Collateral Requirement and Access to Loans by Small- And Medium-Sized Enterprises in Ghana: The Effects of Information Asymmetry and Moral Hazard

Abstract

Small and medium-sized enterprises (SMEs) play critical roles in a country's socio-economic growth by providing business opportunities, creating jobs, and reducing poverty. However, these SMEs face specific challenges in obtaining funds from banks and other financial institutions worldwide, especially in developing countries. The majority of empirical studies on SME financing constraints are conducted in developed economies with limited applicability to developing countries such as Ghana, which have a different level of economic and financial growth. The primary aim of this research was to look at how bank collateral requirements affect SMEs' access to loans in Ghana. This is because in developing countries, banks are the primary source of external funding for SMEs. The research is situated on credit rationing, financing constraint, resource-based and adverse selection theories. The conceptual structure of the study was built on academic works on SME financing. The study looked at and quantified the impact of critical factors to the firm and owner (collateral requirement, information asymmetry and moral hazard) on SMEs' access to bank loans from both SMEs‘ and banks‘ perspectives. The thesis uses a quantitative method approach to examine SME financing constraints using primary data obtained in the form of cross-sectional data from a field survey of SME owners/managers in Ghana. The study's target population was unknown number of SMEs in Accra and Tema which had applied for bank loans. Using purposive sampling, a sample size of 500 SME owners or managers was drawn based on two guidelines and a recommendation in factor analysis from literature. A multiple linear regression model and hypotheses testing were used to analyze the data empirically. The quantitative data were analyzed with the help of the Statistical Package for Social Science Version 23 and Amos version 23, supported by factor analysis and structural equation modelling (SEM) which helped in generating descriptive and inferential statistics. The study discovered that collateral requirement and its associations with information asymmetry and moral hazard were important factors in deciding SME access to bank loans. According to the findings, there is a negative relationship between collateral requirements and SMEs' access to loans in Ghana. Variation in SMEs' access to loans in Ghana can be explained by collateral requirement, the interaction of collateral requirement with information asymmetry, and the interaction of collateral requirement with moral hazard, according to regression analysis. For originality, this is the first comprehensive study in Ghana involving collateral, information asymmetry and moral hazard. The study is novel because it is the first to develop a measurement scale for moral hazard in any SME study. Also, it is the first in studies involving SMEs in the finance and management categories to develop a 2x2 matrix to link all the variables for easy analysis. The introduction of the 2x2 matrix in the study will greatly enhance the main theory underpinning the study, credit rationing theory, as well as the other supporting theories. Practically, SMEs that can provide collateral should continue to do so and those that may not must provide quality information to the banks, using the resource-based theory, to enhance their chances of access to loans. The focus of the banks on a high level of collateral requirement not only restricts credit to SMEs in Ghana, but can penalize the banks as well, as lending to small businesses is seen as a lucrative area of operation globally. Just as the Bank of Ghana has developed collateral policy, they should consider enacting ―Mandatory Information Disclosure‖ policy as well to help mitigate information asymmetry and moral hazard. A limitation in this study is the inability of the researcher to have access to loan lists of SMEs from banks. However, the researcher used some basic criteria (e.g. registered businesses by the Registrar General and SMEs which applied for loans from any universal bank) to determine the target respondents. . The researcher recommends a similar future research on SMEs in Ghana in which information asymmetry will be considered as a mediator and moral hazard as a moderator and perform both moderated mediation and mediated moderation.