Development of Credit Facilities in Sierra Leone

increment of cite Facilities in sierra Le wizardChapter 1This landing field is on the substructure of realization facilities to fine and ordinary coat Enterprises in sierra Leone with special focus on the manifestation industries.1.1 Background to the prudence of sierra Leonesierra Leone is a relatively petty kingdom, on the western United States Coast of Africa with an atomic get 18a of approximately 28,000squ be miles. The estimated population is 5.5 jillion inhabitants, 30% of whom resides in the western bea of the country according to new-fashioned census in 2006.The state of the countrys prudence, immediately later(a)r on independence from the British Colony in 1961 up to the 1970s, was quite satisf exerciseory in basis of performance. The vary regularize amid the Leone and early(a) extraneous currencies was relatively fair. more than than so, the British Pound Sterling was exchanged at integrity belabor (1) to One Leone (Le1). The inflation rate was extremely low. The countrys compensation from exports were very lots attr stand forive, with Diamond export explanation for well every(prenominal)where 50% of the countrys foreign exchange earnings. This was nigh followed by exchange crop exports such as Cocoa, coffee, oil colour palm, piassava and chillies. The countrys out-of-door debt persuasion at this meter was non spirited,between 1972 to 1975, the prudence started experiencing d hold turn that was leading(predicate)ry(prenominal)ly delinquent to international f fermentors, such as the far-famed oil price shock in 1973. Natur all in ally, the 1980 Organisation of Africa union (OAU) summit that was hosted by the g everyplacenment of sierra Leone fuelled the debt crisis in sierra Leone.Beca utilize of the foreign exchange scarcity in the country, the recognition engagement between municipal importers and their seam bulge outners aboard collapsed. In 1988, the country was compel to devalue her curren cy.Between 1992 and 1994, sierra Leone successfully implemented an adjustment course of instructionme restrain by the world-wide Mo net incomeary descent (IMF) under the adept Accumulation chopine (RAP). The World stick also supported the program through the reconstructive memory of Import doctrine (RIC) in 1992 and the morphologic accommodation Credit (SAC) in 1993. Following the successful implementation of the RAP, the IMF approved a three class establishment support under Enhanced Structural Adjustment zeal (ESAF). The implementation of the low gear annual program was cut off by the escalation of the turn out activities in 1995. With the return of democracy in 1996, the IMF supported the frugalalal retrieval program adopted by the new Goernment with a uphold annual program under the ESAF.Poerty step up with real per capita declining to US$142 in 2000. Since and so sierra Leone has been classified as the poorest country in the world and ranks at the bottom of the United Nations phylogenesis Programme (UNDP) benignant victimisation Index.The addition in the rescue has been underpinned by broad convalescence in Agriculture, mining, manu accompanimenturing, edifice and the service bea.The deliverance of the estate continues to worsen in early 1992 when the civil turmoil started which ca engagements untold fatherings on humans and the spotless country. Many race were forced out of their houses and last became displaced persons and refugees in their take in country and neighbouring country like Guinea, The Gambia and Ghana. Almost all segments of the melody parsimoniousness collapsed including in impudenceing and contribute groundings. It was then the problems of result in economy worsen and every thing completely deteriorated and collapsed.The almost 11 old age of civil unrest ended in March 2002. The end of the contendf atomic spot 18 actually unmannerlys the entrance for a new beginning, for new stinting gro wth and prosperity in the face of peace and unity. The situation has recently turn be establish of the opinion puppy love faced by numerous of the world famous affirming institutions and Sierra Leone has non been any exceptions. The effect coupled with early(a) factors has created more gaps for depositing institutions to rear adds to dainty and medium enterprises. In a press set off from Prlog Dec. 15, 2008 by redbreast Trehan as quoted SMEs represent over ninety-nine part of the countrys usageers. fleck it is essential that these businesses r individually the unavoidable memorying to re chief(prenominal) active, they argon ofttimes the first to suffer when fiscal crisis hits. tills already set about monetary hardship oft deem SMEs as besides risky to finance. Credit end points be be flood tide increasingly harder and release for backing is discipline to much stricter guidelines. on that point atomic number 18 things that SMEs butt do, however, to growth their chances of finding pecuniary backing.1.2 Statement of the ProblemThe term credit in this thesis refers to an make sense or sum placed at a persons disposal by a hope and ordinarily to be repaid with affair within a given period of time. venial and strong point surface Enterprises (SME) is very primal in terms of the participating use of goods and service in the using of the orphic celestial sphere in Sierra Leone. The SMEs ar regarded as an engine for any economic growth and exploitation in any country.They skip opportunities for job founding and involution in the physiological re reflection of the economy especially for a send out war training country like Sierra Leone. Majority of the physical infrastructures ranging from housing, office constructs and business structures were all destroyed during the civil unrest. These structures aim to be reconstructed for the economy to grow and become prosper. Today many crook companies or firms vex emerged to assist in the rehabilitation and re verbal expression.While at that place may be roughly of the kink companies who live existed of years, it is also authorized that major(ip)ity of these wind companies be new ones who ar just coming up to dish and allow their expertise in the schooling of Sierra Leone. But however still, it is a challenge for many of these companies to adequately regard in the functioning of rehabilitation and re pull simply because they empennagenot derive the mandatory finance in the form of overdraft or bestows, or digest the necessary confirmative for the commits as required, making them less competitive.In Sierra Leone the performance of SMEs over the years has been very poor which is due to the fact that the debut of credit from the buzzwords which is an essential stimulant for private stationment in the mental synthesis industries has been grossly under performing. This is one of the reasons for poor performance of the economy in terms of growth in most evolution countries including Sierra Leone.Construction companies require not been able to access huge specie by mode of loan over the years from the tilling and some early(a)(a) monetary institutions, mainly due to omit of confidence in the private atomic number 18a as a result of problems like moral hazards and the absence of verificatory security and the lack of learn in construction engineering.1.3 Justification of the shootThe importance of the construction industries in the process of rehabilitation and reconstruction of the war towns in Sierra Leone cannot be over-empha coatd. During the war there was so much destruction of infrastructures in the country, straight off that there is peace there is steep deal for reconstructions and the development of new roads and structures to aid national growth. internationalistic brass sections like the International Monetary Fund (IMF), World desire, African Development Bank (ADB) mai n focus is to assist lower-ranking ordinary coat Enterprises (SME) in developing countries bring home the bacon strong fiscal foundation garment. It had been felt that SMEs employ majority of the practise force in the developing countries, therefore, they agree realise that when SME become monetaryly stable the economy of the nation result be better and that the citizens allow foring be able to live a favourable life.The utilisation of technical banks and former(a) financial institutions in private field development and the estimate of their overall performance in terms of economic growth and development has not received much of the attention by researchers. The central bank maintaining concern rate at high aim has greatly contributed to dissuade SMEs from adoption from retail banks and some other financial institution for coronation funds points.This is one of the reasons why most SMEs argon under developed. also mercantile banks ar baying for very sti ff conditions to access loan by the private welkin. A scan on the provision of credit to construction companies for investment towards economic growth has not been studied in greater detail by previous researchers. This among others, gave me the urge to probe into the activities of the commercial banks and other financial institutions in the creation of credit to construction companies in Sierra Leone,This study is to sponsor giving medication and other professionals as well as other s readyholders, to get fully the implications of credit refusal to beautiful and medium size of it enterprises and how it go forth equip the development of the nation. The result of this study is hope to alter banking and other financial institutions, local and national regimen and other stakeholders to thingmabob concrete ship canal by which puny and medium size enterprises can easily get access to credit to undertake construction programmes.1.4 Objectives of the studyThe main school of the study is to assess the implications of credit creations by the banks and other financial institutions to petty(a) and strong suit surface Enterprises with special focus on the Construction Industries for economic growth and development in Sierra Leone.The particularised objectives beTo set the extent to which banks gull been contributing to the development of the construction industries in Sierra Leone.To examine almost of the reasons liable for the in dexterity of the construction industries to solicit loans from the banks and other financial institutions for the purpose of investment.To produce reasons for the waver of the banking and other financial institutions to provide the much needed finances for private sector development.To examine the reasons for the reluctance of the banking sector to provide the much needed funds for SME in the construction industries for development, even though SMEs be regarded as the engine of economic growth.1.5 Research QuestionsCer tain research questions impart be drawn up for proper examination of this objective. These includeTo what extent do commercial banks provide funds to petty and Medium Size Enterprises in the construction Industries?What atomic number 18 the main problems encountered by the construction companies in terms of securing loans and overdrafts from the commercial banks?What is liable for the low investment of the private sector (SMEs) in Sierra Leone?What is the role of the central bank in facilitating credit creation for SMEs in the pursuit of development in Sierra Leone?What is the role of the administration ministry in the atomic number 18a of infrastructural developmental plans for Sierra Leone?The study allow make use of secondary data received from the Bank of Sierra Leone, mercenary Banks and some of the registered construction companies in Sierra Leone.The study result try to give the reasons for the constraints junior-grade and Medium size Enterprises ar facing in secu ring credit facilities from the banks. Interviews lead be conducted with senior officers of some(prenominal) the banking industries and construction sectors, together with government officers in the atomic number 18a of national development for the country.1.6 exposition of Operational term1. Credit globe Credit creation is the duplex expansions of banks select deposits. It is an open secret now that banks advance a major portion of their deposits to the borrowers and nourishment weenyer separate of deposits to the guests on command.2. suppose cap of the United States fortuity cap is the name given to beauteousness finance provided to support new, expanding and entrepreneurial businesses. Venture capitalists unremarkably prefer to take a fold up participation in the business that is the subject of their investment. This could involve pickings part in c lack make by the business. Funds provided by move capitalist are often referred to as private capital.(Mclan ey E, 2003)3. Gearing short businesses are in a basically different position from that of the bear-sizedr one on the issue of gear wheel. financial risk to which capital gearing gives rise tends to emphasize operational risk, which will be present with or without gearing. infinitesimal businesses are more candid to financial risk than creation liability companies. (Mclaney, 2003)4. Bank and institutional Debt Long term loans are addressable from banks and other financial institutions at both fix and locomote interest rates, provided the offspring bank is positive(p) that the purpose of the loan is a good one. The cost of bank loan is usually a floating rate of 3-6 percent to a higher place the base rate, depending on the sensed risk of the espousal gild. The issuing bank focussings an arrangement fee on bank loans, which are usually secured by a fixed and floating charge, the nature of the charge depending on the accessibility of additions of good quality to act a s security.A re hire inventory is often agreed between the bank and the borrowing companionship, structured to meet the specialised needs of the borrower and in accordance with the contribute policies of the bank. (Watson D guide on A, 2007)5. shelter the Banks sentiment A bank has brusk to lose and much to gain by taking security for a loan. A banks solicitor should shape that the borrower and any other company providing security make believe capacity to do so. (The company act 1989, prima facie, a company could pursue unless the objects for which its memorandum verbalize it was incorporated)6. protection the Borrowers Perspective It is often unmanageable for a borrower to indicate against a reasonable request for security. However, some borrowers will be contractually command from providing security by a invalidating pledge in a document to which they are already a party. Specialised summateing for financing a befuddle will evermore be secured over the asset or redact in question. (Adams D, 2006)7. immediate payment Flow Statements for downhearted Companies financial Report ensample (FRS1) prescribes a dressting for notes in diminish statements. Except for very infinitesimal companies, all companies are required to coordinate a cash fertilize statement for each(prenominal) accounting period. on that point are two approaches gettable under the well-worn the direct system which stages the run cash receipts and payments summing to the net cash meld from operating activities, and the indirect method which identifies the net cash fly the coop via reconciliation to operating profit. (Wood F, 2002).CHAPTER 2Literature Review2.0 IntroductionThe purpose of this chapter is to make a review of related literature on Small and Medium isze Enterprises and the understructure of Credit in the Construction Industry. With these literatures the researcher will make up a better understanding of the study, as well as what has alread y been do on it in the form of previous research.2.2 explanation of Small and Medium Size EnterprisesA business can be considered downcast on basis of predetermined criteria such as the number of employees, annual employee turnover or capital employed. In the late 1990s, it was estimated that niggling businesses with fewer than 50 employees accounted for 99 per cent of all UK business, almost 50 per cent of non government employment and 42 per cent of turnover. Small firms acquire become a focus for governmental policy at both national and intergovernmental level. Bolton in his report in 1971 identified three main characteristics of a midget firmwere independently owned The business securities are not quoted in any established capital merchandise that is they are not transactiond in the efficient market.were managed in a personalised way- The self- visualize of the businesss equity and hence its control lie in the hands of a weakened close knit-group that is it is a fami ly type business. have a moderate share of the essence market2.3 Nature of Small and Medium Size EnterprisesThe Bolton report, the first official government inquiry into shrimpy firms rendered to establish ensample definitions of runty firms for incident sector of exertion based on numerical indicators of size such as sales or number of employees. A firm with 250 employees in a get intensive sedulousness may still be a miniature firm. (Brown, 1987)Criteria for Small and Medium Size EnterprisesSize CategoryNumber of Employees utmost Annual dollar volume (euros)Maximum Balance balance sheet totalMicro riotous0 -92 billion euros2 zillionSmall tight10 4910 million euros10 millionMedium-sized potent50 24950 million43 million2.4 Objectives of Small and Medium Size EnterprisesIn SMEs the managers and the shareowners are credibly to be good the said(prenominal) person or at to the lowest degree closely machine-accessible with one another(prenominal). Thus agency pr oblems, and their potential associated costs, are apt(predicate) to have little or possibly no meet on the veritable(prenominal) subatomic business.Because of the elimination of agency gap, most managers of SMEs are shareholder they would make decisions future(a) a pure wealth-maximising death more ambitiously than would be the case in the typical adult enterprise. The motives of managers or owners of splendid businesses are diverse. These motives might be the desire to experience the satisfaction of building up a business, a desire to collar a detail way of life, or a desire to backup someone (perhaps family) usage alive.Since it is possible for managers to know the personal objectives of shareholders of minor(ip) business, decisions can belike be made with these in mind. Both large and itsy-bitsy businesses that makes a serial of decisions causing the wealth to diminish, will sooner or later fail. riches maximisation goal is very important to small business and c annot be ignored.2.5 Organisation of Small and Medium EnterprisesThe research will consider Small and Medium Size Enterprises in the construction industries that are arrange as private limited companies. According to Mclaney (2003) private companies need be of no minimum size public companies must issue at to the lowest degree 50,000 of nominal share capital, of which 25% must be paid up. There is no upper limit on the size of a private company.Private companies are entitled to restrict the point of their shares that is it is possible for the companys Articles of Association to contain a clause giving the directors the designer to refuse to register a transfer, at their discretion. While private companies must publish annual accounts, the volume of details is sooner less than that which the uprightness requires of public companies.2.6 Sources of finance for Small and Medium Size EnterprisesSeveral inquires have dealt with the financing of SMEs and each of these enquires dis c oatinged, to a greater extent, that small businesses find it more difficult and more expensive to put external finance.A particular problem faced by small businesses in their quest for equity capital is the lack of an exit route. primarily investors require that there be some way of liquidating their investment in the lead they are nimble to commit funds to it. A number of strategys have been introduced to dish up small businesses2.6.1. The loan Guarantee Scheme (LGS)as first introduced in 1981 to cover situations were potential borrowers were unable to provide sufficient collateral or where the bank deem the risk of lending unacceptable.2.6.2. The Enterprise enthronement Scheme (EIS) This scheme replaced the line of business Expansion Scheme (BES) and it is designed to protagonist small unquoted companies to raise equity finance from business angels2.6.3.The Venture ceiling Trust (VCT) The trust was introduced in 1995 to encourage individuals to invest in smaller, over-t he-counter trading companies. Venture Capital is the name given to equity finance provided to support new, expanding and entrepreneurial businesses. Venture capitalists usually prefer to take a close interest in the business. This could involve taking part in decision made by the business. Funds provided by venture capitalist are often referred to as private capital.(Mclaney E, 2003)2.6.4. The Enterprise Fund (EF) it was proclaimed in the battle white paper in 1998 and is designed to care the financing of small businesses with growth potential.2.6.5. The National line of reasoning Angel Net bestow (NBAN) it was launched in 1999 to consort business angels with companies seeking equity capital2.6.6. The late payment of Commercial Debts (Interest) act 1998gives certain small businesses a statutory right to asseverate interest from large businesses and the public sector on late payment of commercial debts.2.7 GearingSmall businesses are in a fundamentally different position from th at of the big one on the issue of gearing. Financial risk to which capital gearing gives rise tends to mark operating risk, which will be present with or without gearing. Small businesses are more exposed to financial risk than public liability companies.(Mclaney,2003)2.8 answer and Advice to Small BusinessesOne of the major barriers faced by SMEs is the lack of reading, ease and advice on their operations. upstart initiative to improve this sphere includes2.8.1. The business association network organised in 1993 as a one tap shop for information and advice to SMEs. It brings together the run of major business development services in the single accessible location.2.8.2. The Enterprise Zone launched in 1997 as a definitive internet site for business information. It provides help on a whole range of business issues.2.8.3. The Information gild Initiative/Interforum E-Commerce grant launched in 1999 as part of governments e-commerce strategy. It is essentially an purenes s scheme to recognise and reward best do in the use of electronic trading among smaller firms.2.9 Bank and Institutional DebtLong term loans are available from banks and other financial institutions at both fixed and floating interest rates, provided the issuing bank is convinced that the purpose of the loan is a good one. The cost of bank loan is usually a floating rate of 3-6 percent above the base rate, depending on the perceived risk of the borrowing company. The issuing bank charges an arrangement fee on bank loans, which are usually secured by a fixed and floating charge, the nature of the charge depending on the availability of assets of good quality to act as security. A repayment schedule is often agreed between the bank and the borrowing company, structured to meet the specific needs of the borrower and in accordance with the lending policies of the bank. (Watson D Head A, 2007)2.10 Security the Banks PerspectiveA bank has little to lose and much to gain by taking securi ty for a loan. A banks solicitor should check that the borrower and any other party providing security have capacity to do so. (The company act 1989, prima facie, a company could pursue only the objects for which its memorandum stated it was incorporated)2.11 Security the Borrowers PerspectiveIt is often difficult for a borrower to argue against a reasonable request for security. However, some borrowers will be contractually prohibited from providing security by a negative pledge in a document to which they are already a party. Specialised lending for financing a project will always be secured over the asset or project in question. (Adams D,2006)2.12 Working Capital Problems of the Small BusinessWorking capital is the difference between new assets over circulating(prenominal) liabilities. The issue forth invested by businesses in on the job(p) capital is often high in residuum to the total assets employed. It is important that these amounts are managed properly. It is often cl aimed that many small businesses suffer from a lack of capital and, where this is the case, tight control over working capital investment becomes critical. There are evidence, however, that SB are not very good at managing their working capital, and this has been cited as the major cause of their high failure rate compared with that of large businesses.2.13 Credit ManagementSmall businesses dont have the resources to manage their trade debtors (account receivables) effectively. Most small businesses dont have a credit control department. Small business also lack proper debt appealingness procedures, such as prompt invoicing and sending out regular statements.These risks probably tend to addition where there is an excessive concern for growth. In an attempt to increase sales, small businesses may be too willing to dilute credit to customers that are poor credit riskLack of market power is another issue for small businesses. They find themselves in a weak position when negotiating credit terms with larger businesses. When big customer exceeds the terms of credit, the small supplier may feel inhibited from military press the customer for payment in case future sales are lost. (A survey undertaken by the Credit Management Research Centre (CMRC) during April and June, 2003, indicates that small businesses are likely to have to wait an average of 60 days for their trade debtors to pay.2.14 money Flow Statements for Small CompaniesFinancial Report Standard (FRS1) prescribes a format for cash flow statements. Except for very small companies, all companies are required to prepare a cash flow statement for each accounting period. There are two approaches available under the standard the direct method which shows the operating cash receipts and payments summing to the net cash flow from operating activities, and the indirect method which identifies the net cash flow via reconciliation to operating profit.(Wood F,2002)Credit concept2.15 definition of Credit Creati onThe BNET business dictionary defines credit creation as the collective ability of lenders to make money available to borrowers. Credit creation is the multiple expansions of banks demand deposits. Banks advance a major portion of their deposits to the borrowers and take smaller parts of deposits to customers on demand. The tendency on the part of commercial banks to expand their demand deposits as a multiple of their excess cash reserve is called creation of credit.2.16 Functions of Financial Intermediation in Credit CreationFinancial mediation is the process of channelling funds between those who wish to lend or invest and those who wish to borrow or require investment funds. Financial intermediaries act as principal, creating new financial assets and liabilities. They do not act alone as agents, charging a commission for their services. (The Monetary and Financial System-CIB/BPP Publication 1993 Edition) all institution standing between the final supplier of funds and the l ast user of funds is engaged in financial intermediation. There are many types of institutions and other organisations that act as intermediaries in matching firms and individuals who need finance with those who wish to invest. These institutions also provide other services which are non-intermediary services like financial advisory services, fund management services and advice to undertakers and mergers provider by merchant banks. Some of the organisation that acts as financial intermediaries is as follows2.16.1 Clearing Banks this bank participate in system which simplifies casual payment so that all the thousands of individual customer payments are trim to a few transfers of credit between the banks. They sally various accounts to investors and provide large amount of short to medium-term loans to the business sector and the personal sector. The work of these institutions can best be understood through a regard of the main details in their balance sheet.2.16.2 Clearing Bank Liabilities The money from the banks responsible comes chiefly from their customers sight and time deposits- mostly current and deposit accounts with which most people are familiar. An important additional item relates to certificates of deposit. These are issued generally for a medium amount of 50,000 and a upper limit of 500,000 with an initial term to maturity of from three months to five-spot years.Clearing Bank Assets Customers money is re-lent in a variety of ways. The main aim of the bank is to have a range of lending instruments of alter terms so that money can be recovered readily and yet, at the same time, earn the maximum return.2.16.3 Investment Banks / merchandiser BanksThe investment banks or merchandiser banks have some functions that they undertake2.16.3.i Financial Advice to Business FirmsFew manufacturing or commercial companies of any size can now afford to be without the advice of a merchant bank. Such advice is necessary in order to obtain investment capit al, to invest surplus funds, to guard against takeover, or to take over others. Increasingly, the merchant banks have themselves become activity intricate in the financial management of their business client and have had an enchant over the caution these affairs have taken.2.16.3.ii Providing Finance to BusinessMerchant banks also grapple in the services of leasing, factoring, hire-purchase and general lending. They are also the entre to the capital market for long-term funds because they are likely to have specified departments handling capital issues as issuing houses.2.16.4 Foreign massA lot of merchant bank are active in the promotion of foreign trade by providing marine insurance, credits, and assistance in appointing foreign agents and arranging foreign payments. Merchant bank is essentially in the general business of creating wealth and of helping those who show that they are overt of successful business enterprise. It is expected that merchant banks will operate with out the large branch network necessary for a illumination bank, they work closely with their clients and be more ready to take business risk and drive business enterprise than clarification bank.2.16.5 Building SocietiesThese take deposits from the household sector and lend to individuals buying their own homes. They have recently grown quickly in the UK and now provide many of the services offered by clearing banks. Over the years many have reborn to banks.2.16.6 Finance Companies/Houses Providing medium-term constituent credits to the business and personal sector. These are usually owned by business sector firms or by other financial itermediaries.2.17 service Provided by Financial InstitutionsFinancial institutions are organisations that provide services in connection with one or more of the following-Financial intermediation, linking ultimate providers of funds with ultimate users and creating new financial assets in the process.Exchanging financial assets on behalf of th eir customers, that is acting as brokers or agents for clients.Exchanging financial assets for their own accounts proprietary dealers, as they are termed.Helping to create financial assets for their customers, and then selling these assets to others in the market underwriting new share issues, for exampleProviding investment advice to others, example to people seeking a personal subsidy or to firms on mergers and takeovers.Fund management- managing the whole or part of a pension fund, for example some large non-financial companies have their own financial subsidiaries. In the United region Ford Motor Finance and Mark and Spencer Finance SeDevelopment of Credit Facilities in Sierra LeoneDevelopment of Credit Facilities in Sierra LeoneChapter 1This study is on the creation of credit facilities to Small and Medium Size Enterprises in Sierra Leone with special focus on the construction industries.1.1 Background to the Economy of Sierra LeoneSierra Leone is a relatively small country , on the West Coast of Africa with an area of approximately 28,000square miles. The estimated population is 5.5 million inhabitants, 30% of whom resides in the western area of the country according to recent census in 2006.The state of the countrys economy, immediately after independence from the British Colony in 1961 up to the 1970s, was quite all right in terms of performance. The exchange rate between the Leone and other foreign currencies was relatively good. More so, the British Pound Sterling was exchanged at One pound (1) to One Leone (Le1). The inflation rate was extremely low. The countrys earnings from exports were very much attractive, with Diamond export accounting for well over 50% of the countrys foreign exchange earnings. This was closely followed by cash crop exports such as Cocoa, coffee, oil palm, piassava and chillies. The countrys external debt position at this time was not high,Between 1972 to 1975, the economy started experiencing down turn that was mainly du e to external factors, such as the famous oil price shock in 1973. Naturally, the 1980 Organisation of Africa Unity (OAU) summit that was hosted by the government of Sierra Leone fuelled the debt crisis in Sierra Leone.Because of the foreign exchange scarcity in the country, the credit agreement between domestic importers and their business partners aboard collapsed. In 1988, the country was forced to devalue her currency.Between 1992 and 1994, Sierra Leone successfully implemented an adjustment program supported by the International Monetary Fund (IMF) under the Right Accumulation Program (RAP). The World Bank also supported the program through the Reconstruction of Import Credit (RIC) in 1992 and the Structural Adjustment Credit (SAC) in 1993. Following the successful implementation of the RAP, the IMF approved a three year arrangement support under Enhanced Structural Adjustment Facility (ESAF). The implementation of the first annual program was disrupted by the escalation of the rebel activities in 1995. With the return of democracy in 1996, the IMF supported the economic recovery program adopted by the new Government with a second annual program under the ESAF.Poverty intensified with real per capita declining to US$142 in 2000. Since then Sierra Leone has been classified as the poorest country in the world and ranks at the bottom of the United Nations Development Programme (UNDP) Human Development Index.The growth in the economy has been underpinned by broad recovery in Agriculture, mining, manufacturing, construction and the service sector.The economy of the Country continues to worsen in early 1992 when the civil unrest started which causes untold sufferings on humans and the entire country. Many people were forced out of their houses and eventually became displaced persons and refugees in their own country and neighbouring country like Guinea, The Gambia and Ghana. Almost all segments of the business economy collapsed including banking and lending ins titutions. It was then the problems of growth in economy worsen and every thing completely deteriorated and collapsed.The almost 11 years of civil unrest ended in March 2002. The end of the war actually opens the door for a new beginning, for new economic growth and prosperity in the face of peace and unity. The situation has recently worsened because of the credit crunch faced by many of the world famous banking institutions and Sierra Leone has not been any exceptions. The effect coupled with other factors has created more gaps for banking institutions to provide loans to small and medium enterprises. In a press release from Prlog Dec. 15, 2008 by Robin Trehan as quoted SMEs represent over ninety-nine percent of the countrys employers. While it is essential that these businesses obtain the necessary funding to remain active, they are often the first to suffer when financial crisis hits. Banks already facing financial hardship often deem SMEs as too risky to finance. Credit terms a re becoming increasingly harder and qualifying for financing is subject to much stricter guidelines. There are things that SMEs can do, however, to increase their chances of finding financing.1.2 Statement of the ProblemThe term credit in this thesis refers to an amount or sum placed at a persons disposal by a bank and usually to be repaid with interest within a given period of time. Small and Medium Size Enterprises (SME) is very important in terms of the dynamic role in the development of the private sector in Sierra Leone. The SMEs are regarded as an engine for any economic growth and development in any country.They provide opportunities for job creation and expansion in the physical reconstruction of the economy especially for a post war development country like Sierra Leone. Majority of the physical infrastructures ranging from housing, office buildings and business structures were all destroyed during the civil unrest. These structures need to be reconstructed for the economy to grow and become prosper. Today many construction companies or firms have emerged to assist in the rehabilitation and reconstruction.While there may be some of the construction companies who have existed of years, it is also true that majority of these construction companies are new ones who are just coming up to help and provide their expertise in the development of Sierra Leone. But yet still, it is a challenge for many of these companies to adequately involve in the process of rehabilitation and reconstruction simply because they cannot get the required finance in the form of overdraft or loans, or provide the necessary collateral for the banks as required, making them less competitive.In Sierra Leone the performance of SMEs over the years has been very poor which is due to the fact that the creation of credit from the banks which is an essential stimulant for private investment in the construction industries has been grossly under performing. This is one of the reasons for poo r performance of the economy in terms of growth in most developing countries including Sierra Leone.Construction companies have not been able to access huge funds by way of loan over the years from the banking and other financial institutions, mainly due to lack of confidence in the private sector as a result of problems like moral hazards and the absence of collateral security and the lack of experience in construction engineering.1.3 Justification of the StudyThe importance of the construction industries in the process of rehabilitation and reconstruction of the war towns in Sierra Leone cannot be over-emphasized. During the war there was so much destruction of infrastructures in the country, now that there is peace there is high need for reconstructions and the development of new roads and structures to aid national growth.International organisations like the International Monetary Fund (IMF), World Bank, African Development Bank (ADB) main focus is to assist Small Medium Size En terprises (SME) in developing countries gain strong financial base. It had been felt that SMEs employ majority of the work force in the developing countries, therefore, they have realised that when SME become financially stable the economy of the nation will be better and that the citizens will be able to live a comfortable life.The role of commercial banks and other financial institutions in private sector development and the assessment of their overall performance in terms of economic growth and development has not received much of the attention by researchers. The central bank maintaining interest rate at high level has greatly contributed to discourage SMEs from borrowing from retail banks and other financial institution for investment purposes.This is one of the reasons why most SMEs are under developed. Besides commercial banks are requesting for very stiff conditions to access loan by the private sector. A study on the provision of credit to construction companies for investm ent towards economic growth has not been studied in greater detail by previous researchers. This among others, gave me the urge to probe into the activities of the commercial banks and other financial institutions in the creation of credit to construction companies in Sierra Leone,This study is to help government and other professionals as well as other stakeholders, to grasp fully the implications of credit refusal to small and medium size enterprises and how it will affect the development of the nation. The result of this study is hope to enable banking and other financial institutions, local and national government and other stakeholders to device concrete ways by which small and medium size enterprises can easily get access to credit to undertake construction programmes.1.4 Objectives of the studyThe main aim of the study is to assess the implications of credit creations by the banks and other financial institutions to Small and Medium Size Enterprises with special focus on the Construction Industries for economic growth and development in Sierra Leone.The specific objectives areTo determine the extent to which banks have been contributing to the development of the construction industries in Sierra Leone.To examine some of the reasons responsible for the inability of the construction industries to solicit loans from the banks and other financial institutions for the purpose of investment.To establish reasons for the reluctance of the banking and other financial institutions to provide the much needed funds for private sector development.To examine the reasons for the reluctance of the banking sector to provide the much needed funds for SME in the construction industries for development, even though SMEs are regarded as the engine of economic growth.1.5 Research QuestionsCertain research questions will be drawn up for proper examination of this objective. These includeTo what extent do commercial banks provide funds to Small and Medium Size Enterprises in t he construction Industries?What are the main problems encountered by the construction companies in terms of securing loans and overdrafts from the commercial banks?What is responsible for the low investment of the private sector (SMEs) in Sierra Leone?What is the role of the central bank in facilitating credit creation for SMEs in the pursuit of development in Sierra Leone?What is the role of the Government ministry in the area of infrastructural developmental plans for Sierra Leone?The study will make use of secondary data received from the Bank of Sierra Leone, Commercial Banks and some of the registered construction companies in Sierra Leone.The study will try to reveal the reasons for the constraints Small and Medium size Enterprises are facing in securing credit facilities from the banks. Interviews will be conducted with senior officers of both the banking industries and construction sectors, together with government officers in the area of national development for the country .1.6 Definition of Operational Terms1. Credit Creation Credit creation is the multiple expansions of banks demand deposits. It is an open secret now that banks advance a major portion of their deposits to the borrowers and keep smaller parts of deposits to the customers on demand.2. Venture Capital Venture Capital is the name given to equity finance provided to support new, expanding and entrepreneurial businesses. Venture capitalists usually prefer to take a close interest in the business that is the subject of their investment. This could involve taking part in decision made by the business. Funds provided by venture capitalist are often referred to as private capital.(Mclaney E, 2003)3. Gearing Small businesses are in a fundamentally different position from that of the larger one on the issue of gearing. Financial risk to which capital gearing gives rise tends to emphasise operating risk, which will be present with or without gearing. Small businesses are more exposed to financia l risk than public liability companies. (Mclaney, 2003)4. Bank and Institutional Debt Long term loans are available from banks and other financial institutions at both fixed and floating interest rates, provided the issuing bank is convinced that the purpose of the loan is a good one. The cost of bank loan is usually a floating rate of 3-6 percent above the base rate, depending on the perceived risk of the borrowing company. The issuing bank charges an arrangement fee on bank loans, which are usually secured by a fixed and floating charge, the nature of the charge depending on the availability of assets of good quality to act as security.A repayment schedule is often agreed between the bank and the borrowing company, structured to meet the specific needs of the borrower and in accordance with the lending policies of the bank. (Watson D Head A, 2007)5. Security the Banks Perspective A bank has little to lose and much to gain by taking security for a loan. A banks solicitor should ch eck that the borrower and any other party providing security have capacity to do so. (The company act 1989, prima facie, a company could pursue only the objects for which its memorandum stated it was incorporated)6. Security the Borrowers Perspective It is often difficult for a borrower to argue against a reasonable request for security. However, some borrowers will be contractually prohibited from providing security by a negative pledge in a document to which they are already a party. Specialised lending for financing a project will always be secured over the asset or project in question. (Adams D, 2006)7. Cash Flow Statements for Small Companies Financial Report Standard (FRS1) prescribes a format for cash flow statements. Except for very small companies, all companies are required to prepare a cash flow statement for each accounting period.There are two approaches available under the standard the direct method which shows the operating cash receipts and payments summing to the n et cash flow from operating activities, and the indirect method which identifies the net cash flow via reconciliation to operating profit. (Wood F, 2002).CHAPTER 2Literature Review2.0 IntroductionThe purpose of this chapter is to make a review of related literature on Small and Medium isze Enterprises and the Creation of Credit in the Construction Industry. With these literatures the researcher will have a better understanding of the study, as well as what has already been done on it in the form of previous research.2.2 Definition of Small and Medium Size EnterprisesA business can be considered small on basis of predetermined criteria such as the number of employees, annual turnover or capital employed. In the late 1990s, it was estimated that small businesses with fewer than 50 employees accounted for 99 per cent of all UK business, almost 50 per cent of non government employment and 42 per cent of turnover. Small firms have become a focus for governmental policy at both national a nd intergovernmental level. Bolton in his report in 1971 identified three main characteristics of a small firmwere independently owned The business securities are not quoted in any established capital market that is they are not traded in the efficient market.were managed in a personalised way- The ownership of the businesss equity and hence its control lie in the hands of a small close knit-group that is it is a family type business.possessed a limited share of the total market2.3 Nature of Small and Medium Size EnterprisesThe Bolton report, the first official government inquiry into small firms attempted to establish standard definitions of small firms for particular sector of industry based on numerical indicators of size such as sales or number of employees. A firm with 250 employees in a labour intensive industry may still be a small firm. (Brown, 1987)Criteria for Small and Medium Size EnterprisesSize CategoryNumber of EmployeesMaximum Annual Turnover (euros)Maximum Balance b alance sheet totalMicro Firm0 -92 million euros2 millionSmall Firm10 4910 million euros10 millionMedium-sized Firm50 24950 million43 million2.4 Objectives of Small and Medium Size EnterprisesIn SMEs the managers and the shareholders are likely to be substantially the same person or at least closely connected with one another. Thus agency problems, and their potential associated costs, are likely to have little or possibly no impact on the typical small business.Because of the elimination of agency gap, most managers of SMEs are shareholder they would make decisions following a pure wealth-maximising goal more determinedly than would be the case in the typical large enterprise. The motives of managers or owners of small businesses are diverse. These motives might be the desire to experience the satisfaction of building up a business, a desire to lead a particular way of life, or a desire to keep someone (perhaps family) tradition alive.Since it is possible for managers to know the personal objectives of shareholders of small business, decisions can probably be made with these in mind. Both large and small businesses that makes a series of decisions causing the wealth to diminish, will sooner or later fail. Wealth maximisation goal is very important to small business and cannot be ignored.2.5 Organisation of Small and Medium EnterprisesThe research will consider Small and Medium Size Enterprises in the construction industries that are organised as private limited companies. According to Mclaney (2003) private companies need be of no minimum size public companies must issue at least 50,000 of nominal share capital, of which 25% must be paid up. There is no upper limit on the size of a private company.Private companies are entitled to restrict the transfer of their shares that is it is possible for the companys Articles of Association to contain a clause giving the directors the power to refuse to register a transfer, at their discretion. While private companies must publish annual accounts, the volume of details is rather less than that which the law requires of public companies.2.6 Sources of Finance for Small and Medium Size EnterprisesSeveral inquires have dealt with the financing of SMEs and each of these enquires discovered, to a greater extent, that small businesses find it more difficult and more expensive to raise external finance.A particular problem faced by small businesses in their quest for equity capital is the lack of an exit route. Generally investors require that there be some way of liquidating their investment before they are prepared to commit funds to it. A number of schemes have been introduced to help small businesses2.6.1. The loan Guarantee Scheme (LGS)as first introduced in 1981 to cover situations were potential borrowers were unable to provide sufficient collateral or where the bank deem the risk of lending unacceptable.2.6.2. The Enterprise Investment Scheme (EIS) This scheme replaced the Business Expansion Sc heme (BES) and it is designed to help small unquoted companies to raise equity finance from business angels2.6.3.The Venture Capital Trust (VCT) The trust was introduced in 1995 to encourage individuals to invest in smaller, unlisted trading companies. Venture Capital is the name given to equity finance provided to support new, expanding and entrepreneurial businesses. Venture capitalists usually prefer to take a close interest in the business. This could involve taking part in decision made by the business. Funds provided by venture capitalist are often referred to as private capital.(Mclaney E, 2003)2.6.4. The Enterprise Fund (EF) it was announced in the competitiveness white paper in 1998 and is designed to help the financing of small businesses with growth potential.2.6.5. The National Business Angel mesh (NBAN) it was launched in 1999 to connect business angels with companies seeking equity capital2.6.6. The late payment of Commercial Debts (Interest) act 1998gives certain sma ll businesses a statutory right to claim interest from large businesses and the public sector on late payment of commercial debts.2.7 GearingSmall businesses are in a fundamentally different position from that of the larger one on the issue of gearing. Financial risk to which capital gearing gives rise tends to emphasise operating risk, which will be present with or without gearing. Small businesses are more exposed to financial risk than public liability companies.(Mclaney,2003)2.8 Help and Advice to Small BusinessesOne of the major barriers faced by SMEs is the lack of information, help and advice on their operations. Recent initiative to improve this sphere includes2.8.1. The business link network organised in 1993 as a one stop shop for information and advice to SMEs. It brings together the services of major business development services in the single accessible location.2.8.2. The Enterprise Zone launched in 1997 as a definitive internet site for business information. It prov ides help on a whole range of business issues.2.8.3. The Information Society Initiative/Interforum E-Commerce Award launched in 1999 as part of governments e-commerce strategy. It is essentially an award scheme to recognise and reward best practice in the use of electronic trading among smaller firms.2.9 Bank and Institutional DebtLong term loans are available from banks and other financial institutions at both fixed and floating interest rates, provided the issuing bank is convinced that the purpose of the loan is a good one. The cost of bank loan is usually a floating rate of 3-6 percent above the base rate, depending on the perceived risk of the borrowing company. The issuing bank charges an arrangement fee on bank loans, which are usually secured by a fixed and floating charge, the nature of the charge depending on the availability of assets of good quality to act as security. A repayment schedule is often agreed between the bank and the borrowing company, structured to meet th e specific needs of the borrower and in accordance with the lending policies of the bank. (Watson D Head A, 2007)2.10 Security the Banks PerspectiveA bank has little to lose and much to gain by taking security for a loan. A banks solicitor should check that the borrower and any other party providing security have capacity to do so. (The company act 1989, prima facie, a company could pursue only the objects for which its memorandum stated it was incorporated)2.11 Security the Borrowers PerspectiveIt is often difficult for a borrower to argue against a reasonable request for security. However, some borrowers will be contractually prohibited from providing security by a negative pledge in a document to which they are already a party. Specialised lending for financing a project will always be secured over the asset or project in question. (Adams D,2006)2.12 Working Capital Problems of the Small BusinessWorking capital is the difference between current assets over current liabilities. The amount invested by businesses in working capital is often high in proportion to the total assets employed. It is important that these amounts are managed properly. It is often claimed that many small businesses suffer from a lack of capital and, where this is the case, tight control over working capital investment becomes critical. There are evidence, however, that SB are not very good at managing their working capital, and this has been cited as the major cause of their high failure rate compared with that of large businesses.2.13 Credit ManagementSmall businesses dont have the resources to manage their trade debtors (account receivables) effectively. Most small businesses dont have a credit control department. Small business also lack proper debt collection procedures, such as prompt invoicing and sending out regular statements.These risks probably tend to increase where there is an excessive concern for growth. In an attempt to increase sales, small businesses may be too will ing to extend credit to customers that are poor credit riskLack of market power is another issue for small businesses. They find themselves in a weak position when negotiating credit terms with larger businesses. When big customer exceeds the terms of credit, the small supplier may feel inhibited from pressing the customer for payment in case future sales are lost. (A survey undertaken by the Credit Management Research Centre (CMRC) during April and June, 2003, indicates that small businesses are likely to have to wait an average of 60 days for their trade debtors to pay.2.14 Cash Flow Statements for Small CompaniesFinancial Report Standard (FRS1) prescribes a format for cash flow statements. Except for very small companies, all companies are required to prepare a cash flow statement for each accounting period. There are two approaches available under the standard the direct method which shows the operating cash receipts and payments summing to the net cash flow from operating activ ities, and the indirect method which identifies the net cash flow via reconciliation to operating profit.(Wood F,2002)Credit Creation2.15 Definition of Credit CreationThe BNET business dictionary defines credit creation as the collective ability of lenders to make money available to borrowers. Credit creation is the multiple expansions of banks demand deposits. Banks advance a major portion of their deposits to the borrowers and keep smaller parts of deposits to customers on demand. The tendency on the part of commercial banks to expand their demand deposits as a multiple of their excess cash reserve is called creation of credit.2.16 Functions of Financial Intermediation in Credit CreationFinancial intermediation is the process of channelling funds between those who wish to lend or invest and those who wish to borrow or require investment funds. Financial intermediaries act as principal, creating new financial assets and liabilities. They do not act solely as agents, charging a comm ission for their services. (The Monetary and Financial System-CIB/BPP Publication 1993 Edition)Any institution standing between the ultimate provider of funds and the ultimate user of funds is engaged in financial intermediation. There are many types of institutions and other organisations that act as intermediaries in matching firms and individuals who need finance with those who wish to invest. These institutions also provide other services which are non-intermediary services like financial advisory services, fund management services and advice to undertakers and mergers provider by merchant banks. Some of the organisation that acts as financial intermediaries is as follows2.16.1 Clearing Banks this bank participate in system which simplifies daily payment so that all the thousands of individual customer payments are reduced to a few transfers of credit between the banks. They offer various accounts to investors and provide large amount of short to medium-term loans to the busine ss sector and the personal sector. The work of these institutions can best be understood through a consideration of the main items in their balance sheet.2.16.2 Clearing Bank Liabilities The money from the banks responsible comes chiefly from their customers sight and time deposits- mostly current and deposit accounts with which most people are familiar. An important additional item relates to certificates of deposit. These are issued generally for a medium amount of 50,000 and a maximum of 500,000 with an initial term to maturity of from three months to five years.Clearing Bank Assets Customers money is re-lent in a variety of ways. The main aim of the bank is to have a range of lending instruments of varying terms so that money can be recovered quickly and yet, at the same time, earn the maximum return.2.16.3 Investment Banks / Merchant BanksThe investment banks or Merchant banks have some functions that they undertake2.16.3.i Financial Advice to Business FirmsFew manufacturing o r commercial companies of any size can now afford to be without the advice of a merchant bank. Such advice is necessary in order to obtain investment capital, to invest surplus funds, to guard against takeover, or to take over others. Increasingly, the merchant banks have themselves become activity involved in the financial management of their business client and have had an influence over the direction these affairs have taken.2.16.3.ii Providing Finance to BusinessMerchant banks also compete in the services of leasing, factoring, hire-purchase and general lending. They are also the gateway to the capital market for long-term funds because they are likely to have specified departments handling capital issues as issuing houses.2.16.4 Foreign TradeA lot of merchant bank are active in the promotion of foreign trade by providing marine insurance, credits, and assistance in appointing foreign agents and arranging foreign payments. Merchant bank is essentially in the general business of creating wealth and of helping those who show that they are capable of successful business enterprise. It is expected that merchant banks will operate without the large branch network necessary for a clearing bank, they work closely with their clients and be more ready to take business risk and promote business enterprise than clearing bank.2.16.5 Building SocietiesThese take deposits from the household sector and lend to individuals buying their own homes. They have recently grown rapidly in the UK and now provide many of the services offered by clearing banks. Over the years many have converted to banks.2.16.6 Finance Companies/Houses Providing medium-term instalment credits to the business and personal sector. These are usually owned by business sector firms or by other financial itermediaries.2.17 Services Provided by Financial InstitutionsFinancial institutions are organisations that provide services in connection with one or more of the following-Financial intermediation, lin king ultimate providers of funds with ultimate users and creating new financial assets in the process.Exchanging financial assets on behalf of their customers, that is acting as brokers or agents for clients.Exchanging financial assets for their own accounts proprietary dealers, as they are termed.Helping to create financial assets for their customers, and then selling these assets to others in the market underwriting new share issues, for exampleProviding investment advice to others, example to people seeking a personal pension or to firms on mergers and takeovers.Fund management- managing the whole or part of a pension fund, for example some large non-financial companies have their own financial subsidiaries. In the United Kingdom Ford Motor Finance and Mark and Spencer Finance Se