• Requirements of Access to Finance

  • Business Registration

  • Financial Records

  • Repayment Capacity

  • Securities

• Checklist: What Finance do I need?

• Loan Application Procedures

• Guarantees

• Categories of Financial Institutions and
  Market Segments for Loans

• Networks of Financial Institutions

 
Requirements of Access to Finance  [top]

Although the banks emphasize their interest in lending to small enterprises, they highlight the problems of it to the same extent. The crucial aspects of loan appraisals – financial records, demonstration of repayment capacity and securities – are considered to be more problematic with small enterprises than with larger ones. Many bankers say that MSEs often simply do not have it – no accounts, no formal business plan and no titles for their securities.

Business registration  [top]
Business Registration is a prerequisite at all banks for access to credit for businesses. The business registration itself is undertaken at the Registrar General’s Department. All enterprises must also register directly with the Internal Revenue Service and the Value Added Tax (VAT) Secretariat for purposes of statutory tax e.g. taxes, rebates, and exemptions thereof. Finally, enterprises must register and obtain an environmental permit from the Environmental Protection Agency (EPA).

A resolution of the company’s board of directors must be handed in by Ltd.s to prove that all directors agreed to take up a loan.

Financial records  [top]
The first constraint for MSEs in access to credit is the banks’ requirement of financial records on the past performance of the enterprise. Many MSEs have difficulties in providing these.

The constraint put on MSEs’ access to finance by the level of requirements of financial records varies between the different financial institutions. Those who target mainly micro enterprises do generally not require balance sheets or profit and loss statements. However, they are nevertheless interested in the past performance of the applicant’s enterprise. To build an idea on it, they often rely on simple sales records.

Other institutions, as for example ADB and GCB, require from the loan applicant to fill their financial data into a form designed by the bank. The task is less complex for the MSE than producing independently its own records. However, they still need to have some form of record keeping in place in order to be able to fill in the forms correctly.

For the lack of proper accounts, many banks use bank statements as a proxy to analyse the financial track record of a small enterprise. For the enterprise this means that its access to credit is constrained by having an active and positive banking track record or not.

The strictest form of financial records are audited accounts. In Ghana all enterprises registered as limited liability companies (Ltd.) are required by law to keep audited accounts. Therefore, the banks request from Ltd.s – and a large part of MSEs in Ghana are Ltd.s – to present audited accounts with their loan applications. The banks’ experience is that the problem of most Ltd.s is not so much to present audited accounts, but the quality of the accounts.

This is also true for other forms of records: The main constraint for MSEs is to convince the bank of the reliability of the data. The banks’ trust in all forms of records is low. They check sales records and the data filled in their forms on consistency and whether they correspond with other information given by the loan applicant. When banks analyse bank statements they also inquire whether the applicant has debts at other banks. For audited accounts it plays a major role whether the bank considers the auditor who did the accounts as a reliable source or not.

One source of mistrust in financial records is the experience that MSEs often understate their sales and profits for tax purposes. Although the banks show a certain degree of understanding to this, the access to credit is seriously hampered by this form of record keeping. An enterprise that has the declared objective to grow will need to overcome this practice as it is a substantial obstacle for a smooth banking relationship.

Demonstration of Repayment Capacity  [top]
The second constraint for MSEs in access to credit is the banks’ scepticisms of their repayment capacity. Generally, MSEs have difficulties in convincing the banks on this issue.

The core of the repayment capacity is the cash flow of the enterprise after receiving the loan. If the loan serves to finance one specific transaction only, it is fairly easy to establish the cash flow. The only requirement in this case is that the applicant brings the contract of the order for the transaction. The bank then cross-checks directly with the issuer of the order. 

It becomes more complicated if an MSE applies for working capital or for a fixed investment. The returns are more difficult to determine and the analysis of the bank becomes more complex. Consequently, MSEs have more to prove.

The main factors considered by the banks are the personality of the owner or manager of the enterprise, the marketability of its products, the reliability of its supplies and the profit margin.

These factors are not relevant for access to finance only, but they are the basis for every sound enterprise. If the business model of an enterprise is not viable, it is more than justified that it does not get a credit. However, access to finance is here not discussed as a problem of unsound business models, but as being constrained by the inability of MSEs to communicate with banks on their business model.

The requirements of the banks how to demonstrate repayment capacity vary and thus challenge MSEs’ ability to communicate to a different degree.

The strictest form is a formal written business plan including cash flow projections for the future. Not many MSEs are able to meet this requirement. And many banks complain that MSEs submit business plans that look very sophisticated on paper only, as they have been developed by consultants on behalf of the MSE. But the MSE itself is unable to understand or implement the plan.

A more flexible way of analysing the repayment capacity is to conduct an interview with the owner/manager of the MSE often combined with a site visit in order to understand his business model. This approach is mainly used by those banks serving the smaller segment of the MSEs.

Securities  [top]
The third constraint for MSEs in access to credit are the security requirements of the banks. MSEs often do not have assets that qualify as security for a loan, or if they have the assets they do not have proper titles.

Again, the banks’ requirements are different according to different market segments. The institutions specialised in microfinance have group facilities that rely on peer pressure without any other form of collateral. But also the participation in a group poses certain constraints on an enterprise.

 
Checklist: What Finance do I need?  [top]

With regards to finance, you should give attention to questions such as:

• What is my total capital requirement?

• Do I need a loan? What will be my equity contribution? How much is my additional loan requirement?

• Where do I get a loan fund from? What are the loan conditions?

• What type of security (collateral) am I required to present to lending institutions such as to micro finance institutions and other conventional banks?

• What are the loan terms and conditions, grace period, interest rate, repayment schedule, etc.?

• What is the project feasibility? Is my business feasible enough to generate profit and pay loans back within the specified loan term?

Loan Application Procedures  [top]

Most of the loan applicants must have been a customer of the bank for at least 6 months.

• He must have a good record on his bank account.

• His history of debt repayments must be clear and without problems

• Most of the banks provide credit appraisal forms to their clients. For each clientele segment - salaried workers, individual borrowers, institutional borrowers (small enterprises, companies), group loans.

• The loan application form is completed by

  • a Guarantee form signed by a guarantor (name of borrower and guarantor with full address, security offered by salary, land, buildin, vehicle, stock or working capital with indication of actual value)

  • a Client Performance Report (previous loan facilities granted, last loan repayment performance, recommendation for repat loan).

The loan application form must be filled based on the fore-mentioned financial record documents.

 
Guarantees  [top]
Understand the rationale of a bank: First, the bank assess if they want to give a credit (will it be repaid). Only then, they start looking for securities. That implies the business owner has to make up his mind what he has to offer – do not wait to be told the requirements.

Different categories of securities:

• Supply contract / receivables: Can be very simple and is often the best solution, but only for transaction based investments. Works only if the supplier or buyer is willing to enter into the credit relation with the bank.

• Group schemes: Very specific solution…Applied by ADB, Atwima, First Allied, Sinapi.

• Personal Guarantor: The FI wants to understand (i) what is the relation of the guarantor to the borrower and why does he accept to be his guarantor, (ii) the “net worth” of the guarantor. The FIs prefer guarantors who have an account with them. For most FIs only an exception.

• Equipment: E.g. a car or machines – FIs ask for insurance of the equipment used as security. The more moveable, the more reluctant is the FI.

• Mortgage: For large loans only and accepted only if the property is easily sellable. Applicants need to have clear property rights / titles.

• Near cash securities: Highest preference of FIs. But if the applicant has enough near cash resources he might better not take a credit.

Categories of Financial Institutions and
Market Segments of Loans  [top]

There are different types of Financial Instiutions with differents categories
of clientele and differents types of credit offers.

• Commercial and Merchant Banks

• Rural Banks

• Micro-Finance Institutions

Finally, the loan applicant must

• contact personally the financial institutions in his location;

• ask for the actual interest rates and loan conditions (note, that loan conditions, especially interest rates can change from day to day);

• ask for the loan application form and other forms;

• agree upon the loan application procedure.

The following list of market segments for loans gives you an idea on the possible range of loans.

Networks of Financial Institutions  [top]

Ghana Association of Bankers.
Is the Network of about 20 Ghanaian commercial banks like Amalgamated Bank Limited, Barclays Bank of Ghana Limited, Ghana Commercial Bank Limited, Merchant Bank Limited and others.

ARB APEX Bank Limited. Network of Rural Banks http://arbapexbank.com/ ARB APEX is the Ghanaian Network of 121 Rural Banks to provide and exchange information on rural banking services in Ghana;  Promote and strengthen cordial relationship among the RCBs; Help contribute to the development of agriculture, commerce, industry and the general well being of rural areas in Ghana;  Undertake the education of rural communities on the work of the RCBs;  Ensure that RCBs are generally seen as instruments of national development in the rural areas.

GHAMFIN Ghana Micro Finance Institutions Network
Mission Statement: To co-ordinate and support the activities of MFIs with a view to promoting the development of an efficient and sustainable MFI industry in Ghana. www.ghamfin.org
Members are about 120 Financial NGOs like Action Aid Ghana, Freedom for Hunger, Catholic Relief Services, about 30 BDS providers like Empretec and Consultants, about 2o Rural banks, 10 Savings and Loan Institutions and 5 Susu.

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Business Development Services (BDS) - Ghana