME’s industries. However, this
SME’s in Ghana do not have collateral for securing loans from the creditors and makes it very
difficult to run the firm.
Avortri, Bunyaminu and Wereko (2013) examined factors that affect SME’s in Ghana. Stratified
sampling technique was adopted in the administration of questionnaires based on
consumables, wares and cosmetics, motorcar spare parts, constructional material and
stationeries. Regression analysis and descriptive statistics were used to establish an
interrelationship between the dependent variables and other independent variables. Chi square
test was used and revealed that there was a positive linear relationship between the number of
financial institutions and ease of access to credit. Essayed (2005) noted that require of loan by
SME’s are different from those of large businesses.
Zarook, Rahman and Khanam, (2013) and Slavec & Prodan, (2012) in their study discovered a
significant positive correlation with access to bank loans. This study concurred with Ahmed &
Hamid (2011) study where the top managers’s level of education as a measure of the quality of
human capital and findings showed that there was a significant positive correlation between
education level (literacy level) and the probability of accessing bank finance. There is no
standard framework in all this literature review, variables changes from one to another.
Summary of the literature
Inadequate information and knowledge have been noted to have led to increase in the problem
of accessing finance for SME’s. This can also be as a result of the terms of interest charged,
disclosures required for assets and debts, misuse of credit gotten and general unpreparedness
when seeking for loans. Cole et al., (2009) in India and Indonesia found that the chief
determinant of demand for financial facilities was financial literacy. In most sectors of the
Ghanaian economy, SME’s are not well built access loans. They have no assets.
Cost of credit determined by the interest rate are charged by lending institutions has of recent
been fluctuating extensively because of economic problems. Interest rate or the cost of credit
has been high and this has kept small enterprises out of the banks where they have preferred
to use their internally generated funds.
Finally, this review has shown that the problem of access of finance is not solely from the
businesses but also the lending businesses. Where the demand exceeds the supply of loans, it
creates problems. Also, there is no innovation amongst the SME’s and this render them as not
fit in securing loans.

AMIHERE ACKAH KWADWO

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