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DEFAULT IN LENDING POTENTIAL OF SMALL AND
MEDIUM ENTERPRISES: THE CASE OF GHANA


Bismark Tenkorang
Formerly at University of Leicester, UK


Frank Tenkorang
University of Nebraska-Kearney, USA.


Nacasius Ujah
University of Nebraska-Kearney, USA.


Fletcher Ziwoya
University of Nebraska-Kearney, USA

ABSTRACT

Ability of a firm to repay loans is crucial to its access to credit. Banks in Ghana rate high
default rate as a major obstacle of small and medium-sized enterprises (SMEs) in loan
acquisition. The ability of a bank to predict default potential will help mitigate default
rates. In most African countries, methods of accessing default potential are still
rudimentary, thus making it even more difficult for businesses, especially SMEs to
secure loans. The objective of this research is to empirically test an internal model for
assessing default potential by SMEs in Ghana. To achieve this, we utilize probit and
logit models based on survey information from 70 SMEs and proprietary data from a
large Ghanaian bank to estimate loan default probability. We find that the default risk
for SMEs in Ghana is minimal for SMEs with a high net profit, a large amount borrowed,
and personal property used as collateral in securing the loan. While the statistical
analyses buttress the evidence documented in the literature, we find that the
substantive impact for net profit and amount borrowed stands at less than one percent
and at approximately three percent if the SMEs report 634 and 1,215 thousand Ghanaian
cedi, respectively.

Key Words: credit risk, default rate, financing, Ghana, profit, regulation, SMEs,
collateral, loan, probit, logit

JEL: G21, G32