Default in Lending Potential of Small and Medium Enterprises : The Case of Ghana

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