Skip to main content
SpringerLink
Log in

Evaluation of Lending Methodologies Used by Ghanaian Banks to Extend Credit to SMEs

  • Chapter
  • First Online:
Financial Sector Development in Ghana

  • 123 Accesses

Abstract

Lending methodologies play a pivotal role in promoting credit allocation to small businesses by reducing the perceived problem of asymmetric information associated with small business financing. This chapter assessed the lending methodologies used by Ghanaian banks in their lending activities emphasizing on SME firms. Quantitative data were collected from 848 SMEs based in Accra using a survey questionnaire with a five-point Likert. Factor analysis and comparative one-sample t-test were used to examine how the Ghanaian banks applied lending methodologies in extending credit to SMEs. The analysis identified two domains of the lending methodologies, namely, Collateral and Banking Records (CBRs) and Personal and Business Characteristics (PBCs). The findings revealed that the provision of collateral and information on the business’s policy, philosophy and performance were outstanding requirements for acquiring credit facilities. Overall, the CBR was found to be the dominant lending methodology employed by Ghanaian banks in lending to SMEs. It is concluded that effective policies, infrastructural support and improved lending methodologies are beneficial to banks, SME owners and all stakeholders in the Ghanaian banking industry in the long term.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 139.00
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 179.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD 179.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

References

  • Adeyeye, P. O., Azeez, B. A., & Aluko, O. A. (2016). Determinants of small and medium scale enterprises financing by the banking sector in Nigeria: A macroeconomic perspective. Investment Management and Financial Innovations, 13, 170–175. https://doi.org/10.21511/imfi.13(1-1).2016.04

  • Aga, G. A., & Reilly, B. (2011). Access to credit and informality among micro and small enterprises in Ethiopia. International Review of Applied Economics, 25, 313–329.

    Article  Google Scholar 

  • Allwood, C. M. (2012). The distinction between qualitative and quantitative research methods is problematic. Quality & Quantity. International Journal of Methodology, 46(5), 1417–1429. https://doi.org/10.1007/s11135-011-9455-8

  • Altman, E. I., Esentato, M., & Sabato, G. (2018). Assessing the credit worthiness of Italian SMEs and mini-bond issuers. Global Finance Journal, 43. https://doi.org/10.1016/j.gfj.2018.09.003

  • Altman, D. G., & Royston, P. (2006). The cost of dichotomising continuous variables. BMJ, 332(7549). https://doi.org/10.1136/bmj.332.7549.1080

  • Amorim. L. D. A. F., Fiaccone, R. L., Santos, C. A. S. T., dos Santos, T. N., de Moraes, L. T. L. P., Oliveira, N. F., Barbosa, S. O., dos Santos, D. N., dos Santos, L. M., Matos, S. M. A., & Barreto, M. L. (2010). Structural equation modeling in epidemiology. Cad. SaĂşde PĂşblica, 26(12): 2251–2262, dez.

    Google Scholar 

  • Angori, G., Aristei, D., & Gallo, M. (2019). Lending technologies, banking relationships, and firms’ access to credit in Italy: The role of firm size. Applied Economics, 51(58), 6139–6170. https://doi.org/10.1080/00036846.2019.1613503

    Article  Google Scholar 

  • Asiamah, N., Mensah, H. K., & Danquah, E. (2018). An assessment of the emotional intelligence of health workers: A scale validation approach. Journal of Global Responsibility, 9, 1–24.

    Article  Google Scholar 

  • Asiamah, N., Mensah, H. K., & Oteng-Abayie, E. F. (2017). General, target and accessible population: Demystifying the concepts for effective sampling. The Qualitative Report, 22(1), 1–14.

    Google Scholar 

  • Bank of Ghana. (2019). Financial stability reports.

    Google Scholar 

  • Bartoli, F., Ferri, G., Murro, P., & Rotondi, Z. (2013). SME financing and the choice of lending technology in Italy: Complementarity or substitutability? Journal of Banking & Finance, 37(12), 5476–5485.

    Article  Google Scholar 

  • Beck, T., Degryse, H., De Haas, R., & van Horen, N. (2018). When arm’s length is too far: Relationship banking over the credit cycle. Journal of Financial Economics, 127(1), 174–196. https://doi.org/10.1016/j.jfineco.2017.11.007

    Article  Google Scholar 

  • Berger, A. N., & Black, L. K. (2011). Bank size, lending technologies, and small business finance. Journal of Banking & Finance, 35(3), 724–735. https://doi.org/10.1016/j.jbankfin.2010.09.004

    Article  Google Scholar 

  • Berger, A. N., & Udell, G. (2006). A more complete conceptual framework for SME finance. Banking and Finance, 30(11), 2945–2966.

    Article  Google Scholar 

  • Carbo-Valverde, S., Rodriguez-Fernandez, F., & Udell, G. F. (2009). Bank market power and SME financing constraints. Review of Finance, 13(2), 309–340.

    Article  Google Scholar 

  • Chaibi, H., & Ftiti, Z. (2015). Credit risk determinants: Evidence from a cross-country study. Research in International Business and Finance, 33, 1–16.

    Article  Google Scholar 

  • Comeig, I., Fernández-Blanco, M. O., & RamĂ­rez, F. (2015). Information acquisition in SME’s relationship lending and the cost of loans. Journal of Business Research, 68(7), 1650–1652. https://doi.org/10.1016/J.JBUSRES.2015.02.01

    Article  Google Scholar 

  • Cowling, M., Liu, W., & Ledger, A. (2012). Small business financing in the UK before and during the current financial crisis. International Small Business Journal, 30(7), 778–800.

    Article  Google Scholar 

  • Creswell, J. W. (2003). Research design: Qualitative, quantitative, and mixed methods approaches (2nd ed.). SAGE Publications.

    Google Scholar 

  • Degryse, H., Matthews, K., & Zhao, T. (2017). Relationship banking and regional SME financing: The case of Wales. International Journal of Banking, Accounting and Finance, 8(1), 93–118.

    Article  Google Scholar 

  • De Haas, R., & Van Horen, N. (2013). Running for the exit? International bank lending during a financial crisis. The Review of Financial Studies, 26(1), 244–285. https://doi.org/10.1093/rfs/hhs113

  • Dheeraj, V. (2017). Credit analysis: What credit analyst look for? 5Cs credit analysis. Investment and Banking Training. JP Morgan Equity, IIT Delhi.

    Google Scholar 

  • Duarte, F. D., Gama, A. P., & Esperanca, J. P. (2017). Collateral-based on SME lending: The role of business collateral and personal collateral in less-developed countries. Research in International Business and Finance, 39, 406–422. https://doi.org/10.1016/j.ribaf.2016.07.005

    Article  Google Scholar 

  • Essel, B. K. C., Adams, F., & Amankwah, K. (2019). Effect of entrepreneur, firm, and institutional characteristics on small-scale firm performance in Ghana. Journal of Global Entrepreneurship Research, 9(1), 1–20.

    Article  Google Scholar 

  • Ferri, G., Murro, P., Peruzzi, V., & Rotondi, Z. (2019). Bank lending technologies and credit availability in Europe: What can we learn from the crisis? Journal of International Money Finance, 95, 128–148.

    Article  Google Scholar 

  • Garson, G. D. (2012). Testing statistical assumptions. Statistical Associates Publishing.

    Google Scholar 

  • Gehrig, T., & Stenbacka, R. (2007). Information sharing and lending market competition with switching costs and poaching. European Economic Review, 51(1), 77–99.

    Article  Google Scholar 

  • Hasanaj, P., & Kuqi, B. (2019). Analysis of financial statements: The importance of financial indicators in Enterprise. Humanities and Social Science Research, 2(2) 2019. ISSN 2576-3024; E-ISSN 2576-3032.

    Google Scholar 

  • Hauswald, R., & Marquez, R. (2006). Competition and strategic information acquisition in credit markets. Review of Financial Studies, 9(3), 967–1000. https://doi.org/10.1093/rfs/hhj021

    Article  Google Scholar 

  • Kelava, A. (2016). A review of confirmatory factor analysis for applied research (2nd ed.). Journal of Educational and Behavioral Statistics, 41(4), 443–447. https://doi.org/10.3102/1076998616631747

  • Kessey, K. D. (2015). Assessing credit risk management practices in the banking industry of Ghana: Processes and challenges. Global Journal of Management and Business Research, 15, 1–10.

    Google Scholar 

  • Li, Y., Lu, R., & Srinivasan, A. (2019). Relationship bank behavior during borrower distress. Journal of Financial and Quantitative Analysis, 54(3), 1231–1262. https://doi.org/10.1017/S0022109018001084

    Article  Google Scholar 

  • Manurung, E. (2019). A new approach of bank credit assessment for SMES. Academy of Accounting and Financial Studies Journal, 23, 22–35.

    Google Scholar 

  • Mayo, H. (2012). Principles of finance (pp. 251–276). UET Press.

    Google Scholar 

  • Mills, K., & McCarthy, B. (2014). The state of small business lending: Credit access during the recovery and how technology may change the game (Harvard Business School General Management Unit Working Paper [15-004]).

    Google Scholar 

  • Na-Nan, K., & Wongsuwan, N. (2020). Development and validation of perceived workplace support for small and medium-sized enterprise employees. International Journal of Organisational Analysis, 28(1), 243–259. https://doi.org/10.1108/IJOA-12-2018-1608

  • Palmgren, P., Brodin, U., Nilsson, G., Watson, R., & Stenfors, T. (2018). Investigating psychometric properties and dimensional structure of an educational environment measure (DREEM) using Mokken scale analysis—A pragmatic approach. BMC Medical Education, 18, 235. https://doi.org/10.1186/s12909-018-1334-8

    Article  Google Scholar 

  • Petersen, M. A., & Rajan, R. G. (1994). The benefits of lending relationships: Evidence from small business data. The Journal of Finance, 49(1), 3–37.

    Article  Google Scholar 

  • Petersen, M. A., & Rajan, R. G. (1995). The effect of credit market competition on lending relationship. Quarterly Journal of Economics, 110, 407–443.

    Google Scholar 

  • Poku, K., & Frimpong, F.A. (2009). The assessment of the prospects of venture capital finance in Ghana: The views and perception of some selected SMEs in Ghana. Ninth Annual IBER and TLC Conference Proceedings 2009, Las Vegas, NV, USA.

    Google Scholar 

  • Price Waterhouse Coopers (PwC). (2019). Ghana banking surveys.

    Google Scholar 

  • Quartey, P., Turkson, E., Abor, J. Y., & Iddrisua, A. M. (2017). Financing the growth of SMEs in Africa: What are the constraints to SME financing within ECOWAS? Review of Development Finance, 7, 18–28.

    Article  Google Scholar 

  • Ramalho, R., Jiang, N., Koltko, O., Chávez, É., Koch-Saldarriaga, K. A., & Quesada Gamez, M. A. (2018). Improving access to finance for SMES: Opportunities through credit reporting, secured lending, and insolvency practices (No. 129283, pp. 1–63). The World Bank.

    Google Scholar 

  • Sette, E., & Gobbi, G. (2015). Relationship lending during a financial crisis. Journal of the European Economic Association, 13(3), 453–481.

    Article  Google Scholar 

  • Slocum-Gori, S. L., & Zumbo, B. D. (2011). Assessing the unidimensionality of psychological scales: Using multiple criteria from factor analysis. Social Indicators Research, 102(3), 443–461.

    Article  Google Scholar 

  • Soares, J. O., Pina, J., Ribeiro, M., & Lopes, M. C. (2011). Quantitative vs. qualitative criteria for credit risk assessment. Frontiers in Finance and Economics, 8(1), 69–87. https://doi.org/10.2139/ssrn.2012443

  • Tarka, P. (2018). An overview of structural equation modeling: Its beginnings, historical development, usefulness and controversies in the social sciences. Quality & Quantity, 52(1), 313–354. https://doi.org/10.1007/s11135-017-0469-8

  • Uchida, H. (2011). What do banks evaluate when they screen borrowers? Soft information, hard information, and collateral. Journal of Financial Services Research, 40(1), 29–48. https://doi.org/10.1007/s10693-010-0100-9

    Article  Google Scholar 

  • Win, S. (2018). What are the possible future research directions for bank’s credit risk assessment research? A systematic review of literature. International Economics and Economic Policy, 15(4), 743–759. https://doi.org/10.1007/s10368-018-0412-z

    Article  Google Scholar 

  • World Bank. (2019). Disruptive technologies in the credit information sharing industry: Developments and implications. Fintec Note No. 3. https://doi.org/10.1596/31714

  • Yong, S., Kwenin, C., & Ingabo. C. (2021). Financial constraints to entrepreneurship in Ghana. A report developed as part of the Global Inclusive Growth Partnership (GIGP), in collaboration Aspen Institute and the Mastercard Center for Inclusive Growth.

    Google Scholar 

  • Yoshino, N., & Taghizadeh-Hesary, F. (2018). A comprehensive method for the credit risk assessment of small and medium-sized enterprises based on Asian data (No. 907). ADBI Working Paper Series.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. School of Accounting, Economics and Finance, University of KwaZulu-Natal, KwaZulu-Natal, South Africa

    Kofi Nyarko Gyimah & Paul-Francois Muzindutsi

  2. Department of Accounting Science, Walter Sisulu University, Mthatha, Eastern Cape, South Africa

    Joseph Olorunfemi Akande

Authors
  1. Kofi Nyarko Gyimah
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Joseph Olorunfemi Akande
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Paul-Francois Muzindutsi
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Paul-Francois Muzindutsi .

Editor information

Editors and Affiliations

  1. Department of Applied Economics, University of Cape Coast, Cape Coast, Ghana

    James Atta Peprah

  2. College of Law and Management Studies, University of KwaZulu-Natal, Pietermaritzburg, South Africa

    Evelyn Derera

  3. College of Law and Management Studies, University of KwaZulu-Natal, Durban, South Africa

    Harold Ngalawa

  4. Essex Business School, University of Essex, Colchester, UK

    Thankom Arun

Rights and permissions

Reprints and permissions

Copyright information

© 2023 The Author(s), under exclusive license to Springer Nature Switzerland AG

About this chapter

Check for updates. Verify currency and authenticity via CrossMark

Cite this chapter

Gyimah, K.N., Akande, J.O., Muzindutsi, PF. (2023). Evaluation of Lending Methodologies Used by Ghanaian Banks to Extend Credit to SMEs. In: Peprah, J.A., Derera, E., Ngalawa, H., Arun, T. (eds) Financial Sector Development in Ghana. Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-09345-6_11

Download citation

  • DOI: https://doi.org/10.1007/978-3-031-09345-6_11

  • Published:

  • Publisher Name: Palgrave Macmillan, Cham

  • Print ISBN: 978-3-031-09344-9

  • Online ISBN: 978-3-031-09345-6

  • eBook Packages: Economics and FinanceEconomics and Finance (R0)

Publish with us

Policies and ethics

Search

Navigation