Why small businesses fail to get loans from banks: Insights from Ghana and Global Solutions

By Godfrey AMEKUDOE

Micro, small, and medium-sized enterprises (MSMEs) make up more than 90% of businesses in Ghana and provide over 70% of jobs, making them central to economic growth and poverty reduction.

Yet, these enterprises face a major barrier that holds back their potential, access to finance. Globally, the International Finance Corporation (IFC) estimates that the SME finance gap exceeds $5.7 trillion, growing to $8 trillion when informal businesses are included. Ghana’s case reflects many of these global challenges but also highlights unique opportunities for reform and growth.

Barriers Facing Ghanaian SMEs

Collateral Requirements and Lack of Assets

Collateral remains the greatest obstacle to accessing credit. Ghanaian banks have traditionally required landed property or high-value assets most of which SMEs, particularly those led by women, youth, and rural entrepreneurs, do not possess.

Although reforms allowing movable collateral such as business equipment, inventory, or vehicles have enabled the registration of assets worth billions and unlocked thousands of SME loans, the potential remains underutilized due to limited awareness and access.

High Interest Rates and Short Loan Tenures

Even when approved, loans are often prohibitively expensive. Rates can reach as high as 30%, while loan terms are typically short. For businesses needing patient, long-term capital to fund expansion or purchase machinery, these financial conditions act as stumbling blocks rather than growth enablers.

Rigorous Credit Evaluations and Track Record Demands

Banks prefer established businesses with years of operational history and strong financial documentation. Many SMEs, especially startups or informal firms, lack this track record, cutting them off from formal credit access.

Financial Literacy and Weak Management Practices

A large proportion of SMEs lack the financial skills needed to manage loans responsibly. Weak record-keeping, mixing personal with business finances, and diversion of loan funds to non-business expenses harm repayment credibility. This, in turn, makes banks tighten credit conditions further, perpetuating a cycle of exclusion.

Informality and Lack of Documentation

More than half of Ghanaian SMEs operate informally without registration, verifiable revenues, or tax records. This leaves them ineligible for most bank loans, forcing reliance on personal savings or informal lenders.

The Impact on Ghana’s SMEs

Only about half of SMEs in Ghana have ever accessed bank credit, and fewer than a quarter of those loans extend beyond three years. With such limited access to affordable capital, many businesses remain small and underdeveloped.

Worse still, up to 70% of new SMEs close within three years due to financing challenges. This limits job creation, innovation, and Ghana’s overall industrial transformation.

IFC and Global Solutions: Expanding Access to SME Finance

The IFC and its global programs illustrate pathways Ghana can adopt to close its SME finance gap. Their solutions address structural barriers, reduce risk for banks, and improve SMEs’ capacity to access and manage credit.

Collateral Reform and Movable Assets

Through the Bank of Ghana, IFC has driven reforms to establish movable collateral registries. Now, SMEs can pledge equipment, machinery, livestock, or vehicles as collateral beyond traditional real estate unlocking loans worth over $53 billion globally and enabling more than 324,000 new loans in Ghana. Greater awareness campaigns can help more entrepreneurs benefit from this breakthrough.

Risk-Sharing Facilities and Credit Guarantees

SME lending is seen as risky due to limited repayment histories. IFC addresses this by sharing risk: guarantee facilities cover up to 50% of banks’ SME loan portfolios. Partnerships like IFC’s work with Access Bank specifically target women entrepreneurs, green businesses, and farmers. Internationally, public credit guarantee schemes in OECD and Asian countries have allowed banks to lend to startups and small firms that lack traditional collateral.

Digital Finance and Fintech Partnerships

Technology is reshaping SME finance by lowering costs and widening access. IFC increasingly works with fintech companies to enable:

• Cash-flow based lending, which uses transaction data and mobile money activity to assess creditworthiness.
• Embedded finance, where SMEs access instant credit within supplier and buyer platforms.
• Automated loan monitoring, reducing misuse of funds and building lender confidence. Global examples from Kenya to India show digital lending can reach millions of businesses that banks historically excluded.

Financial Literacy and Advisory Support

To reduce default rates and ensure effective credit use, IFC pairs financing with advisory programs. These improve accounting, record-keeping, and financial decision-making among SMEs. Germany has long demonstrated this model, where consultancy support is integrated with loan disbursement.

The result is improved repayment, stronger business growth, and healthier lender-SME relationships.

Alternative Financing Mechanisms

Not every SME is loan-ready, so IFC promotes alternatives such as leasing (for equipment), factoring (turning invoices into cash flow), and equity financing for startups. These tools expand options for businesses at different stages, reducing overdependence on traditional bank loans.

Global Lessons for Ghana

United Kingdom: Relationship lending and advanced credit scoring help banks assess businesses based on performance and plans, not just collateral.

Germany: Loans are combined with advisory services to ensure SMEs invest in productive growth.

United States: Fintech collaborations enable fast digital lending based on cash flow instead of collateral.

OECD Countries: Public credit guarantee schemes spread risk between banks and governments, expanding lending to women, youth, and startups.

Asia: Countries like South Korea and Singapore use targeted SME funds to drive industrialization and global competitiveness.

Charting Ghana’s Path Forward

To overcome financing challenges and empower its SME sector, Ghana must adopt a comprehensive approach:

1. Promote the use of movable asset collateral through education and easier access.
2. Expand risk-sharing facilities and guarantee schemes, with greater government participation.
3. Partner with fintech firms to scale digital lending and cash-flow based credit models.
4. Invest in financial literacy programs to build SMEs’ managerial capacity and loan discipline.
5. Develop sector-specific loan products tailored to agriculture, green industries, and seasonal businesses.
6. Encourage alternative forms of financing like leasing, factoring, and venture capital so SMEs can access diverse funding paths.

Conclusion

Ghana’s SMEs are the bedrock of its economy but remain stifled by financial barriers. The lessons from IFC’s local interventions and international case studies are clear, with regulatory reforms, digital innovation, financial education, and risk-sharing partnerships, banks and SMEs can build mutual trust.

By treating small businesses as growth partners not just credit risks Ghana can unleash a new era of inclusive growth, job creation, and industrial transformation.

The post Why small businesses fail to get loans from banks: Insights from Ghana and Global Solutions appeared first on The Business & Financial Times.

Read Full Story