THE EFFECT OF DEBT MANAGEMENT ON LOAN REPAYMENTS IN SMALL AND MEDIUM SIZE ENTERPRISES IN BUEA MUNICIPALIY, SOUTH, WEST REGION

ABSTRACT 

Small and medium scale enterprises (SMEs) are considered important in both developed and developing countries. They produce goods and services which help to increase economic growth and contribute significantly to employment creation. Unquestionably, access to finance from financial institutions is essential for the profitability and sustainable growth of the SMEs sector. The purpose of the study was to examine the effect of debt management on loan repayment of SMEs in Buea Municipality. Examine the extent to which gender affects loan repayment of SMEs in Buea Municipality. Specifically, the study seeks to evaluate the extent to which the type of business sector, the size of a loan incurred, borrower’s indebtedness and extent to which education and training in credit management affects the repayment capacity among SMEs in Buea Municipality. In order to achieve these objectives, the study employed a cross-sectional research design to sample 100 respondents using a structure questionnaire through Convenience and Simple random sampling techniques. Chi-Square test and Regression techniques were employed to analyzed the data using SPSS 21.0.  Findings revealed that even though more male pays their credit on time, majority of the defaulters were still the same men. it was concluded that there is a significant difference between the credit management of the SMEs owners across genders. Regression analysis revealed that the sector of operation of the business has a negative and insignificant relationship with SMEs owner’s ability to default loan. In addition, loan size has a significant positive relationship with loan repayment. This implies that the higher the loan the higher the chances of defaulting. Findings further revealed that borrower’s indebtedness also shows a positive and significant relationship with loan repayment. It was concluded that SMEs owners who have attained a certain education and training on debt management have fewer chances of undergoing loan default. It was recommended that financial institutions should observe thoroughly, size of the loan, borrower’s history, knowledge in the type of businesses etc. before granting loans to small scale enterprises.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study 

Small and medium-sized enterprises are at the core of the global economy. The role of small and medium-sized enterprises (SMEs) in the development process remains at the forefront of policy debates in developing countries as well as in developed countries, according to Bataa (2008). Bataa seems to believe that the advantages claimed for SMEs are various, including the encouragement of entrepreneurship; the greater likelihood that SMEs will utilize labour-intensive technologies and thus have an immediate impact on employment generation; they can usually be established rapidly and put into operation to produce quick returns; and that, they may well become a countervailing force against the economic power of larger enterprises. Nonetheless, Deakins (2009) argued that SME growth is accelerating the achievement of broader socio-economic goals, including poverty alleviation. Then again, CEEDR (2007) argued that SMEs ‘ ability to grow is highly dependent on their willingness to invest in restructuring, innovation, and qualification; all of which require capital and thus access to equity or debt financing. This study there sought to examine the effects of debt management on loan repayment of SMEs in Buea Municipality. 

In in this chapter, adding to the introduction, the researcher presents the background to the study, the statement of the problem, the purpose of the study, the objectives of the study, research questions, hypotheses, scope of the study, the significance of the study, and definitions of operational terms and concepts.

In a study by Rweyemamu et al. (2003), it was found that formal financial institutions have struggled to support small and medium-sized enterprises by providing loans in both urban and rural communities due to the difficulties of repaying loans. These include poor financial management; existence of information asymmetry and bank credit rationing (Chijoriga and Cassimon (1999). Ogawa and Suzuki (2000) pointed out that the bank does not want to offer loans to small and medium-sized enterprises because the scope of the loans needed is too limited and they find it costlier to offer such loans. 

According to Chijoriga and Cassimon (1999), most formal institutions find low-income SMEs to be too bad to save, and are not known to them personally, do not hold written accounts or business plans; they typically borrow small and inexpensive quantities.

However, the underlying variables/challenges facing SMEs were classified by Nawai and Shariff (2010) under four distinct headings: individual/borrower, firm, institutional / lender and loan characteristics affecting loan repayment. Nonetheless, Derban, Binner and Mullineux (2005) tended to group the factors into three main categories: the intrinsic characteristics of borrowers and their businesses; the characteristics of the borrower’s lending institution and the suitability of the borrower’s product; and the systemic danger of external factors such as the economic, political and business environment in which the borrower operates. They argued that each of these could make it unlikely that the loan would be repaid. 

Atieno (2009) states that for new SMEs to start and expand operations, develop new goods, invest in new workers or production facilities, access to external financing is important. The availability of finance for investment in positive net present value projects is vital to the sustainability and viability of new SMEs. An overwhelming majority of new SMEs rely on internal funding (contribution from investors, family and friends). Internal financing is often insufficient for the sustainability and growth of new SMEs. Keeping costs within the constraints of self-financing is increasingly difficult. New SMEs, therefore, need external capital (Oke, Adeyemo and Agbonlahor 2007). Moreover, financing theories suggest, that all being equal, banks will finance lower risk, lower growth ventures (Nawai and Shariff, 2010). 

SME failure cannot, however, be limited to a lack of funding. Nieman and Niewenhuizen (2009) noted that the largest percentage of SMEs have failed due to cash flow problems during the first two years of their existence. Cash flow problems can result from lack of access to bank finance or from lack of knowledge of financial management (Nawai and Shariff, 2010). Nawai and Shariff (2010) further endorsed the belief that SME owners must themselves be able to interpret and understand financial statements. In addition to this, most owners and operators of SMEs are financially illiterate, which leads to mismanagement of business finances causing most enterprises to fail. Foxcroft, Wood, Kew, Herrington and Segal (2002) reported that the lack of education and training in new firms has limited management efficiency.

Lack of education and skills can as well mean, or lead to a lack of, financial management knowledge. In support of this notion, Fatoki and Garwe (2010) argued that lack of knowledge and training are some of the reasons for the low level of entrepreneurial creation and the high failure rate of small businesses. In addition, loans to small and medium-sized enterprises remain a laborious and overwhelming operation as many factors affect the survival of these businesses and their loan repayment behaviour. The main challenge is getting information about the business (López, 2007). In addition, accounting skills are lacking for SME owners, leading to improper accounting procedures. Small business owners often mix their personal finances with business finances which complicate the assessment of affordability and confusing to the assessor. It is from this background that the study aimed at examining the effects of debt management on loan repayment on SMEs in Buea municipality.

Like other companies, small-scale businesses require money to operate their operations. As mentioned earlier, capital generation through credit systems has become a necessity for small-scale business growth. This creates debt for these companies. Tantum (2003) advances that debt is the amount of taxes incurred during a tax period due to some kind of governmental jurisdiction. Debt takes many forms and can be defined by a bond, loan check, mortgage and other terms of repayment and interest rates where applicable. Such various forms are indicators of the intent to refund the amount owed on an agreed date as set out in the terms of repayment.

Wallitsch (2007) argues that debt management is an approach that is adapted to guide an individual or business organisation to manage its debt. This definition includes debt settlement, bankruptcy, debt consolidation, personal loans as well as other techniques that assist businesses to service outstanding debts. Therefore, debt management can be interpreted as a deliberate action taken by a debtor or agents employed on their behalf to reduce the debt burden or strategize to eradicate the debt through appropriate terms of payment. Cecchetti et al. (2011) note that a fair level of debt promotes welfare and growth, but high-level debts can lead to a decline in a company’s growth. Reinhart et al. (2009) support this argument by suggesting that debt only has a positive impact on a company’s growth when it is within certain limits. He assumes that when the ratio goes beyond certain rates, a business is vulnerable to a financial crisis. Stern Stewart and Business share the same view that high debt increases the likelihood of a company facing financial distress. Accumulating high levels of debt by a small scale enterprise will constrain its ability to undertake a project that is likely to be profitable. This is because it would not be able to attract new debt from financial institutions. 

1.2 Historical Background 

Cameroon has experienced a rise in its public debt due to poor debt management. Cameroon debt is now estimated at 6527 billion CFA which is about 32% of its Gross Domestic Product (GDP) (business in cameroon.com). Though Cameroon is still within the Economy of Monetary Community of Central Africa (CEMAC) limit of 70% of GDP and its debt is still better than some countries in the CEMAC region like Gabon whose debt was 9912 million dollars in 2018 which is over 58.19% of its GDP. They however, experienced a 4.45% fall in debt from 2017 where the debt was 62.64% of the GDP. While Cameroon had an increase in debt from 5419 billion in 2017 which was about 28% of its GDP (Cameroon, 15 May 2019). These debt finances activities have to generate future income for our country which would help her pay the debt in time. Though the increase in debts proper management would be good for our country. 

The small business normally goes in for loans and their main problem has been to pay back this loan in time and avoid delinquency and default. A lot of businesses have been closed or collapse in Cameroon due to this example the Meridien BIAO Cameroon Bank which collapses in 1996 because it could not pay its creditors (Cameroon, 15 May 2019). Thus and effective debt management plan in business in Cameroon would help them pay their loans in time.

1.3 Contextual Background

Several contexts explain debt management including macro context, objectives and debt management strategy, cost and risk and the role of debt management and how it should be organized. The micro concept talks about the basic budget arithmetic. It explains that a risky debt structure indicates a risk to the business and high debt imply higher cost (Jessen, 29 June 2019). This shows that an ineffective debt management plan would cost more harm to the business.

More so, the objectives and strategies used by management for debt management are very important. A good objective for acquiring debts and a good management strategy to manage the debt after acquisition would go a long way to endure repayment and prevent delinquency thus making it possible to collect more loans for the business.

Furthermore, the cost and risk of a loan should be defined in a debt portfolio. Cost is the interest payment on debt while the risk is negative effects that could arise from and undesirable outcome. The role of a debt manager is to monitor and manage risk (refinancing risk, interest rate and currency risk), and to ensure that they acquire the debt at the cheapest cost possible. Short term debt seems to be relatively cheaper than long term debts. 

Lastly, the role of the debt management office in an enterprise is very important here. For effective strategy development and coherent it is important to have a central efficient debt manager, who would develop a good debt management strategy and implements the strategy. 

1.4 Theoretical Background.

Many empirical studies have used Modigliani’s lifecycle theoretical model as quoted in Deaton (2005) as their primary approach to understanding SMEs ‘ credit actions (Nofsinger, 2011 and Holzl, 2009). In line with these studies, Fatoki and Asah (2011) observed that small and medium-sized enterprises that have been in business for more than five years have a much better chance of success in their credit applications compared to small and medium-sized enterprises founded for less than five years.

In the same vein, Nofsinger and Wang (2011) argue that a business ‘ trading experience is another major factor explaining the difference in debt financing levels available to SMEs; yet Fatoki and Asah (2011) believe that as a business increases its ability to enhance its information and financial management practices, it simplifies access to debt financing from financial institutions.

Despite efforts to theorize the financial behavior of SMEs in an attempt to conceptualize the various financing trends pursued by SMEs at different stages of profitability and development, it seems that different theories suggest different approaches.

The theories under SMEs that form the bases of this research are the Social Network Theory, Social Exchange Theory, Theory of Large Numbers and Transactional cost theory regarding loan and repayment described how the performance of SMEs in Buea Municipality. Models use by SMEs to access loans such as Credit Scoring Model, Accounting-based Model and the Survival-based Credit Scoring Model would be employed. 

1.5 Statement of Problem 

SMEs in sub-Saharan Africa are more financially constrained than in any other developing country, according to data collected by the World Bank (2011) at the enterprise level. Just 20% of SMEs in Sub-Saharan Africa have a line of credit from a financial institution compared to, for example, 44% in Latin America and the Caribbean, and only 9% of their investment is financed by banks versus 23% in Eastern Europe and Central Asia.

Loans play a vital role in the economic growth and creation of small and medium-sized enterprises and are essential inputs required to establish and grow the enterprise of small and medium-sized enterprises. Loans help SMEs to access financial resources and take advantage in their immediate environment of potentially profitable investment opportunities (Zeller and Sharma, 1998). The need for loans or credit facilities is needed by self-financing limitations, production level uncertainty, and the time lag between input and output (Kohansal and Mansoori, 2009). The repayment of loans to SMEs, however, is a primary concern for SME owners because it has a direct impact on the success, creditworthiness and development of business ventures (López, 2007). Efficient loan repayment determines the cash flow and the success of the day-to-day operations of the business. Low loan servicing and management results in late payment in the supply chain to borrowers and other stakeholders. The repayment of loans must, therefore, ensure extensive monitoring of the cash flow as well as debtor collection strategies. Despite the role played by SMEs in employment creation and poverty alleviation, SMEs in Cameroon are currently faced with many serious loan repayment difficulties which act as a barrier to their emergency and growth. Besides, no study has examined the effects of loans repayment on SMEs business performance within Morogoro municipality. 

Small-scale businesses require financial assistance to become viable and efficient, according to Babgana (2010) as quoted in Moruf (2013). These businesses play a pivotal role in the nation’s economic development, in the fields of employment, general development and the marketing of goods and services. Despite the role played by SMEs in employment creation and poverty alleviation, SMEs in Cameroon are currently faced with many serious loan repayment difficulties which act as a barrier to their emergency and growth. Besides, no study has examined the effects of loans repayment on SMEs business performance within Buea municipality. Taking the above reasons into consideration, this study aimed at examining the effects of debt management on loan repayment of SMEs in Buea Municipality. 

1.6 Research Questions 

1.7 Main Research Question 

What is the effect of poor debt management on loan repayment of SMEs in Buea Municipality? 

1.8 Specific Research Questions 

1. How does Gender Affects Credit Management Practices of SMEs in Buea Municipality? 

2. How does the type of business sector operating by borrower affect loan repayment of SMEs in Buea Municipality?

3. How the size of loan incurred by borrower affects loan repayment capacity of SMEs in Buea Municipality? 

4. How does borrower’s indebtedness affect loan repayment of SMEs in Buea Municipality?

5. How does educational level attained, explain credit management among SMEs in Buea Municipality? 

1.9 Objectives of the Study 

1.9.1 Main Objective 

The main objective of the study is to examine the effect of debt management on loan repayment of SMEs in Buea Municipality

1.9.2 Specific Objectives 

1. To Examine whether Gender Affects Credit Management Practices of SMEs in Buea Municipality 
2. To examine whether the type of business sector operating by borrower affect loan repayment of SMEs in Buea Municipality 
3. To examine whether the size of loan incurred by borrower affects loan repayment capacity of SMEs in Buea Municipality 
4. To investigate whether borrower’s indebtedness affect loan repayment of SMEs in Buea Municipality
5. To investigate how education and training in credit management attained, affects the repayment capacity among SMEs in Buea Municipality 

FURTHER READING: BANKING AND FINANCE PROJECT TOPICS WITH MATERIALS