SMEs’ Financing and Banks’ Profitability: A “Good Date” for Banks in Ghana?

ABSTRACT

Small and medium enterprises (SMEs) are the core of most economies and are a major source of economic growth. In recent times, banks have been actively involved in the financing of SMEs through the provision of loans to this sector. This paper investigates the impact of SMEs financing on banks’ profitability in Ghana. The study employed the fixed effect model as the main regression tool. The study result reveals that SMEs significantly contribute to banks’ profitability in Ghana. Interestingly, transaction cost in administering SME loans was insignificant in all the models. Higher inflation reduces the real value of the loan and erodes the interest returns on the total credit to the SMEs. Conversely, growth of GDP enhances the growth of the bank profit.

KEYWORDS:

• SMEs
• financing
• banks
• profitability
• Ghana

Notes

1. Dr Kwame Nkrumah, who gained independence for Ghana from Britain in 1957, served as the first prime minister of the colonial Gold Coast (now Ghana), a position he occupied until he was deposed in 1966.

2. Dr Kofi Abrefa Busia, who was born on July 11, 1913, was prime minister of Ghana from 1969 to 1972.