THE ROLE OF MICROFINANCE ON THE GROWTH OF SMALL AND

MEDIUM SIZE ENTERPRISES

CHAPTER ONE

1.1 BACKGROUND OF STUDIES

In as much as the world is gradually moving from a 20th century technology to a

21st century technology, the more there is need for adequate supply of funds to

acquaint to the growing and ever needing population. Looking at time in

memorial one could discover the permanent stay of large production firm as well

as enterprises due to their stable availability to capital and hence due to their

large economies of scale they could only keep some few employees whom could

serve a lot of time in the production sector hence definitely

becamemonopolistic. In recent years with the evolution of microfinance and

small and medium size enterprises there has been some changes which this study

will enlighten the minds of the scholars who are interested in the development

of Cameroon to attain the 2035 vision of an emergent economy. Microfinance is

not a new concept. It is dates back in the 19th century when money lenders were

informally performing the role of now formal financial institutions. The informal

financial institutions constitute; village banks, cooperative credit unions, state

owned banks, and social venture capital funds to help the poor. These

1
 institutions are those that provide savings and credit services for small and

medium size enterprises. They mobilize rural savings, deposits and agricultural

fares so as to encourage these entrepreneurs and have simple and straight

forward procedures that originate from local cultures and are easily understood

by the population (Germidis et al., 1991). These funds are to finance the

informal sector SMEsand it known that these SMEs are more likely to fail

(Maloney, 2003). The creation of SMEs generates employment but these

enterprises cannot survive for long if they do not have access to enough capital

consequently they are bound to die after a short while causing those who gained

job positions to lose them and even go poorer than how they were when they do

not have adequatesupport from government and financial

institutions.

It is not until recent that microfinance had gained recognition thanks to the

noble prize winner Yunus Muhammad of the Grameen Bank together with his

development to then banking welfare to the Indian women who could not get access

to capital from the traditional principle of financial collateral which they could not

affordMohammadYunus, 2003. Banker to the Poor: Micro-Lending and the Battle

against World Poverty. Alan Jolis, New York)

2
 It should be noted that microfinance is not a panacea but it is a main tool that

foster development in developing countries.It is known worldwide (E.U 2011,

google.com) that the poor cannot borrow from the banks. Banks do not lend to them

because they do not have what is required to be granted a loan or to be provided with

the bank services. The lack of financial power is a contributing factor to most of the

societal problems. These problems emanate from poverty and it is known that with

poverty one is bound to suffer so many consequences ranging from lack of good

health care system, education, nutrition, Microfinance has proved this bank concept

to be wrong. They target the poor who are considered risky but the repayment rate

turns to be positive as compared with the regular commercial banks (Zeller and

Sharma, 1998).

Researchers have viewed microfinance in different dimensions. Microfinance

gives people new opportunities by helping them to get and secure finances so as to

equalize the chances and make them responsible for their own future. It broadens the

horizons and thus plays both economic and social roles by improving the living

conditions of the people. These improvements are in a nutshell to alleviate poverty,

and according to this project, it will be seen from the point of the development of

small and medium size enterprises SMEs and focusing mostly in the rural areas

3
The UN millennium goal to alleviate poverty by the year 2015 is far from fetch

despite the enormous works that microfinance institutions are doing to contribute in

this domain (HiderinkandKok, 2009). The main challenge facing the poor is to gain

financial power to enable them boost their income generating activities (Yunus,

2003).

1.2 STATEMENT OF PROBLEM

The research problem is based on the welfare of small and medium size enterprises

in their varioussectors of activities. This resource base should provide a platform for

the development of rural SMEs, and contribute to the country's fightagainstpoverty.

Business development, however, requires more than natural resources, and it is not

clear what challenges and opportunities in development rural SMEs are facing in

Cameroon.

DoesMicrofinance assistance have an absolute condition in the

development of small and medium size enterprises?

This study will investigate the underlying issues small enterprises in rural

areas are facing in their development. Particular attention will be given to the issue

of financing firm development, where one of the biggest microfinance institutions in

Cameroon by name Azire Cooperative Credit Union Ltd (AziCCUL). Whom from

4
the 1960’s have been carrying out a serious campaign against poverty by the

provision of financial, moral and developmental support to the growth of SME’s.

These specific questions shall guide us into the research

a) What markets are available for the small and medium size enterprises?
b) Is there sufficient access to technology and labour resources?

c) Do firms have access to financial capital to fund development by MFI

under the normal regulatory condition?

d) 1.3 Objectives of Research

This study is intended to investigate the problems and opportunities that small

businesses face in their development efforts, with a particular interest in the role that

microfinance institutions may be playing. In addition to gaining a more general

understanding of the challenges facing developing small firms, the study will

identify how MFIs are contributing to the development of small businesses and small

businesses succeed or fail in their efforts to acquire financing for their development.

This study is focus on the resource needs of developing rural small and medium size

firms, and how microfinance may be contributing to small firms' development, and

thus the sustainable development of rural agricultural, and manufacturing

infrastructure in Cameroon. The specific objectives are:

I. To investigate the extent in which AZICCUL helps its members in

5
 developing their small or medium size businesses.

II. If these services provided by AZICCUL are helpful to those who receive it.

III. If any other institution provided more better services than MFI’s

1.4 HYPOTHESIS

A hypothesis is going to further explain the idea behind the study which is

definitely a defense why the research is out to produce a particular result hence

proving the reasons for the research. This is justified as seen below;

H0: Small and Medium Size Enterprises receive absolute assistance from

microfinance institutions

H1: Small and Medium Size Enterprises do not receive absolute assistanceS support

from microfinance institutions

1.5 Significance/Justification of Study

In trying to justify why the current study is important, it is vital to mention that

researchers have found this area of study very important to the development of the

socio-economic activities in developing countries and their contributions to the

development of small and medium size businesses in. Extensive research has been

6
carried out on the role of the financial management aspects. Thisresearch will

therefore focus on AZICCUL which has not been exploited in terms of its

contributions to the development of small and medium size businesses and

particularly in the agricultural domain. A study of this nature is equally very

important because it is going to add more scientific facts on the microfinance plays

in the society.

Microfinance as a whole provides the rural population a means to have access to

financial services in their localities to boost their living standards in a sustainable

manner in line with the millennium development goals of alleviating poverty in

developing countries by2035. They can contribute in the fight against poverty by

improving the agricultural sector which is the main source of living to the inhabitants

of such developing nations as well as the secondary and tertiary sector. Thus it will

pave a way forward for potential investors to invest and a sustainable development

of SMEs to understand the difficulties they may come across and how they can

succeed in their endeavors.

1.6 SCOPE OF THE STUDY

AZICCUL is a credit union with six branches in Cameroon (Bamenda, Yaoundé

and Douala) with its main objective of providing financial services to the poor which

cannot be done by macro financial institutions and as such helping in poverty

7
alleviation and alleviating poverty. To cover the regions in the country will be

impossible because of the limited time frameof this research. For this reason, the

research will be limited to activities in the North West of Cameroon and south west

region due to the possibility of my accessibility

. The impact of microfinance to the development of SMEs in this area will be

analyzed, looking at its contributions, and in what form, and of course the response

of entrepreneurs to the contributions of this institution to them. As well as a

comparison between the before and after effect of the union on the business.

1.6 STRUCTURE OF THE STUDY

Chapter two comprises of theoretical perspective of the research; it talks about the

Literature Review Empirical Literature. It is followed by Chapter Three which

discusses the Method of Research and Data Collection. Chapter four which analyses

the result collected from our study and interpretation. Finally chapter five

summarizes the research, Discussion, Conclusion and Recommendation

CHAPTER TWO

INTRODUCTION

This chapter will discuss microfinance involvement into the financing of

8
SME’s in the Cameroonian economy. More so we look at the various theories that

refer their study to the role of microfinance in the development of small and medium

size enterprises. This chapter focuses on some of the concepts of microfinance and

the role they play in the development of SMEs. The concepts chosen are those that

are in relation with the area of this project. The chapter opens with an overview of

microfinance. This shows the various products and services that MFIs have and

explain how they are of importance to the development of SMEs, and also the extent

to which transaction cost affects the delivery of these products and services. The next

center of attention is SME growth and development.

2.1CONCEPTUAL ISSUES

9
2.1.1 Empirical literature/ Literature review

We shall be looking at the studies carried out by other researchers on their view

about small and medium size enterprises and their support from Microfinance

Institutions.

Maruthi Ram Prasad, Sunitha and LaxmiSunitha (2011) conducted a study on

Emergency and Impact of Micro-Finance on Indian Scenario. After the

pioneering efforts by Government, Banks, NGOs, etc the microfinance scene in

India has reached in take off stage. An attempt could be initiated to promote

a cadre of new generation micro-credit leaders in order to strengthen the

emergence of Micro-Finance Institution (MFIs), so as to optimize their

contribution towards the growth of the sector and poverty alleviation. Each

Indian state could consider forming multi-party working group to meet with

microfinance leaders and have a dialogue with them about how the policy

environment could be made more supportive and to clear up misperceptions. With

one state leading the way, we need to build on a successful model. By unleashing

the entrepreneurial talent of the poor, we will slowly but surely transform India in

ways we can only begin.

Idowu Friday Christopher (2010) conducted a study to find the Impact of

Microfinance on Small and Medium-Sized Enterprises in Nigeria. The fundamental

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objective of this study is to assess the impact of Microfinance on Small and Medium

Enterprises (SMEs) in Nigeria. Simple random sampling technique was employed

in selecting the 100 SMEs that constituted the sample size of the research.

Structured questionnaire was designed to facilitate the acquisition of relevant

data which was used for analysis. Descriptive statistics which involves simple

percentage graphical charts and illustrations was tactically applied in data

presentations and analysis. The findings of the study reveal that significant number

of the SMEs benefitted from the MFIs loans even though only few of them were

capable enough to secure the required amount needed. Interestingly, majority of the

SMEs acknowledge positive contributions of MFIs loans towards promoting

their market share, product innovation achieving market excellence and the

overall economic company competitive advantage. Other than tax incentives and

financial supports, it is recommended that Government should try to provide

sufficient infrastructural facilities such as electricity, good road network and

training institutions to support SMEs in Nigeria.

C.B.Ngehnevu&F.Z.Nembo (2010) conducted a study on The Impact of Micro

Finance Institutions (MFIs) in the Development of Small and Medium Size

Businesses (SMEs) in Cameroon Microfinance is a term used by many in different

domains to fight poverty. Poverty is a syndrome that is affecting the developing

countries and especially in sub Saharan Africa. This thesis iSs focused on three
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specific objectives: The first of them is to investigate whether CamCCUL helps

its members and/or customers in developing their small or medium size businesses.

The second aim is to find out whether rural SMEs can secure micro-financing with

ease and on reasonable terms. Lastly, to determine if there are underlying factors,

such as size of operation, securable wealth, or gender of application, is a factor in

getting a loan.

In other to accomplish the task, we had to gather data from primary and secondary

Sources in the rural areas of Cameroon. The primary sources where from

questionnaires and interviews.The population is drawn from two different groups;

the members of CamCCUL and the credit unions constituting CamCCUL league.

We will used of closed and open ended questions. The responses are analysed using

percentage frequency tables.

CamCCUL provide its members with financial and social intermediation services to

help improve their businesses. Securing micro-financing by SMEs is determined

by the stage or level of development in which the business is. Businesses that are

viewed as growing had it easy to get a loan. But the main criteria used were the

ability to pay back and to meet the set requirements to obtain a loan.

The main requirement is fixed tangible assets such as land. Onecan notice that the

poorest of the poor were not included in designing and implementing their policies.

12
The entry requirements are difficult for the poorest to meet thus they do not enjoy

the services of CamCCUL. We can say that the poorest are those who are not involve

in any income generating activities

2.4 Theoretical frame work

Critically looking at the various studies we have to center our frame of work based

on the various aspect that they depict such as;

 Access to finance by SME’s

 Risk management techniques by MFI to hedge against default

 Poverty alleviation.

 Cost of capital

All these are framed in the works of other writers as such.

Diagne and Zeller (2001) argue that insufficient access to credit by the poor

just below or just above the poverty line may have negative consequences for SMEs

and overall welfare. Access to credit further increases SME‟s risk-bearing abilities;

improve risk-copying strategies and enables consumption smoothing overtime. With

these arguments, microfinance is assumed to improve the welfare of the poor. It is

argued that MFIs that are financially sustainable with high outreach have a greater

13
livelihood and also have a positive impact on SME development because they

guarantee sustainable access to credit by the poor (Rhyne and Otero, 1992).

Buckley (1997) argue that, the indicators of success of microcredit programs namely

high repayment rate, outreach and financial sustainability does not take into

consideration what impact it has on micro enterprise operations and only focusing

on “microfinance evangelism”.

Carrying out research in three countries; Kenya, Malawi and Ghana, Buckle (1997)

came to the conclusion that there was little evidence to suggest that any significant

and sustained impact of microfinance services on clients in terms of SME

development, increased income flows or level of employment. The focus in this

augment is that improvement to access to microfinance and market for the poor

people was not sufficient unless the change or improvement is accompanied by

changes in technology and or technique.

Zeller and Sharma (1998) argue that microfinance can aid in the improvement or

establishment of family enterprise, potentially making the difference between

alleviating poverty and economically secure life. On the other hand, Burger (1989)

indicates that microfinance tends to stabilize rather than increase income and tends

to preserve rather than to create jobs.

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 Facts by Coleman (1999) suggest that the village bank credit did not have any

significant and physical asset accumulation. The women ended up in a vicious cycle

of debt as they use the money from the village banks for consumption purposes and

were forced to borrow from money lenders at high interest rate to repay the village

bank loans so as to qualify for more loans. The main observation from this study was

that credit was not an effective tool to help the poor out of poverty or enhance their

economic condition. It also concluded that the poor are too poor because of some

other hindering factors such as lack of access to markets, pricestocks, unequal land

distribution but not lack of access to credit. This view was also shared by Adams and

Von Pischke (1992).

A study of thirteen MFIs in seven countries carried out by (Mosley and Hulme

(1998) concludes that household income tends to increase at a decreasing rate as the

income and asset position of the debtors is improve.

Diagne and Zeller (2001) in their study in Malawi suggest that microfinance

do not have any significant effect in household income meaning no effect on SME

development. Investing in SME activities will have no effect in raising household

income because the infrastructure and market is not developed.

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2.2 REVIEW THEORIES

In corporate finance, pecking order theory (or pecking order model) postulates

that the cost of financing increases with asymmetric information. Financing comes

from three sources, internal funds, debt and new equity. Companies prioritize their

sources of financing, first preferring internal financing, and then debt, lastly raising

equity as a “last resort”. Hence: internal financing is used first; when that is depleted,

then debt is issued; and when it is no longer sensible to issue any more debt, equity

is issued. This theory maintains that businesses adhere to a hierarchy of financing

sources and prefer internal financing when available, and debt is preferred over

equity if external financing is required (equity would mean issuing shares which

meant 'bringing external ownership' into the company). Thus, the form of debt a firm

chooses can act as a signal of its need for external finance.

The pecking order theory is popularized by Myers and Majluf (1984) when they

argue that equity is a less preferred means to raise capital because when managers

(who are assumed to know better about true condition of the firm than investors)

issue new equity, investors believe that managers think that the firm is overvalued

and managers are taking advantage of this over-valuation. As a result, investors will

place a lower value to the new equity issuance.

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Pecking order theory was first suggested by Donaldson in 1961 and it was modified

by Stewart C. Myers and Nicolas Majluf in 1984. It states that companies prioritize

their sources of financing (from internal financing to equity) according to the cost of

financing, preferring to raise equity as a financing means of last resort. Hence,

internal funds are used first, and when that is depleted, debt is issued, and when it is

not sensible to issue any more debt, equity is issued.

Pecking order theory starts with asymmetric information as managers know more

about their companies prospects, risks and value than outside investors. Asymmetric

information affects the choice between internal and external financing and between

the issue of debt or equity. There therefore exists a pecking order for the financing

of new projects.

Asymmetric information favours the issue of debt over equity as the issue of debt

signals the board’s confidence that an investment is profitable and that the current

stock price is undervalued (were stock price over-valued, the issue of equity would

be favoured). The issue of equity would signal a lack of confidence in the board and

that they feel the share price is over-valued. An issue of equity would therefore lead

to a drop in share price. This does not however apply to high-tech industries where

the issue of equity is preferable due to the high cost of debt issue as assets are

intangible

17
Evidence of the theory

Tests of the pecking order theory have not been able to show that it is of first-order

importance in determining a firm's capital structure. However, several authors have

found that there are instances where it is a good approximation of reality. On the one

hand, Fama and French, and also Myers and Shyam-Sunderfind that some features

of the data are better explained by the Pecking Order than by the trade-off theory.

Goyal and Frank show, among other things, that Pecking Order theory fails where it

should hold, namely for small firms where information asymmetry is presumably an

important problem.

All these are required according to a report by Jan Batoldly a lecturer at the

University of Greenwich Business School published on the 28th of February 2008

which he said that the main source of finance company is equity.Accessing credit is

considered to be an important factor in increasing the development of SMEs. It is

thought that credit augment income levels, increases employment and thereby

alleviate poverty. It is believed that access to credit enables poor people to overcome

their liquidity constraints and undertake some investments such as the improvement

of farm

Technology inputs thereby leading to an increase in agricultural production

18
(Hiedhues, 1995). The main objective of microcredit according to Navajas et al,

(2000) is to improve the welfare of the poor as a result of better access to small loans

that are not offered by the formal financial institutions.

2.3 THE CONCEPT OF MICROFINANCE

The history of microfinance began sometime in India when the lecturer and professor

in Economics Muhammad Yunus discovered that the Indian women suffered a lot of

poverty and maltreatment from their employers who asked them to produce brooms

and sell and yet they could not make any profit to take home to feed their hungry

families. Yunus as an Economist said to himself that if he taught economics and did

not put it into practice then he had not imparted anything on the population.

Discovering that the women did not have access to finance from commercial banks

due to their inability to afford a strong financial collateral, he decided to take a loan

from his bank and then sub granted them to the broom makers so that they could

start on their own and then after sales they should repay him just the principal and a

little interest hence that brought about the GRAMEEN BANK which offered

financial aid at very cheap cost based on confidence.

Microfinance is defined as a development tool that grants or provides financial

services and products such as very small loans, savings, micro-leasing,

microinsurance and money transfer to assist the very or exceptionally poor in

19
expanding or establishing their businesses (Robinson, 1998). It is mostly used in

developing economies where SMEs do not have access to other sources of financial

assistance (Robinson, 1998). In addition to financial intermediation, some MFIs

provide social intermediation services such as the formation of groups, development

of self confidence and the training of members in that group on financial literacy and

management (Ledgerwood, 1999).There are different providers of microfinance

(MF) services and some of them are; nongovernmental organizations (NGOs),

savings and loans cooperatives, credit unions, government banks, commercial banks

or non-banking financial institutions. The target group of MFIs are selfemployed

low income entrepreneurs who are; traders, seamstresses, street vendors, small

farmers, hairdressers, (Ledgerwood, 1999).As well as some retailers, small

manufacturing companies as bakeries etc.

2.3.1 PRODUCTS AND SERVICES OF MICROFINANCE

According to Bennett (1994) and Ledgerwood (1999) MFIs can offer their clients

who are mostly the men and women who could be below or slightly above the

poverty line a variety of products and services. The most prominent their services is

financial, that they often render to their clients without tangible assets and these

clients mostly live in the rural areas, a majority of whom may be illiterate. Formal

financial institutions do not often provide these services to small informal businesses

run by the poor as profitable investments. They usually ask for small loans and the

20
financial institutions find it difficult to get information from them either because they

are illiterates and cannot express themselves or because of the difficulties to access

their collateral (farms) due to distance. It is by this that the cost to lend a dollar will

be very high and also there is no tangible security for the loan. The high lending cost

is explained by the transaction cost theory.

Products offered by Microfinance

 Savings account: This accrues yearly interest from what is known as
monthly share savings.
 Deposit account.
 Loans: such as social and consumption loans, business loans,
agricultural loans, emergency loans, real estate loans, special
operations(overdraft, syndicate loans, express loans, short term loans)
 Salary payments: both to members and customers.

 Sub-accounts: such school fees, Christmas account, death celebrations

and so on.
 Rest management income: claims to members death or incapacitation
 Daily saving to traders with daily transactions.
 Money transfers: both to members and non-members.

The services provided to microfinance clients can be categorize into four broad

different categories:

21
• Financial intermediation or the provision of financial products and services

such as savings, credit, insurance, credit cards, and payment systems should

not require ongoing subsidies.

• Social intermediation is the process of building human and social capital

needed by sustainable financial intermediation for the poor. Subsidies should

be eliminated but social intermediation may require subsidies for a longer

period than financial intermediation.

• Enterprise development services or non-financial services that assist micro

entrepreneurs include skills development, business training, marketing and

technology services, and subsector analysis. This may or may not require

subsidies and this depends on the ability and willingness of the clients to pay

for these services.

• Social services or non-financial services that focus on advancing the welfare

of micro entrepreneurs and this include education, health, nutrition, and

literacy training. These social services are like to require ongoing subsidies

and are always provided by donor supporting NGOs or the state (Bennett,

1997; Legerwwod, 1999)

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2.3.2 CONCEPT OF SMALL AND MEDIUM ENTERPRISES, GROWTH

AND DEVELOPMENT

Small and medium enterprises (SMEs) or small and medium-sizedbusinesses

(SMBs) are companies whose personnel numbers fall below certain

limit(http://wiki.answers.com/

The abbreviation "SME" is used in the European Union and by international

organizations such as the World Bank, the United Nations and the World Trade

Organization (WTO). Small enterprises outnumber large companies by a wide

margin and also employ many more people. SMEs are also said to be responsible for

driving innovation and competition in many economic sectors.

In July 2011, the European Commission said it would open a consultation on the

definition of SMEs in 2012. In Europe according to the E.U report (google.com)

there are three broad parameters which define SMEs:

• micro-entities are companies with up to 10 employees

• Small companies employ up to 50 workers

• Medium-sized enterprises have up to 250 employees.

23
The European Union definition of SME follows: "The category of micro, small and

medium-sized enterprises (SMEs) is made up of enterprises which employ fewer

than 250 persons and which have an annual turnover not exceeding 50 million euro,

and/or an annual balance sheet total not exceeding 43 million euro."

EU member states have had individual definitions of what constitutes an SME. For

example, the definition in Germany had a limit of 255 employees, while in Belgium

it could have been 100. The result is that while a Belgian business of 249 employees

would be taxed at full rate in Belgium, it would nevertheless be eligible for SME

subsidy under a European-labeled-programme.

According to German economist Hans-Heinrich Bass ( July 2011)empirical

researches on SME as well as policies to promote SME have a long tradition in

[West] Germany, dating back into the 19th century. Until the mid-20th century most

researchers considered SME as an impediment to further economic development and

SME policies were thus designed in the framework of social policies. Only the ordo-

liberal school, the founding fathers of Germany's social market economy, discovered

their strengths, considered SME as a solution to mid20th century economic problems

(mass unemployment, abuse of economic power), and laid the foundations for non-

selective (functional) industrial policies to promote SMEs.”

24
 While in Nigeria, The Central Bank of Nigeria defines small and medium

enterprises in Nigeria according to asset base and number of staff employed. The

criteria are an asset base between N5 million and N500 million, and a staff strength

between 11 and 300 employees.

Cameroon on its own scale follows that of the European zone which is obviously the

above.(source;“European Commission (2003-05-06). "Recommendation

2003/361/EC: SME Definition". Retrieved 2012-09-28. , Jump up Jump up ^Enterprise and

Industry Publications: The new SME definition, user guide and model declaration, Extract of

Article 2 of the Annex of Recommendation 2003/361/EC).

2.4 GROWTH OF SME’S

Small and Medium size enterprises have in recent years been trying all possible to

increase its growth size but due to the absence of enough and available capital they

have simply not been able to reach the benchmarks of their aspirations. According

to an article published by JOE DINGA PEFOKthe post newspaper no.01482 of

Monday 25th of November 2013 page 5, the Association of Financial Institutions in

Cameroon (APECAM) disclosed that 13 commercial banks have as deposits worth

FCFA 2800 billion while small and medium sized enterprises remained under

financed. APECAM president Mathieu MANDENG said this money is deposited in

different accounts by differ banks. He also disclosed that money which the CEMAC

25
zone keeps as reserves in the banks is 3 times more than the normal requirement.

This is about FCFA 1650 billion which was confirmed to be lying idle by the senior

BEAC officer. This money would have been given out as loans by the different

commercial banks to SME’s. He also said a risk retention mechanism to be put in

place by these banks to avoid default of payment. It was then he disclosed the fact

that Microfinance Institutions remain the sole hope of SME’s and though they have

some lapses in handling they high demand for loans, the market forces of demand

and supply are likely to add, such that the higher the demand for loans, the higher

the price for loans (interest) due to scarcity of funds. Here a perfect financial system

should be implemented like that in Ghana called the “Susu” and the “Feulu” in

Uganda and Kenya. Sub sequentially we cannot envisage a high percentage of

economic growth without a balance growth in investments.

2.4.1 Categorization of Small and Medium Size Enterprises

ENTERPRISE CAPITAL TURNOVER DEBT EMPLOYEES

CATEGORY

26
Medium sized <500m FCFA <1 billion <200m ≤250

FCFA

Small <100m FCFA <500billion <50m ≤100

FCFA

Micro <10m FCFA <50million <50m ≤50

FCFA

27
 Chapter Three

Introduction

This study comprises of a study which is based on the Role of Microfinance

Institutions on the Growth of Small and Medium Size Enterprises. Hence it lays more

emphasis on a scale of SME’s and MFI’s. We will elaborate on the Research Design,

Area of study, Sampling Techniques, Instrument of Data collection. In definite terms

we will work on both qualitative and quantitiveanalysisThis survey is carried out on

a sample population of the North West Region, specifically Bamenda. This is more

accessible to the researcher.

Research Design

Adopting a research design within the framework of this study such that we assess

the effect MFI’s on the growth of SME’s in the central business district which the

Bamenda and the South West region and that of the southwest region which is Buea.

For data analysis the research design stipulates the use of statistical methods, non-

experimental and descriptive methods to give results of the data. We will purposely

pick out SME’s from the various sectors of the Economy. It will have to also contain

qualitative and will aim to collect data that is representative of the sample population.

28
Area Study

The study is carried out in two towns of Cameroon. That is in both North West and

South West region i.e. Bamenda and Buea and will comprise of a scale of selected

Small and Medium Size enterprises (companies)andAzire Cooperative Credit Union

limited(AziCCUL) as the main microfinance institution to be studied well as

companies that must have had a certain degree of relationship with any Microfinance

Institution as our case study. That is why the area of study is a perfect choice due to

the availability of such genre of enterprises both of the primary sector, secondary

and tertiary sectors of production.

Sampling Techniques

The nature of the research requires the need of thorough examination of the

Enterprises on their level of growth hence the use of Questionnaire for target

questions financial reports of any slated financial years of as to allow the testing of

ratios.

29
Data Collection

This work will require primary data, secondary data as well as borrowed fact from

past authors. This will comprise of questionnaires. The financial data consist of

balance sheet, profit and loss statement and financial statement.

Instrument of Data Collection

In order to derive exact data from our targeted companies as well those who have

relationship with any microfinance institution. We will administer 20 purposive

questionnaires so as to target the SME’s and will be personally administered.

Data Analysis and Tools of Analysis

After collecting data, responses then analysis will be done in the following ways.

Tables and Percentages representing the responses.The use of pie charts and bar

charts to relate the degree of role played by the MFI. The financial reports will be

tested by ratios and benchmarks quantitatively analyzed. The hypothesis will then

be tested and with the use of percentages which those above 50% will have a positive

remark and significant because it will be a more benchmark from our hypothesis.

30
 CHAPTER FOUR

DATA PRESENTATION AND DISCUSSION OF RESULTS

4.1 PRESENTATION OF DATA

This chapter focuses on presenting data collected from the

questionnaires, interpreting them and drawing relevant conclusions from their

results. The interpretation will be geared towards confirming or rejecting the

31
research hypothesis. It also aims at showing the role commercial banks play in the

development of small businesses.

Thirty questionnaires were issued to some small businesses selected.

From all the 20 questionnaires given, 16 came back and 4 were not returned. From

those interviewed, 11 were commercial /retailers, 3 were manufacturing enterprises,

2 were service industries and 1 was an Agricultural enterprise. I will present and

analyze the data both in a quantitative method and qualitative method. The first 13

questions are to be analyzed quantitatively while the lat 3 questions are to be

determined qualitatively. The variables are presented together with their analysis.

The quantitative representation is done as such: Number of respondents for each

variable 100

Total number of respondents 1

4.1.1 AGE STRUCTURE OF THE BUSINESS

The age factor of SMEs greatly determines their ability to stay in business, to be

credible in business decision and policy formulation to achieve long-term plan. This

is because one would expect to know which level microfinance institutions actually

32
give a lot of support to the various small and medium size enterprises. As well as

their relationship with these institutions. Table 4.1.1 below shows the different age

structures and their frequencies.

Age Range Frequency Percentage Cumulative

frequency

Less than one year 2 14% 2

1-3 years 6 40% 8

5-10 years 7 46% 15

Above 10 years 0 0% 15

Total 15 100%

SOURCE; FIELDWORK, May 2014

The results could be represented using a pie chart as seen in figure 4.1.1 below

33
 AGE OF BUSINESS
0%

14%
46%

40%
<1 YEAR
1-3 YEARS
5-10 YEARS
ABOVE 10
YEARS

FIGURE 4.1.1

From the above graph, it is seen that 14% of the businessmen are less than a year

old, 40% between 1-3 years, and 46% between 5-10 years while 0% are 60years and

above. These results show that more than a quarter are still in their mid term growth

i.e. are not yet old, while 40%are beginners

4.1.2 Number Employees

This variable is a very sensitive one to measure the commitment of a small and

medium size enterprise in terms of growth as well as payment of salaries hence I will

have to show how related to the MFI for support in relation to employee

management. This is illustrated below in table 4.1.2.

34
Year of Commencement Frequency Percentage

≤ 10 10 66%

10-50 5 34%

51-100 / 0%

≥100 / 0%

Total 15 100%

SOURCE; FIELDWORK, May 2014

These results tell us that most of the firms in the area of studies are the first category

of small and medium size enterprises, this is seen in that most of the run just about

10 employees hence the 66% while the remaining 34% are for the other forms of

SMEs who have above 10 employees. They still approve the support of MFI in their

management. The results above could be represented in the bar chart below:

35
 50%
45%
40%
35%
30%
25%
5- 10 YEARS
20%
15% 1-3 YEAR
10% < 1 YEAR
5%
0%

<1 YEAR
1-3 YEARS
5-10 YEARS
ABOVE 10
YEARS

FIGURE 4.1.2

4.1.3 MAIN SOURCE OF CAPITAL

Here, I looked the various sources of their capital to the business. The main aim is
to see how MFI play the role of financial sustainability to the SMEs. Within the 20
questionnaire administered, most of the responses were related to either one or two
main sources of capital to the business. This is illustrated in the table below
Response Frequency Percentage

Loan from MFIs 8 36%

Loan from commercial 2 9%

banks

36
Personal savings 9 40%

Family and relatives 3 15%

Total 22 100

SOURCE; FIELDWORK, May 2014

When looking at the tables above you discover that most Small and Medium Size

Enterprises mostly have their capital from personal savings in MFIs due to their

high interest yielding rate followed by loans they collect from these same

institutions due to the low interest they pay on a loan. We can see this on the pie

chart below;

MAIN SOURCE OF CAPITAL

15%

15%
LOAN FROM MFI
36.00%
36%
LOANNKS FROM COMMERCIAL
BA
PERSONAL SAVINGS

40% FAMILY /RELATIVES

40%
9%
9.00%

37
FIGURE 4.1.3

4.1.4 KNOWLEDGE OF MICROFINANCE INSTITUTIONS

Here, we look number of respondents who are aware of the existence of

Microfinance Institutions and definitely if they belong to any of its categories. This
is illustrated on the table 4.1.4 as seen below.
Response Frequency Percentage

Yes 15 88%

No 0 0

Not quite 2 12%

Total 17 100%

FIG.4.1.4

As seen above, definitely most businesses 88% know very much about Microfinance

as well know of their operations and benefits where as the other 12% have maybe

heard but have not enjoyed any of their services.

38
4.1.5 THOSE BELONGING TO THE MICROFINANCE INSTITUTION

Here, we look those who belong to any category of microfinance institutions and
their commitment to them. Table 4.1.5
Response Frequency Percentage

Yes 13 81%

No 3 9%

Total 16 100%

SOURCE; FIELDWORK, May 2014

The result clear distinguishes those who know about MFIs and belong to them and

those not belonging to them. The difference happens to be so wide. This means that

most businesses are members to MFIs.

4.1.6 BENEFITS OF MICROFINANCE SERVICES

This is the most explicit variables that explain how microfinance institutions help

these SMEs in any way they can be it in terms of loans, savings, investment or risk

management and many others. Also most of the responses answered many

different services they enjoy from these institutions. Table 4.1.6 clearly shows this
Response Frequency Percentage

Loan/credit 10 38.5%

39
Investment support 5 7%

Saving facilities/overdrafts 10 38.5%

Risk management schemes 1 4%

Any other service 0 0

Total 26 100%

SOURCE; FIELDWORK, May 2014

Out of all the responses we got, their results tie with the variable which says that

most of this small and medium size enterprises who say the get their capital from

loans from MFIs as well as their personal savings from the same institutions. We

represent this properly on the pie-chart to show the gap between these differ services.

BENEFITS ENJOYED FROM MFI

4%
7%

LOAN/CREDIT
38.50% SAVINGS
INVESTMENT ADVICE
38.50% RISK MANAGEMENT

40
4.1.7 OTHER SOURCES OF CAPITAL OR SUPPORT FROM

COMMERCIAL BANKS

Out of the 20 respondents, 15 of them answered this question so as to give me a clue

on their commitment to microfinance institutions as well as the popularity of these
institutions. This is seen in table 4.1.This 7 below.
Response Frequency Percentage

Yes 6 40%

No 9 60%

Total 15 100%

SOURCE; FIELDWORK, May 2014

Some of these aids include overdrafts, discounts and even interest on savings. We

notice that most of the SMEs are financially related to microfinance institutions than

commercial banks for certain reasons we shall analyze subsequently.

4.1.8 PROBLEMS FACED BY SMALL BUSINESSES WITH SMALL AND

MEDIUM SIZE ENTERPRISES

Problems Frequency Percentage

Collateral 8 50%

Repayment duration 3 19%

Interest rates for loans 5 31%

Total 16 100%

41
SOURCE FIELDWORK, May 2014

From the table, the frequencies sum up to 16 meanwhile there were 20

respondents. It is seen that 50% 0f the businesses face the problem of provision of

collateral because most of them are starters and hence they find it hard to provide

collaterals. While 31% of the SMEs complain of finding it difficult to pay their

principals and interest at same moment, this is so because there exist very small

number of MFIs whereas there are more demands for financial assistance and also

they poor repayment approach hence so as to avoid a lot of delinquency they are

bound to demand valuable collaterals.

4.2 DISCUSSION OF RESULTS

From the above data collected, a lot of information was gathered pertaining

to the study’s area of interest.

Firstly, the age ranges shown on the cumulative frequency curve in figure 4.1.1

shows that most of the respondents had firms that were above the ages of 5 years old

and they had been very versed with their relationship with MFI

4.2.1 Comparing Microfinance Institutions and Commercial Banks

Most respondents who hard answered this question presented their answers this way

42
VARIABLE PREFERENCE

MICROFINANCE INSTITUTIONS CHEAP, CUSTOMER

ORIENTED(MORE PREFERABLE)

COMMERCIAL BANKS (LESS PREFERABLE)

In this light I will like to assert that MFIs are more satisfactory than commercial

banks.

Many respondents in the questions 4 clearly proved to the survey that they enjoy the

savings facilities of the microfinance institutions as well as their loans they collect

from these institutions; however they complain of some problems they encounter

with these institutions, they complain of the collaterals. This is due to the fact that

delinquency is unnecessarily high and this causes them to avoid loan granting based

on trust.

43
 CHAPTER FIVE

Discussion, Conclusion and Recommendation

5.1 Discussion

In this part of the paper, we shall take each of the specific objectives to compare

with theory. A conclusion will then be drawn whether there are any discrepancies

or the findings are in line with theory. We shall then try to find out why these

inconsistency and suggest possible solutions.

The main focuses of our investigation were:

To investigate how Microfinance Institutions tries to help its members in

developing their small or medium size businesses.

To find out whether Microfinance Institution members feel they have reasonable

and fair access to micro financing

44
Micro finance, its members and the development of their businesses

Microfinance in its mission statement has as priority to improve the welfare of its

members by promoting them to become financially strong. This microfinance

institution is a semi formal financial institution providing banking services to the

poor. They do not cater for the poorest. The criteria set up are difficult for the

poorest to meet and hence they cannot be a member and cannot benefit from

MFI’s intermediation services. They give out loans to boost the economic sector

and also train members how to judiciously use the money granted to them so as

to repay back without any difficulty. According to Ledgerwood (1999), some MFIs

provide financial and social intermediation services such as the formation of

groups, development of self confidence and the training of members in that group

on financial literacy and management. We can say here that, this study realized

the similarity of the empirical study and theory.

They have services and products that members or inhabitants of rural localities

never use to have. The services that were only meant for the rich can now be

enjoyed by the poor though not the poorest, who were unable to finance their

economic activities previously due to lack of access to commercial banks.

Making a comparative analysis, both the members and the credit unions confirmed

that the MFI’s is helping them in most of their business activities. When a business
45
is flourishing, it means the living standards of the family concern will be better and

also the expansion and consequently job opportunities will come up.

The increase in membership indicates that there is a positive impact in MFI’s

activities. They have rated the level of awareness of their products and services to

members as high. They notice this by the influx of new members and that the

number increases at an increasing rate. Here some of the staffs are deployed to the

various localities to sensitize on the availability and need for small businesses to

contact them for the services they offer and that it will help them. They also go

around mobilizing their members to save and this is done from business to

business.

The effect of business size in securing financing for growth

Securing finance in the form of loans by SMEs is determined not only by the size of

business operation but also of the type of business and the worth of it. MFI’s does

not only grant these aspiring businesses loans but also provide them with some

training. These trainings are meant to feed the entrepreneur with the necessary

business skills to better run the venture. The determining factor for a firm’s growth

is the availability of resources to the firm (Ghoshal, Halm and Moran, 2002).

Early stage businesses are not easily granted with loans. They represent a smaller

percentage from the field data gotten. Most of them do not or find it difficult to
46
meet the requirements for a loan (collateral). They cannot secure the necessary

resources and has a possibility to die in this early stage. The granting of loans is

much easier to large firms that small ones (Gary and Guy, 2003). MFIs consider

client’s ability to repay debt and assess the minimal sum they can contribute as

equity before offering a loan. Existing firms are considered to have a history that

can be judge by the MFIs before granting a loan. A bad history means loan denial

and a good history means the loan will be granted. A start up business does not

have this history and MFIs do not rely on them because of not facing the problem

of information asymmetry. This is in confirmation with Ledgerwood (1999) that

MFIs prefer to provide products and services to meet the needs of growing

businesses since they are considered more reliable and less risky.

Microfinance institutions are important in that they fill the gaps that exist between

commercial banks and wealthy clients. They are to meet the needs of those who

are considered not fit to use the bank’s services and most especially the poorest.

There is a mad rush of customers to the credit unions to enjoy their services which

the banks do not offer. These services include; low interest rates, not so strict

collateral, generally an encouraging banking conditions. Since more well to do

people are rushing to become members, this has made the credit unions stricter in

its liquidity criteria that has made it not easy for the poorest to meet up.
47
The country has been stroke by economic crisis thus making the inhabitants

skeptical to save in commercial banks. During the crises period most banks were

liquidated and made away with client’s money. They leave to suffer the

consequences. With the credit union, which operates more or less like a

cooperative, the customers are the owners. They are confident in it because they

know how it is run and all decisions taken are taken by themselves (Tawah et al.,

2008). There exist local NGO‟s who, with the help of the Government helps in

meeting the needs of the local people. The NGO‟s are more concern with

farmers. They provide them with subsidies popularly known as “subventions”.

These are in the form of tools, fertilizer, seedlings etc and manpower training.

CIG‟s are groups of individuals with common goals in an area and whose activities

are considered of paramount to the well being of the society. The government is

more involve with these local groups than with individuals. The individuals that

are considered are those with large pieces of land and who can be able to manage

the inputs. They must have the knowhow to convince the actors concern.

5.2 Conclusion
Microfinance institutions are an asset to the developing and transition
countries. The services they provide are tailored to meet the needs and
aspirations of the local inhabitants and emphases are towards the poor.

48
The products and services put forth to the members are not by itself a
solution to the numerous problems affecting the poor. These problems
range from business skills, lack of financial intermediation services, and
the lack of markets, technology etc. This financial intermediation services
will only provide a plat-form for those who are considered not fit to meet
the obligations of the banks to be a client. SMEs are very much affected
by these constraints and these MFIs are towards bridging the gap
between formal and informal financial services. These institutions and its
network being a typical example, provides a focal point that makes its
members financially comfortable but with their hard work and
commitment. It should be noted that microfinance does not serve or
solve all the problems of the poor but it serves as a means of helping
them to boost their economic activities or augmenting their status.
According to Hulme et al (1996), microfinance schemes often are of
paramount importance when the targeted problem is in its initial stage
and not when it has emanated. Microfinance is only a portion of what is
needed to boost an enterprise activity in the rural areas and who are
incapable of getting the necessary assistance from a commercial bank. It
develops new markets, increases income, creates and accumulates
assets and promotes a culture of entrepreneurship. Besides
infrastructural development, MFI’S needs information from the poor
micro entrepreneur about market trends and skills so as to create a
49
favorable financial environment for them. MFI’s has as mission
statement to sustain and develop a secure and law abiding network of
cooperatives credit unions that offer efficient development of their
members and communities. It is noticed that MFIs has as main target the
poor and the poorest. MFI’s and its network can be considered as
targeting the poor but not the poorest. The requirements needed by the
credit unions to become a member are not easy to be met by these
poorest individuals. The amount demanded to own a share is high for
these poorest. The products and services and also the convenience of the
microfinance institutions are noted to be one of the driving forces behind
its success.
Despite the high interest rate charged sometimes, their products
and services are still demanded but at times they are subsidized by the
government or NGOs. The main underlying factor here is that
commercial banks do not serve poor clients with small loans as compared
to Microfinance Institutions in the society for their growth.
5.4 problems encountered during the Research
During this survey, I went through some inevitable problems which
hindered me to fully acquire data to get an understandable result,
however it didn’t stop the completion of the research.
We had a problem in administering the questionnaire because
some microfinance institution refused to receive me, claiming that they
50
were too busy. Other refused because they didn’t want to disclose
private information about their institutions.
Furthermore when the questionnaires were administered the
institution gave me appointments during their break and on reaching
there, no one would be on seat. At times, I had to stand outside their
office for about an hour and a half before being attended to.
More so getting the financial statement of the Small and medium
size Enterprises was very difficult because they did not want their
financial data to be publicized.
Again during the interviewing process, business owners
deliberately refused to collaborate because they thought I was a tax
inspector.
Also the fact this research this work was carried out at the same
time attending lectures was a limitation. The microfinance institution
gave us appointment at the same hours we were supposed to be in class.
So we had to forgo one.
Finally we had financial difficulties. The manuscript were
repeatedly printed or documented each time we had to correct as well
as research was tough due to our low accessibility to internet as we
always bought time and other research kits and accessories.

51
5.4 Recommendation
The membership fee for new applicants should be reduced so as to
incorporate the very poor into the system. This will enable them get
access to the products and services that those just below or just above
the poverty line enjoy.
The mode of repayment should be revised so that the poorest can
borrow without collateral. This should be done in a way that will increase
the frequency of repayments and this is known to reduce the risk of non-
payments. Evidence from Bangladesh by Armendariz and Morduch
(2005) suggest that MFIs with high repayment rates have low moral
hazard problems.
The Cameroon Government on its part should a more stable and
predictable environment to encourage nationals to keep their money
with microfinance institutions. For many Cameroonians do not consider
Microfinance institutions as a safe place to keep money especially the
smaller and newly created ones due to their constant liquidation of
these institutions for example FIFFA
Group-based lending should be encouraged. This will serve as a
means to increase its depth since some poor men and women cannot
have access to these products and services. But with the formation of a
group, members of that group may apply for the services and members
in the group act as guarantors for the others.
52
Microfinance institutions should always try to attend to students who
come for research purposes such as questionnaires, before they reject
them because not all research involve inside or secret information.

53
54
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