Trade credit and supply chain delivery in the Ghanaian construction industry: Analysis of vendor interactions with small to medium enterprises

Abstract

Purpose

Trade credit is treated as a financial intermediation device whereby construction vendors act as financial providers to their customers through deferred payments of goods purchased. The purpose of this paper is to investigate and report upon the key factors and motives influencing vendors' decision on trade credit provision to small to medium sized construction firms.

Design/methodology/approach

Adopting deductive methodological approach, this paper utilises a combination of primary data emanating from structured survey questionnaires supplemented by secondary source of data from an extensive literature review, to present insightful commentary about trade credit provision in Ghana. The structured survey questionnaire was administered to 100 construction vendor firms/suppliers to elicit relevant data about their trade credit intentions. Drawing upon the principles of a total design method (TDM) of survey, a relatively high response rate of 57 percent was achieved. Principal component (factor) analysis was adopted to obtain simplification of variables and to detect underlying dimensions and reveal potential complex structures within decision variables.

Findings

The underlying constructs and motives of vendors on trade credit were intricately interwoven in two principal factors: risk distribution and liquidity; and sustaining business relationship and liquidity. Despite the uncharacteristic manifestation of the liquidity measure being associated with the two principal components, the findings demonstrate the relative importance of liquidity in the trade credit debate. A critical observation stemming from the analysis was that trade policy was absent within the trade credit market in Ghana; this poses a potential threat to trade credit exchange and its development.

Originality/value

The paper's methodological approach is uniquely positioned between the conceptual and empirical interface and the overarching research is pioneering within the developing world nation of Ghana. The paper's findings will be useful to contractors, particularly, small and medium size contractors who are considering feasible finance options; and vendors who seek to consolidate their clientele base.

Citation

Badu, E., Edwards, D.J. and Owusu‐Manu, D. (2012), "Trade credit and supply chain delivery in the Ghanaian construction industry: Analysis of vendor interactions with small to medium enterprises", Journal of Engineering, Design and Technology, Vol. 10 No. 3, pp. 360-379. https://doi.org/10.1108/17260531211274729