Evaluation of Lending Methodologies Used by Ghanaian Banks to Extend Credit to SMEs

Lending methodologies play a pivotal role in promoting credit allocation to small businesses by reducing the perceived problem of asymmetric information associated with small business financing. This chapter assessed the lending methodologies used by Ghanaian banks in their lending activities emphasizing on SME firms. Quantitative data were collected from 848 SMEs based in Accra using a survey questionnaire with a five-point Likert. Factor analysisfactor analysis and comparative one-sample t-test were used to examine how the Ghanaian banks applied lending methodologies in extending credit to SMEs. The analysis identified two domains of the lending methodologies, namely, Collateral and Banking Records (CBRs) and Personal and Business Characteristics (PBCs). The findings revealed that the provision of collateral and information on the business’s policy, philosophy and performance were outstanding requirements for acquiring credit facilities. Overall, the CBR was found to be the dominant lending methodology employed by Ghanaian banks in lending to SMEs. It is concluded that effective policies, infrastructural support and improved lending methodologies are beneficial to banks, SME owners and all stakeholders in the Ghanaian banking industry in the long term.