Financial Literacy setbacks hindering growth in Ghana’s MSME sector

Author: Mrs. Amma Adjeiwaa Antwi

Every business needs to grow and remain sustainable, similar to all other living entities.

Financial literacy is one of the basic supports that businesses require from birth, growth, through to maturity, and sustainability. It is a relevant skill to possess in managing the finances of your business irrespective of the size and nature.

What is Financial Literacy?

Financial literacy is the ability to understand and apply financial skills to manage your personal and business finances. Financial literacy is a must for making wise and informed decisions regarding your finances, avoiding unnecessary levels of debt, and having adequate income in retirement.

As important as it is, many business owners lack such skills. They do not appreciate its relevance in the running of business. This article seeks to highlight the financial literacy setbacks that are hindering growth in Ghana’s MSME sector.

Ghana’s MSME Sector

The Micro Small and Medium Enterprise (MSME) Sector is the largest business sector in Ghana. It currently accommodates about 70% of the country’s workforce. A sector with great potential to alleviate poverty for the masses of Ghanaians but saddled with huge challenges that impede its capabilities.

Financial Literacy setbacks in the MSME sector

Financial literacy is largely lacking in Ghana’s MSME sector. As evidenced in the frequent mismanagement of business finances and the eventual poor access to credit and sense of financial indiscipline. Thus, sustainability in the sector is low, and there is rampant collapse of businesses.

With the potential to alleviate poverty amongst millions of Ghanaians, such financial literacy lapses, and the threats they pose remains a grave issue.

Below I highlight the financial literacy setbacks in Ghana’s MSME sector, identified through observations, one on one and group discussions, and research.

• Inadequate Financial Management skills

  Poor financial management results in losses and eventual shutdown of any business venture. Managing finances has more to do with the judicious use of available financial resources, rather than the availability of funds. A huge section of the MSME sector lack understanding of the basics of managing business finances. They may not appreciate the importance and the strategies for separating business finances from personal finances. They also seem to have low awareness of budgeting, and interpreting revenue differently from profit. Cash turnaround may be high in the sector, but finances are poorly managed. Business collapse is rampant in the sector due to poor financial management skills.

  An added threat is the limited knowledge regarding financial products or services that could benefit them or otherwise. They are therefore heavily excluded from formal beneficial schemes such as insurance and pensions that are now available at the micro level. They may also fall victim to financial scams and lose hard-earned capital to fraudulent schemes. These factors threaten the very existence of such businesses.

• Poor access to credit

  Money is the bloodline of every business. We have been part of several business surveys/feedback activities where access to finance is mentioned by over 70% of entrepreneurs as the biggest threat to their business. Limited financing hinders business growth. Failed loan and business funding applications largely account for the poor access to finance in the MSME sector.

  To a large extent access to credit for MSMEs is hampered by financial illiteracy and indiscipline. Another school of thought may name reasons such as unwillingness of financial institutions to offer credit to small businesses, and inability of small businesses to meet loan application requirements. However, there are root causes for such stringent requirements. In my work within the MSME sector, I have witnessed several incidences where entrepreneurs divert loans into frivolous assets. Repayment of such monies becomes difficult and what follows is default. The result is a bad credit rating which further aggravates the problem of poor access to credit. These are typical instances of financial indiscipline because of poor financial education.

  Such behaviors render the MSME sector unattractive to lenders. The little available credit comes at exorbitant rates that further burden the businesses. Creditors consider the unbanked high risk because of perceived knowledge of mishandling of finances

  Over the past decade local telecom companies have attempted to fill the financial inclusion gap through Mobile Money services. Mobile money platforms offer the means to save, earn interest on monies, transfer monies, and access micro-credit products for all and sundry. The MSME sector was not left out of the novelty. However, the crucial aspect of endowing users with the relevant financial literacy skills was missing. To a large extent, the micro-credit service has suffered non repayment of loans because of poor handling of credit.

  Additionally, inadequate financial literacy limits the capacity of businesses in MSME sector to make informed decisions with regards to sourcing means of financing for business. Do they opt for debt financing, or equity financing? With each option having its peculiar pros and cons, lack of understanding may hinder an informed decision, threatening the very existence of the business.

  Poor budgeting skills also limits ability to manage finances after gaining access to credit facilities

  The second part of this article will discuss how to manage the identified setbacks and ensure a more robust and thriving MSME sector in Ghana.