People migrate for various reasons, which may be as a result of civil wars, unemployment, changes due to the environment, or to improve their standard of living. “Sociologists on the other hand, have long analysed migration in terms of the “push” -“pull” models” (A project of the Levin Institute, n.d, p.8.) The model differentiates between “push” factors that drive people to leave their home countries from “pull” factors that attract migrants to other countries or new locations. Migration has always been a dominating fact of our everyday life [Kathleen Beegle and Carlo Azzarri 2004] and mankind has always lived with it even in biblical times. For example, Jacob, the father of Joseph and members of his family left Cannaan for Egypt because of severe famine that swept through the middle-east belt where they lived at that time [The Bible, Genesis: 45].
ii] Outline of the paper In discussing the reasons for migration, the essay will first and foremost attempt to define migration and why it happens by examining “push” and “pull” factors which sociologists refer to as the main reasons for migration and their effect on sending nations. The essay will further discuss the empirical effects of migration on “sending” nations during the last 20 years.
iii] Organisation of the essay The essay will be organized around four sections namely:
What is migration?
Why does it happen?
Empirical effects of migration on “sending” countries.
Section 1 1.0 What is migration? Migration is the movement of persons from one country or location to another. Migration is common to all living creatures and it is often done for survival and economic reasons by those seeking to migrate. For example, some birds migrate according to W. Alice Boyle and Courtney J. Conway in the report of their research findings, explained that “it is not just whether you eat insects, termites, nectar or candy bars or where you eat them, it matters how reliable that food source is from day to day”. In the case of humans, the World Bank estimates that there are currently 200 million people living in countries where they were not born [Russel, nd] The global mobility of skilled workers has increased in recent years according to the report due to the expansion of the knowledge economy, the progressive globalization of markets and companies, the growing demand for scarce skills and wider political and economic issues. This increase in global mobility is a practical reality of the inter-independence that affects us all and is not necessarily a problem except where critical skills needed by source countries are lost and are not readily replaced; a brain drain [Myburgh, 2002].
1.1 Migration Barriers Migrations come in legal and illegal forms and “while countries seek and promote integrated markets through liberalization of trade and investment, they have largely resisted liberalizing migration policies. Many countries have extensive legal barriers preventing foreigners from entering for purposes of seeking work or residency according to World Bank in its report ‘Globalisation, Growth, and Poverty’. In fact, immigration policies across the world are getting tighter as governments attempt to limit the economic, cultural and security impact of large movement of people from one country to another. Despite the reluctance of governments to liberalise immigration policy, the number of people living outside their country of origin is rising”. (A project of the Levin Institute, n.d, p.2). According to the 2010 United Nation’s Human Development Report, migrants account for approximately 3.1 percent of the world population [as of 2010].
Section 2 2.0 Why people migrate “A poll conducted by Gallup Polls across 82 countries revealed that more than one in four participants displayed a desire to move abroad. The figure when put together, represents a median of about 26 percent. In certain countries, such as Sierra Leone, Ghana and Nigeria, more than half of participants surveyed said they wanted to emigrate. On the lower end, participants in Thailand [8%], Australia [8%], and Saudi Arabia [1%] displayed nearly no desire to emigrate” [A project of the Levin Institute, n.d, p.2].
People migrate for various reasons, bringing back what I said earlier when I mentioned a few reasons, which may be as a result of civil wars, unemployment, environmental or climatic changes or to improve their standard of living. The major two reasons encouraging an individual to migrate can be divided into “push” or “pull” factors. The former refers to circumstances which encourage migrants to leave the country of origin while the latter refers to the attraction that make migrants leave for a particular destination country because of the special skills and technical training the migrant possesses which the developed country may be lacking in quantity [Gbemiga Bamidele, 2001 check date].
2.1 Push Factors Push factors come in many forms. Sometimes these factors leave people with no choice but to leave their country of origin. Following are three examples of push factors that drive people to emigrate from their home country.
a] Unemployment/Poverty: Economics provides the main reason behind migration. In fact, according to the International Labour Organization, about half of the total population of current migrants, 100 million women and men migrant workers, have left home to find better job and lifestyle opportunities for their families. In some countries jobs simply do not exist for a great deal of the population. In others, the gap between the rewards of labor in the sending and receiving country are great enough so as to warrant a move. The unemployment situation in developing countries is a big problem to youths who have left schools waiting to be engaged in the labour market and the various governments who find it difficult to find a solution to it.
In Morocco for example, unemployment which represented less than 17% of the economic causes of emigration before 1960, far behind the search for a more lucrative work [50%] or the improvement of the living standard [25%] became the principal economic cause of emigration in the 90s. According to the data collected by Hamdrouch , 41% of answers ? indicate unemployment as the first cause of emigration whereas the search for a more lucrative work and the improvement of the standard of living represent 38% and 14% respectively as the reasons for emigration [Fida Karam, Bernard Decaluwe, 2007].
In Kenya, it is reported that people are unable to contribute to the economic growth, not because they are weak, but because they are unable due to lack of jobs. Those who are qualified, willing and dedicated are unable to secure themselves a job. Another reason for unemployment is the low education level of a large percentage of the population. Because they lack the technical knowledge and cannot specialize in carrying out roles in factories they, for example, are unable to secure a job. Another is the high population growth rate which also is a major factor that has made Kenya not to secure jobs because of the high competition and fewer jobs [Patrick Kioko Katli, 2000â€¦.?].
In Nigeria, the two decades of economic stagnation and micro-economic instability, corruption and poor resource management, most Nigerians especially young people consider migration as a panacea to economic problems. In recent years, there has been unprecedented rate of rural-urban migration and emigration into other countries of Africa, Europe and America. For example, due to migration and subsequent urban growth, Lagos a city in Nigeria, which did not appear in the list of fifteen largest cities in 1950, occupied the fifteenth position in 1955 and is expected to jump to number three position in 2015 with over 24 million inhabitants [Toredo, 1997]. As regards movement outside Nigeria, there has been a remarkable increase in emigration to Europe, North America, the Middle East and South Africa from the 1980s following economic down-turn, introduction of liberalisation measures and emergence of repressive military dictatorship [Adedokun, 2003]. Thousands of professionals, especially scientists, academics, and those in the medical fields have emigrated mainly to Western Europe, the United States of America and the Persian Gulf States. At the same time, unskilled Nigerians with little education have gone abroad to work as street cleaners, security guards, taxi drivers and factory hands. In Southern Nigeria, for example, between 50 and 80 percent of households have at least one migrant member [Bah et al, 2003]. Migration is considered essential to achieving success and young men who do not migrate or commute to town or abroad are often labelled as idle and may become object of ridicule.
India has recently experienced a surge in emigration due to a combination of these factors. India’s unemployed have never been properly estimated, but they could total 100 million, with a further annual job loss rate of around 10 million as the global recession continues to take its toll on the Indian economy. [Globalisation]. The number of skilled workers coming out of Indian universities has never been higher. Meanwhile, the number of domestic jobs available to them is minimal. Only about 0.7m jobs a year have been created in the past few years, most of them in the public sector. This will not keep skilled workers in the country. Many instead go to the United States, where their skills and their lower wage demands are sought after by high-tech companies. In fact, about 40 percent of recent immigrants from India to the U.S. have been accepted due to employment based preferences, thus showing the high degree of American corporation’s demand for Indian skilled labor. As the population grows at 20 million per year, and more and more students graduate from technical universities, India may experience a great deal more emigration.
b] Civil Strife/ War/ Political and Religious Persecution People also migrate to avoid civil strife, war, political and religious persecution in their own country. For example, when there was widespread political unrest in Albania which eventually led to war in 1999, there was mass exodus of people from the country, which by 2001 had led to one sixth, possibly even one fifth of the country’s population leaving abroad. Initially, people left by sea to Italy and move to other European destinations, including the UK. [Eugenia Markovaâ€¦â€¦.]
Financial Sector And Sme Development In Ghana Economics Essay
The theoretical background of this paper is the Agency Theory . The assumption made is that information asymmetry exists at all stages of the banking services supply chain and that actors are rational utility maximizes. Financial institutions have traditionally focused on micro and large multi corporate businesses due to the high risks and high transactional costs involved when dealing with SMEs. A gap is created due to the neglect; this is what the IFC and others refer to as the SME Financial Gap . The concept SME financial gap generally refers to the
Ghana is one of the three strongest economic policy performers among low-income African countries with a stable political climate to do business. Ghana still relies heavily on international financial and technical assistance. Gold, cocoa and timber are the major sources of foreign exchange. The introduction of Ghana¿½s Economic Recovery Program (ERP) in 1983 to recover the initially very weak private sector participation did improve consistently but although still levels were modest during 1987-91.
Over the past years, Ghana has witnessed dynamic changes in its financial sector. There are 26 major banks currently operating in the country as at 2008. Banks serve a prominent role as corporate entities that provide investment capital in the economy to support employment opportunities, human resources development and contribute towards national and community development programmes. They primarily furnish loans to individuals and companies to finance various projects, which lead to economic, and private sector development.
1.2 Purpose of Study
The paper seeks to identify the cause of the problem which hinders SMEs from gaining access to financial products and services in Ghana; then describes the huge opportunities being lost due to lack of financing for SME development and what economic contributing factors it impacts on the country.
Data on SMEs in Ghana is not easily available but there have been numerous researches on the development and progress of financing SMEs in Ghana by international organisations and other research experts. Secondary data from such findings will be employed to analyse financing and its effects on SME development in Ghana.
2 Literature Review
Chapter 2 provides an overview of existing literature on SME financing including common definitions of the SME sector, their economic importance and various problems that result in the limited access to finance.
2.1 Importance of SMEs
SMEs contribute significantly to employment and GDP making it an important area of development in emerging markets. Most countries have the most jobs generated from SMEs.
The definition of SMEs defers from country to country, there is no single uniformly acceptable definition of an SME. According to the World Bank Group, the definition of SME includes three sub-categories:
? Micro-enterprise: up to 10 employees; total assets/total annual sales of up to US$100,000; turnover must be in excess of US$400,000, and tangible assets in excess of US$200,000;
? Small enterprise: between 10 and 50 employees; total assets/total annual sales between US$100,000 and US$3 million;
? Medium-sized enterprise: between 50 and 300 employees, total assets/total annual sales between US$3 million and US$15 million.
2.2 Constraints to SME Access to Financing
Constrained SME development and competitiveness is mostly due to access to finance rather than the cost of finance. In addition, because of location or sectoral specialization, many firms within the SME sector are growing beyond the size that informal sources of finance can support and institutional credit is the only feasible option for upward movement to them
The absence of proper financial accounting among many small and even medium-scale firms may be due to various reasons, ranging from the reluctance to reveal critical information to competitors to non-transparent practices to minimize the tax burden. Nevertheless, it precludes the establishment of long-term bank-client relationships, which are part of the reputation collateral. The availability of good information on enterprise finance and governance structure is a prerequisite for the preparation of a bankable business plan, which, can be used as a partial substitute for fixed-asset collaterals on the financial supply side. Shortcomings in information disclosure can therefore be viewed as evidence of management weaknesses and financial indiscipline by institutional analysts and loan appraisers.
A good business plan is of critical importance for new, young or small firms because of their typical lack of real-asset collateral, equity capital and credit track record.
According to Hallberg 2001, complex legal and regulatory environment has often combined with opaque discretion to raise significantly the transaction costs on SMEs because of their limited size and resources. He further says that slow progress in the development of sustainable financial schemes, the structural diversification of financial institutions and the emergence of a ¿½non-repayment culture¿½ among enterprises, especially if the resources concerned are regarded as part and parcel of poverty reduction efforts from the public sector
SMEs have to pay a higher rate of interest and comply to more restrictive requirements on institutional credit obtained by them, compared to those imposed on their large-scale counterparts. For example, the interest premium in 33 completed World Bank projects on SME financing (mentioned earlier) averaged 4.9 points for small enterprises and 4.4 points in the case of medium-scale firms. In absolute terms, the rates on SME loans are as high as 24-33 per cent, reflecting in part the larger inducement for financial institutions to participate in SME lending
Persistent constraints on SMEs financing, and the restrictive terms and conditions on approved loans, are virtually a universal and significant problem among developing countries. In China, for example, commercial banks can vary the interest rate on one-year term loans (which stood at 5.31 per cent in February 2002) up to plus or minus 10 per cent for SOEs. The percentage variation can be up to 30 per cent for SMEs and 50 per cent for rural cooperatives. However, many banks still see the returns as inadequate to compensate them for the risks and costs incurred in lending to private firms. Most financial institutions have not been able to operate profitably with SMEs as their sole or major debt clientele, despite the interest premium based on higher risk and transaction cost. Even in developed countries such as the United States, small-business loans are regarded as opaque assets, constituting thus the main component of credit risk
Collateral requirements by commercial banks in developing countries have been a contentious issue in SME financing. However, 92 per cent of all small-business debt to financial institutions in the United States are secured.
Many SMEs avoid using commercial banks for payroll management and other day-today working accounts (of incoming and outgoing transactions), thus precluding the formation and cementing of bank-client relationships which are an integral part of the so-called reputation collateral on the SME side. Thus, most commercial banks and DFIs do not have sufficient information on, among other things, the likely cash flows in business performance (and hence the capacity for loan repayments internal to the enterprises under consideration) plus the credit histories of the concerned SME entrepreneurs themselves, including their personal characters and business commitment. As a result, the paperwork and documentation required by banks can often take 24 workdays to complete, compared to the 14-day gestation time on credit applications from large firms and less than two weeks in micro lending. For example, only 10 per cent of start-up firms in Ghana can obtain bank loans but medium-sized enterprises and older firms (presumably with a good credit history and hence relationships with banks) are provided with start-up credit three times more often than their smaller counterparts.
2.3 Agency Theory
Agency theory assumes that social life is a series of contracts. The theoretical background of this paper is based on the principal agency theory. The assumption made is that information asymmetry exists at all stages of contracts between banks (agents) and SMEs (principal). Assuming that both are rational utility maximizes and are likely to have different goals. Charles Perrow states that ¿½agency theory assumes that social life is a series of contracts. Conventionally, one member, the ‘buyer’ of goods or services is designated the ‘principal,’ and the other, who provides the goods or service is the ‘agent’¿½hence the term ‘agency theory.’ The principal-agent relationship is governed by a contract specifying what the agent should do and what the principal must do in return¿½.
The principal-agent model has two different key elements which exist in both the agents and principals namely goal conflict and information asymmetry; these elements bring meaning to the theory in its context. To illustrate this relationship further, an example given by Evans, 1980, refers to the market for professional services in economics, between a patient (principal) and a physician (agent); the assumption is that both are rational utility maximizes. The patient would want a good treatment at the lowest charge possible. On the other hand, the physician also wants to maximize his income, in that case he may be tempted to provide more medical services than necessary or set a higher price than the normal rates. Clearly, the patient is at a disadvantage in this exchange because there is no way of evaluating the physician¿½s services. Both parties have hidden information that the other does not know. This situation shows that information asymmetry exists with the physician being on the advantageous sided. Relating this example to banks and SMEs a similar situation can be seen. Banks are revenue generating institutions and offer financial services and products. SMEs on the other hand need these financial services to strive their business
Due to the existence of goal conflict between agents (banks) and principals (SMEs), agents have a distinct motive to move to other market segments thus neglecting the SME market segment (see figure 1). Although agents may face similar challenges in other market segments (large multinational and corporate large businesses); the incentive to shift to these markets is that marginal returns are high and on the microfinance level, there is lower risks in giving loans . According to the IFC, a study on emerging markets revealed that as corporate banking margins continue to shrink and increasing fiscal restraint lowers yields on government borrowings, banks have begun to assess the opportunities offered by SMEs. Providing banking services to this underserved SME market segment can increase their access to financial services and generate more employment opportunities and income.
2.4 The SME Finance Gap
The SME finance gap depicts the severely constrained access to financial services and products in many developing countries. The SME banking market consists of firms whose financial requirements are too large for microfinance, but are too small to be effectively served by corporate banking models.
Figure 1. The finance SME gap
In addition, information asymmetry creates an unbalanced information flow and this imperfect information influences economic decision-making on both sides. Three other problems can be drawn from the interrelationship between the agent and the principal, which addresses the outcome of information asymmetry (see diagram 1)
Diagram 1: Principal-Agent relationship
Source: self-prepared; adapted from various literature
Theoretically, in assuming perfect competition, the agent and the principal will act for their own interest but at the same time be conscious of the basis for which the other is operating. This will then result in a beneficial exchange for both parties and contracts can be made. Even in a case where there are relatively similar goals, conflict may exist over the exact means to use with an agent’s desire to obtain slack resources that provide the incentive and the information asymmetry that provides the opportunity to shirk
3 SME Financing in Ghana
Chapter 3 give the definition of SME in Ghana, a brief description of the financial system in and assesses the problem of SME finance gap and the principal-agent problem; then it goes further to describe the SME banking services and products available in Ghana.
3.1 Definition of SME in Ghana
for instance in the case of Ghana SME has no common definition. The NBSSI refers to small enterprises as businesses that have about 6-29 employees or with a fixed asset (excluding land and building) not exceeding ¿½780 million ($54,948) ; and a medium enterprise is one that employs between 30-99 employees or with fixed assets not more than ¿½2.5 billion ($176,118). In addition, the Ghana Statistical Service has its own definition, which recognises small enterprises as those with below 10 employees and a medium enterprise as those businesses that employ above 10 employees. The Empretec Ghana foundation , regards all businesses managed by its owner as an SME.
3.2 The Ghanaian Financial System in Brief
Over the past years, Ghana has witnessed dynamic changes in its financial sector. The number of banks has increased from 9 in 1989 to 21 at May 2006 (www.bog.gov.gh). These banks serve a prominent role as corporate entities that provide investment capital in the economy to support employment opportunities, human resources development and contribute towards national and community development programmes (Aryeetey, E.