Small and Medium Enterprises Failure in Ghana: Causes, Effects, and Solutions

Small and Medium Enterprises Failure in Ghana: Causes, Effects, and Solutions

Daniel Bamfo*, PhD Candidate

School of Graduate Studies, Valley View University, Accra, Ghana

*Corresponding Author

DOI: https://dx.doi.org/10.47772/IJRISS.2024.803309S

Received: 20 September 2024; Accepted: 30 September 2024; Published: 16 October 2024

ABSTRACT

This study explored the causes, effects, and potential solutions to the high failure rates of Small and Medium Enterprises (SMEs) in Ghana. Recognizing the critical role SMEs play in economic development and job creation, the research sought to address the pressing need for sustainable strategies that can enhance their viability. Utilizing a qualitative research methodology, the study relied on secondary data collected from academic journals, government reports, and reputable publications published between 2020 and 2024, employing a systematic literature review to synthesize findings. Key findings revealed that financial constraints, managerial shortcomings, regulatory challenges, and inadequate infrastructure significantly contributed to SME failures, impacting the broader economy and workforce. The implications of these findings underscore the necessity for targeted interventions, including improved access to finance, effective managerial training, and streamlined regulatory processes, to foster a supportive environment for SMEs in Ghana. Ultimately, the study provides a foundation for future research and policy formulation aimed at enhancing the sustainability and growth of SMEs in the country.

Keywords: SME failure; causes, effects, solutions, finance, managerial skills, inadequate infrastructure, economic impact, social impact, development impact

BACKGROUND OF THE STUDY

Small and Medium Enterprises (SMEs) are the backbone of Ghana’s economy, contributing considerably to employment creation, poverty alleviation, and general economic growth. According to the Ghana Statistical Service, SMEs account for over 80% of all firms in Ghana and employ roughly 85% of the workforce (Quartey et al., 2022). Despite their importance, a high rate of failure plagues SMEs in the country, with many enterprises collapsing within their first few years of operation. Understanding the origins, repercussions, and potential remedies to this failure is vital for sustaining sustainable SME growth in Ghana.

The World Bank defines SME failure as the inability of a business to continue operating owing to insolvency or bankruptcy. According to their definition, failure is characterized by a business’s inability to honour its financial responsibilities, which often leads to formal legal actions such as liquidation or bankruptcy (World Bank, 2021). Several reasons contribute to the failure of SMEs in Ghana. A big difficulty is limited access to funding. Many SMEs struggle to secure sufficient capital due to tight lending criteria, high-interest rates, and a lack of collateral (Mensah, 2020). Financial institutions consider SMEs as high-risk clients, making it harder for these firms to get the necessary financing to grow and sustain operations (Quartey et al., 2022).

Additionally, bad management practices and a lack of entrepreneurial skills lead to SME failure. Entrepreneurs frequently lack the requisite competence in strategic planning, financial management, and market research, leading to inefficient operations (Abor & Quartey, 2023). Furthermore, fluctuating macroeconomic conditions, such as inflation and currency fluctuations, make it tough for SMEs to retain profitability (Ackah & Vuvor, 2020).

Inadequate infrastructure, notably in terms of transportation and access to utilities, also poses a significant problem for SMEs, particularly in rural areas (Boateng, 2021). Moreover, the regulatory environment is typically complex and demanding, with SMEs experiencing bureaucratic delays and significant compliance costs (Darko & Donkor, 2022).

The collapse of SMEs has far-reaching implications on both the economy and society. On an economic level, SME failures contribute to high unemployment rates, as SMEs are the key source of employment in Ghana (Agyapong, 2021). The closing of these firms often results in employment losses, which exacerbates poverty and affects household incomes (Amponsah & Gyamfi, 2022).

Furthermore, SME failures contribute to a reduction in government revenue, as SMEs are key contributors to the country’s tax base. Reduced tax revenue impacts the government’s ability to invest in key infrastructure and social services (Owusu-Ansah, 2021). On a social level, the failure of SMEs can lead to increased social instability, as job losses and economic suffering may drive individuals into criminal activities and social unrest (Owusu-Ansah, 2021).

Addressing the causes of SME failure demands a multi-faceted strategy. First, expanding access to funding for SMEs is vital. Financial institutions should adopt more flexible lending criteria and offer new financing solutions, such as microfinance and venture capital, to assist SME growth (Mensah, 2020). Government initiatives that reduce the cost of borrowing and boost investment in SMEs can also play a substantial influence (Darko & Donkor, 2022).

In addition, providing training and capacity-building programs helps provide entrepreneurs with the skills essential to manage their enterprises efficiently. Such programs should focus on issues such as financial literacy, company planning, and marketing strategies (Boateng, 2021).

Further, the government should strive on simplifying regulatory processes and eliminating the bureaucratic hurdles that inhibit SME operations (Agyapong, 2021). Investments in infrastructure development, particularly in rural regions, would help simplify market access and lower operational costs for SMEs (Quartey et al., 2022).

Technology adoption is another key solution. Encouraging SMEs to embrace digital platforms for marketing, finance management, and operations can improve efficiency and enhance their market reach (Ackah & Vuvor, 2020).

Statement of the Problem

The high failure rate of Small and Medium-sized Enterprises (SMEs) in Ghana poses a significant threat to the country’s economic development, with approximately 70% failing within the first five years (Asare & Yawson, 2022). This precarious situation, where SMEs account for nearly 80% of total employment and contribute over 70% to national GDP (Ghana National Policy for MSMEs, 2023), is driven by challenges such as financial constraints, inadequate managerial skills, unfavorable regulatory environments, and macroeconomic instability. Approximately 75% of SMEs struggle to secure funding due to stringent lending criteria (Mensah et al., 2023), and over 65% of owners lack formal management training (Osei et al., 2020). Moreover, excessive bureaucracy and complex tax regulations hinder growth (Quartey et al., 2021), while economic instability negatively impacts sales and profitability for 70% of SMEs (Akpan et al., 2024). To combat these issues, researchers recommend a comprehensive approach that includes improving access to finance (Amoah et al., 2022), enhancing managerial training (Mensah et al., 2023), streamlining regulatory processes (Quartey et al., 2021), and stabilizing the macroeconomic environment (Akpan et al., 2024).

However, the the failure rate of SMEs still persist. To address the high failure rate of Small and Medium Enterprises (SMEs) in Ghana, the study recommends a multi-faceted approach, focusing on improving access to finance, enhancing managerial training, simplifying regulatory processes, and upgrading infrastructure. Additionally, developing support networks, promoting market access, and boosting financial knowledge and inclusion are essential for increasing SMEs’ sustainability and competitiveness.

Purpose of the study

The study aims to explore the causes and impacts of the high failure rates of SMEs in Ghana. It seeks to identify the challenges these enterprises face and propose practical solutions to enhance their sustainability, improve access to finance, and create a more favorable regulatory environment, ultimately supporting economic development and job creation in the country.

Objectives of the study

The objectives of the study are to:

1. Identify the key causes of SME failure in Ghana, including internal factors such as poor management and external factors like economic challenges.
2. Analyze the effects of SME failure on the economy, employment, and overall business ecosystem in Ghana.
3. Explore possible solutions to reduce the high failure rates, focusing on policy interventions, financial support, capacity building, and other measures that can sustain SME growth and resilience.

Significance of the Study

The significance of this study lies in its substantial contribution to the literature on Small and Medium-sized Enterprises (SMEs) by analyzing the factors contributing to high failure rates in Ghana, including financial constraints, managerial shortcomings, regulatory challenges, and external economic factors. By addressing a literature gap regarding the impact of SME failures on the economy and workforce, the research enriches discussions on SME growth in developing countries. Furthermore, it identifies key areas for policymakers needing intervention, such as improving access to finance and simplifying regulations, which can facilitate the creation of evidence-based policies that foster economic growth and job creation. Additionally, for SME owners and managers, the research offers valuable insights into common pitfalls and effective management practices, equipping them with essential skills for successful operation in a competitive market. Financial institutions can also benefit from this study by gaining an understanding of SMEs’ specific financial needs and developing tailored products, which encourages collaboration to create more inclusive financing options. Lastly, the study sets the stage for future research on SME growth and sustainability in Ghana, suggesting areas for further exploration, such as the long-term effects of SME failures and comparative studies with other developing nations, ultimately contributing to a deeper understanding of SME dynamics.

METHODOLOGY

The research design of the study on SME failure in Ghana employs a qualitative framework, utilizing secondary data through systematic literature review methods. This approach enhances understanding of the complexities of SME failure and aids in forming evidence-based recommendations for their sustainability and growth. Data was collected from academic journals, government reports, and reputable publications from 2020 to 2024, focusing on empirical research and policy documents. A systematic review was conducted using databases like Google Scholar and JSTOR, prioritizing peer-reviewed articles that provided insights into the causes, effects, and solutions related to SMEs. Data analysis involved thematic synthesis to identify key themes such as financial constraints, managerial shortcomings, regulatory challenges, and infrastructure limitations, while thematic and comparative analyses highlighted patterns and gaps in the literature for future exploration.

CAUSES OF SME FAILURE IN GHANA

High SME failure rates threaten economic stability and the livelihoods of many Ghanaians. This research aims to identify the factors,as well as empirical evidence behind SME failure , offering insights for policymakers to address financial, managerial, and regulatory challenges.

Challenges in accessing credit

Limited access to finance is a key hurdle contributing to the high failure rate of Small and Medium Enterprises (SMEs) in Ghana (Gyimah, et al., 2020). Despite their vital role in the economy, many SMEs struggle to acquire adequate capital to sustain and grow their operations (Ocloo et al., 2021). This financial limitation impacts all elements of their firm, leading to operational inefficiency and eventual failure (Gyimah, et al., 2020).

SMEs in Ghana experience considerable problems in receiving loans from traditional financial institutions, mostly due to severe lending conditions such as high collateral demands, rigorous credit evaluations, and inflated interest rates (Quartey et al., 2022). These restrictions are particularly tough for SMEs, which frequently lack large assets and have limited credit records, making it hard for them to acquire loans required for capital investment, expansion, or daily operations (Abor & Quartey, 2023). This lack of capital affects their capacity to exploit development opportunities, manage cash flow, and respond effectively to market changes. Additionally, high interest rates imposed by banks, due to the perceived risk of lending to SMEs, further deter small enterprises from obtaining external capital. When SMEs do take on loans, the high expenses frequently contribute to financial distress, repayment issues, and potential business loss (Boateng, 2021). Moreover, financial inclusion is restricted, as many SMEs operate informally and lack access to conventional banking services and credit facilities (Darko & Donkor, 2022). A lack of financial literacy exacerbates these issues, prohibiting business owners from employing available financial products effectively (Mensah, 2020). The availability of alternative financing sources, such as venture capital or crowdfunding, is likewise constrained in Ghana, partly due to insufficient awareness and infrastructure (Ackah & Vuvor, 2020). This further constrains SMEs’ expansion potential. The combined effect of these financial restrictions significantly damages SMEs’ operational efficiency and growth potential, as they struggle to invest in technology, market expansion, and innovation (Agyapong, 2021).

Empirically, there are findings from research showing that financial constraint is a major cause of SME failure in Ghana.

Mensah et al., (2023) examined the financial challenges faced by SMEs in Ghana and their impact on business survival. The research found that approximately 75% of SMEs reported difficulties in securing adequate financing due to stringent lending criteria imposed by financial institutions. Furthermore, the study revealed that a significant portion of SMEs relies on personal savings and informal sources, which often prove insufficient for expansion and operational sustainability. The study concluded that improving access to finance through tailored financial products is critical for enhancing SME survival rates.

Osei et al. (2020) explored the role of financial constraints in the failure of SMEs in their study. The researchers found that inadequate access to finance was a predominant factor leading to the closure of about 60% of SMEs within their first three years of operation. The study highlighted that many SME owners lack knowledge of financial management, which contributes to their inability to secure funding. The findings underscored the need for financial literacy programs aimed at empowering SME owners to enhance their chances of obtaining financing.

Akpan et al. (2024) investigated the influence of financial constraints on the performance of SMEs in Ghana. The study reported that high-interest rates and a lack of collateral were significant barriers to accessing credit, leading to business failure for 70% of the SMEs surveyed. The research emphasized that many entrepreneurs resorted to informal financing methods, which do not provide adequate support for growth. The study recommended that financial institutions develop more flexible lending criteria to support the sustainability of SMEs.

Quartey et al. (2021) conducted a study examining the relationship between financial constraints and SME failure in Ghana. The research indicated that nearly 67% of SMEs cited limited access to credit as a primary reason for their inability to scale operations and remain viable. The authors found that existing financial institutions often neglect the unique needs of SMEs, which exacerbates their vulnerability to economic shocks. The study called for policies that promote inclusive financing mechanisms tailored to the specific requirements of SMEs.

Poor Managerial Skills and Lack of Business Planning

Poor managerial skills and ineffective business planning are important contributors to the high failure rate of SMEs in Ghana, influencing both strategic decision-making and daily operations (Ocloo et al., 2021). Many SME owners lack formal management training, which contributes to poor financial monitoring, inefficient resource allocation, and operational mismanagement (Darko & Donkor, 2022). Without proper financial literacy, managers struggle with budgeting and cash flow management, resulting in financial instability (Ackah & Vuvor, 2020). Moreover, the absence of formalised business planning implies many SMEs operate informally, lacking clear aims and strategies for growth (Agyapong, 2021; Ocloo et al., 2021)). This shortcoming limits their capacity to identify target markets, respond to competitive dynamics, and manage risks, adding to operational inefficiencies and poor financial management (Boateng, 2021). Inadequate risk management further exacerbates their vulnerability, since many SMEs fail to prepare for potential disruptions such as economic downturns or regulatory changes (Quartey et al., 2022). To address these difficulties, training and assistance activities focused on strengthening managerial abilities, financial literacy, and strategic planning are vital. Government and NGOs can play a role by delivering training programs, workshops, and mentoring services, while policymakers can provide funds and resources for business development (Ackah & Vuvor, 2020; Boateng, 2021). Strengthening managerial competencies and business planning methods can considerably boost the resilience and success of SMEs in Ghana.

Empirically, there are findings from research showing that managerial constraint is a major cause of SME failure in Ghana.

Osei et al. (2020) investigated the impact of managerial skills on the survival of SMEs in Ghana. The study revealed that over 65% of SME owners lacked formal management training, leading to poor decision-making and operational inefficiencies. The authors found that these managerial shortcomings significantly contributed to the high failure rates of SMEs, with 58% of surveyed businesses closing within their first three years. The research emphasized the necessity of targeted managerial training programs to enhance the skills of SME owners and improve business outcomes.

Asare and Yawson (2022) examined how managerial capabilities influence the sustainability of SMEs in Ghana. The study found that inadequate strategic planning and poor financial management practices were prevalent among SME owners, with 70% of respondents admitting to insufficient managerial skills. The study concluded that these managerial constraints hindered effective resource allocation and strategic decision-making, which in turn led to a higher likelihood of business failure. The study recommended that SMEs invest in training programs focused on managerial competence.

Mensah et al. (2023) explored the correlation between managerial deficiencies and the failure rates of SMEs in their research. The study highlighted that 68% of SME owners lacked experience in critical areas such as marketing, human resources, and financial management. As a result, these businesses often struggled with ineffective operations and poor market positioning, leading to a failure rate of about 65% within five years. The study advocated for the implementation of comprehensive managerial training programs to equip SME owners with essential skills and knowledge.

Quartey et al., (2021) conducted a study examining the influence of managerial skills on the operational performance of SMEs in Ghana. The study reported that inadequate managerial training was a significant factor contributing to business failures, with 66% of respondents indicating that they felt unprepared to handle the complexities of running a business. The study found that these constraints negatively impacted the ability of SMEs to adapt to changing market conditions, leading to a higher likelihood of failure. The study recommended the establishment of mentorship and training initiatives to improve managerial competencies among SME owners.

Inadequate infrastructure

Inadequate infrastructure is a key external issue contributing to SME failure in Ghana. Key services including transportation, electricity, communication, and utilities are important for corporate operations, but their low quality or absence presents severe obstacles. Poor road networks, particularly in rural regions, increase transportation costs and delay delivery, disrupting supply chains and limiting market access (Agyemang et al., 2021). Unreliable electricity leads SMEs to rely on expensive generators, raising operational expenses and resulting to closures (Agyemang et al., 2021). Limited access to internet and telecommunications affects SMEs’ ability to compete in digital markets (Mensah et al., 2020).

Empirically, there are findings from research showing that infrastructural constraint is a major cause of SME failure in Ghana.

Agyemang et al., (2021) conducted a study examining the relationship between infrastructure constraints and the performance of SMEs in Ghana. The study found that inadequate transportation and electricity supply significantly hindered SME operations. The survey revealed that over 75% of SME owners reported frequent power outages and poor road conditions as major challenges that impeded their productivity and profitability. The study concluded that these infrastructure constraints were directly linked to the high failure rates of SMEs and recommended investment in reliable infrastructure to support business growth.

Mensah et al., (2022) explored the impact of infrastructure on the success of SMEs in Ghana. The study highlighted that inadequate access to basic services such as water, electricity, and transportation was a significant barrier for 70% of SMEs surveyed. The lack of reliable infrastructure limited their operational capabilities and market reach, contributing to higher failure rates. The study emphasized the need for government intervention in infrastructure development to enhance the viability of SMEs.

Obeng et al., (2023) investigated the infrastructure challenges faced by SMEs in the manufacturing sector in Ghana. Their findings revealed that 80% of the SMEs surveyed reported that poor infrastructure, particularly in transportation and communication, severely impacted their operations and market access. The study linked these infrastructure deficiencies to reduced competitiveness and increased business failure rates, suggesting that improving infrastructure should be a priority for policymakers to foster SME sustainability.

Quartey and Abor (2024) analyzed the effects of infrastructural deficiencies on the growth of SMEs in Ghana. Their study found that the lack of reliable transportation and energy supply was a critical barrier for over 70% of SMEs, directly affecting their operational efficiency and financial performance. The authors argued that these infrastructure constraints contributed to higher operational costs and ultimately led to business failure. They recommended comprehensive infrastructure development strategies to create a more conducive environment for SME growth.

Regulatory and policy barriers

Regulatory and legislative constraints have a crucial influence in the high failure rates of SMEs in Ghana. These impediments include complex regulations, high compliance costs, and limited government backing. The sophisticated regulatory framework provides substantial obstacles for SMEs, resulting to potential non-compliance and punitive penalties (Owusu-Ansah & Agyapong, 2022). High compliance expenses associated to licensing, taxation, and environmental laws impact SME resources and financial stability (Asamoah et al., 2021). Additionally, limited government backing and inadequate infrastructure further hamper SME growth (Ghanaian Ministry of Trade and Industry, 2023). Onerous taxation and unstable fiscal policies promote financial instability and uncertainty, heightening the likelihood of SME failure (Quartey & Abor, 2023). Addressing these difficulties through simpler laws, lower compliance costs, and better support is vital for enhancing SME sustainability and growth in Ghana.

Empirically, there are findings from research showing that infrastructural constraint is a major cause of SME failure in Ghana.

Akpan et al., (2022) investigated the impact of regulatory constraints on the operational efficiency of SMEs in Ghana. The study found that complex regulatory requirements, including cumbersome business registration processes and high compliance costs, deterred potential entrepreneurs and increased the likelihood of business failure. The study highlighted that approximately 65% of SME owners cited regulatory barriers as a significant challenge, impeding their ability to operate effectively and competitively.

Quartey et al., (2023) examined how regulatory challenges affect SME growth in Ghana. The study found that over 70% of SMEs reported difficulties in navigating the regulatory environment, which was characterized by excessive bureaucracy and complicated tax regulations. These barriers not only hindered business operations but also increased the costs associated with compliance, leading to higher failure rates among SMEs. The study recommended reforms to simplify regulatory frameworks to promote a more conducive environment for SME growth.

Osei et al., (2024) explored the regulatory challenges faced by SMEs in the food and beverage sector in Ghana. The research revealed that nearly 80% of SME owners encountered significant regulatory hurdles, including licensing and health compliance issues. These regulatory burdens often resulted in delays and increased operational costs, ultimately leading to higher failure rates. The study called for targeted policy interventions to streamline regulations and reduce the compliance burden on SMEs.

Mensah et al., (2023) analyzed the effects of the regulatory environment on SMEs in Ghana, emphasizing the need for better regulatory practices. The study highlighted that SMEs faced challenges in obtaining the necessary permits and licenses, leading to operational delays and increased costs. The findings indicated that more than 60% of SME owners viewed regulatory constraints as a primary factor contributing to their business failures. The study suggested reforms to enhance the regulatory framework, making it more favorable for SMEs to thrive.

EFFECTS OF SME FAILURE IN GHANA

The failure of Small and Medium Enterprises (SMEs) in Ghana has far-reaching implications for the country’s economy and society. Given that SMEs contribute over 70% to Ghana’s Gross Domestic Product (GDP) and employ around 85% of the workforce (Quartey et al., 2022), their collapse not only hurts individual firms but also threatens national economic stability. The implications of SME failure can be categorised as economic, social, and developmental impacts.

Economic Impacts

Economic volatility is a major external factor contributing to the high failure rates of SMEs in Ghana. This instability emerges in different ways, including inflation, currency fluctuations, and macroeconomic volatility, all of which create a hard environment for SMEs. Persistent inflation, for example, erodes consumer purchasing power and increases input costs for SMEs. Aryeetey and Fosu (2023) argued that high inflation rates in Ghana lead to greater operational expenses and less consumer spending, affecting SME profitability and sustainability. Similarly, variable exchange rates can adversely harm SMEs active in international trade or relying on imported materials. Osei-Assibey and Appiah (2022) discovered that currency fluctuations in Ghana increase expenses for SMEs, compressing profit margins and worsening financial instability. Moreover, larger macroeconomic volatility, including swings in economic growth and employment rates, undermines SME performance by creating an unstable business environment. According to Agyemang and Agyeman (2024), such instability deters investment and limits expansion potential, leading to decreasing demand for SME products and services.

Furthermore, the failure of SMEs in Ghana has other substantial economic ramifications, given their crucial position in the national economy. SMEs generate around 70% of Ghana’s GDP and offer approximately 85% of employment (Quartey et al., 2022). Their collapse not only disturbs economic growth but also contributes to a drop in GDP, as the failure of SMEs inhibits economic activity, particularly in industries depending on them for supply, such as manufacturing and retail (Agyapong, 2021). This decreases competitiveness and innovation, increasing the economy’s vulnerability to external shocks. Additionally, the closure of SMEs results in increased unemployment, especially in rural areas where alternative job prospects are scarce, further reducing household income and undermining domestic demand (Boateng, 2021; Darko & Donkor, 2022). The collapse of SMEs also leads to a loss of tax revenue from corporation, income, and value-added taxes, consequently straining public budgets and limiting government investments in key services (Abor & Quartey, 2023). Moreover, as SMEs close, Ghana becomes increasingly reliant on imported commodities, aggravating the trade deficit and placing pressure on the national currency, resulting to inflation (Agyapong, 2021). Furthermore, SME failures can destabilize financial markets, since increased non-performing loans drive banks to tighten lending standards, restricting access to financing for other enterprises and increasing financial sector vulnerability (Boateng, 2021; Quartey et al., 2022). In summary, the failure of SMEs diminishes national output, leads to unemployment, reduces tax revenues, increases import reliance, and destabilizes financial markets, making it vital to solve these concerns to maintain economic sustainability in Ghana.

To boost SME resilience and growth, it is vital to address these economic difficulties through stable economic policies, effective inflation management, and ways to minimise currency risks.

Social Impacts

The failure of Small and Medium Enterprises (SMEs) in Ghana has substantial societal ramifications due to their key role in employment production, poverty alleviation, and community development. When SMEs collapse, the repercussions are seen across communities, exacerbating social ills and disrupting society. One major social effect is the increase in unemployment and poverty, as SMEs give jobs to a considerable segment of the population, particularly in informal and semi-formal sectors (Quartey et al., 2022). Their failure results in widespread job losses, especially in locations where alternative employment alternatives are scarce, causing more households to slip into poverty owing to the loss of primary income sources (Ackah & Vuvor, 2020). This increased unemployment produces financial strain, reducing families’ capacity to purchase essentials such as food, healthcare, and education, further entrenching cycles of dependency on precarious, low-paying work (Darko & Donkor, 2022).

Moreover, the closure of SMEs contributes to declining living standards, particularly in communities where these firms are significant providers of products and services. When SMEs shut down, consumers risk less access to affordable products, leading to greater living costs (Mensah, 2020). Additionally, the loss of work affects household budgets, making it difficult for families to finance schooling, healthcare, or housing renovations, prolonging cycles of hardship (Abor & Quartey, 2023). This is particularly obvious in low-income communities where SMEs are key service providers.

SME failure further deepens socioeconomic inequality, as vulnerable groups such as women, youth, and rural people, who are commonly employed by these enterprises, are disproportionately affected (Boateng, 2021). The expanding inequality contributes to social tensions, often resulting to crime and social unrest, as unemployment and poverty are known causes of criminal behavior (Owusu-Ansah, 2021). Persistent SME failures further fuel frustration among youth, potentially leading to protests and unrest, especially in metropolitan areas with few economic opportunities (Agyapong, 2021).

Furthermore, SMEs have a significant role in fostering social cohesiveness within communities by serving as hubs of interaction and strengthening social bonds (Owusu-Ansah, 2021). However, their failure can destroy this cohesion, since financial stress leads to fragmentation within communities, with greater rates of family disputes, divorce, and child maltreatment. A breakdown of confidence within communities can also arise, particularly if SME closures are linked to corruption or inadequate government backing (Darko & Donkor, 2022). In summary, SME failures in Ghana have far-reaching societal impacts, including increased unemployment, poverty, declining living standards, rising inequality, and weaker social cohesiveness, all of which endanger the country’s social stability. Addressing these difficulties requires focused measures to foster SME growth, reduce inequality, and promote social peace.

Developmental Impacts

SME failure in Ghana provides substantial hurdles to the nation’s long-term development aspirations, with wide-reaching ramifications for economic growth, innovation, and sustainable development. SMEs, generally considered as engines of innovation, entrepreneurship, and skills development, are vital to the country’s socioeconomic advancement. Their collapse stifles innovation and hampers the formation of a competitive corporate environment required for sustained development (Boateng, 2021). SMEs serve as crucial incubators for new ideas and products, but their failure disturbs this function, diminishing prospects for entrepreneurial growth and lowering Ghana’s competitiveness in regional and global markets, particularly in industries like technology and agro-processing (Darko & Donkor, 2022). The collapse of SMEs also directly impairs the government’s capacity to fulfil Sustainable Development Goals (SDGs), particularly those relating to poverty reduction, decent work, and economic growth (Owusu-Ansah, 2021). With SMEs accounting for 85% of employment in Ghana’s industrial sector, their failure exacerbates unemployment and poverty, undermining SDGs 1 and 8 (Quartey et al., 2022). Additionally, SME failures hinder progress on SDG 9, which focuses on industry, innovation, and infrastructure, as their collapse impedes industrial expansion and modernization initiatives (Agyapong, 2021). Furthermore, SME failures limit economic diversification, leaving Ghana more reliant on traditional sectors like agriculture and mining, which raises sensitivity to global market volatility (Ackah & Vuvor, 2020). The disruption of local supply chains, where SMEs often function as intermediaries, undermines the entire economy by harming larger enterprises’ operations (Quartey et al., 2022). In conclusion, resolving SME failure is crucial to guaranteeing Ghana’s sustainable and inclusive economic growth, as their collapse hampers innovation, interrupts SDG progress, and threatens economic diversity.

SOLUTIONS AND RECOMMENDATIONS ON SME FAILURE IN GHANA

The high failure rate of Small and Medium Enterprises (SMEs) in Ghana has driven numerous stakeholders, including policymakers, financial institutions, and development organisations, to seek practical solutions targeted at reducing these difficulties. Addressing SME failure involves a multi-faceted approach that targets financial, managerial, regulatory, and infrastructure constraints. Improving access to finance is vital, as many SMEs suffer owing to restricted funding sources, high-interest rates, and stringent loan conditions. To overcome this, establishing specialized funds and promoting alternative financing choices like microfinance and crowdfunding could provide more flexible funding (Quartey et al., 2022; Agyapong, 2021). Capacity building and managerial training are equally crucial, as weak managerial skills contribute considerably to SME failure. Offering financial literacy, company planning, and strategic management training, plus mentorship and incubator support, can boost SME sustainability (Darko & Donkor, 2022; Ackah & Vuvor, 2020).

Creating an enabling regulatory framework is also vital, as excessive bureaucracy and high tax loads restrict SME growth. Simplifying registration processes and introducing tax incentives can minimise these barriers and boost entrepreneurial activity (Mensah, 2020). Additionally, infrastructural improvement, such as enhancing power supply and internet connectivity, is crucial for SME resilience. Investment in reliable infrastructure and technology adoption, particularly in rural areas, will assist SMEs increase their market reach and improve operational efficiency (Boateng, 2021).

Furthermore, developing support networks through SME groups, cooperatives, and supply chain relationships with larger firms can give valuable resources and possibilities (Owusu-Ansah, 2021; Darko & Donkor, 2022). Promoting market access, both locally and internationally, is another significant recommendation, with export training and trade facilitation allowing SMEs chances to diversify their revenue streams (Mensah, 2020). Lastly, boosting financial knowledge and inclusion, particularly through digital financial services, can help SMEs better manage their finances and enhance their resilience (Abor & Quartey, 2023).

In conclusion, tackling SME failure in Ghana requires a comprehensive plan encompassing financial, managerial, regulatory, and infrastructure improvements. By boosting access to capital, strengthening managerial skills, enhancing regulatory support, expanding market access, and utilising technology, SMEs can become more competitive and contribute more effectively to Ghana’s economic development.

CONCLUSION

The high failure rate of SMEs in Ghana is primarily driven by a combination of financial, managerial, regulatory, and infrastructure problems. Limited access to capital, weak managerial skills, limited infrastructure, and complex regulatory environments hinder SMEs from attaining sustainable growth. These difficulties not only affect the individual enterprises but also have widespread economic, social, and developmental ramifications, including growing unemployment, reduced GDP, and a weakened ability to reach the Sustainable Development Goals (SDGs). Tackling these difficulties through greater access to capital, enhanced managerial skills, infrastructure development, and regulatory reforms is vital for the growth and survival of SMEs in Ghana.

FUTURE RESEARCH DIRECTIVES

Future study should highlight crucial areas to enhance SME growth and sustainability in Ghana. These include studying alternative financing sources including venture capital and crowdfunding, assessing the long-term impact of managerial and financial literacy training on SME performance, and investigating the link between infrastructure upgrades and SME growth. Additionally, research should focus on how simpler regulations might increase SME sustainability and the impact of technology adoption, particularly mobile payments and digital finance, in enhancing efficiency and market access.

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