The effect of Micro Finance Institutions on the Growth of Small and Medium Size Enterprises

ABSTRACT

The research project was carried out in order to look at The effecs of Micro finance on the growth of small and meduim size enterprises in Buea Municipality with the case of Mutengene saving. Inorder to acomplish this work, the data collected and used came from primary sources.

The primary data is obtained from the use questionnaires. The study use the chy square technique to capture the services of MSLCS to SMEs. Basing on the research findings, it was seen that, there is little progress on the contribution of MSLCS credit Union on the performance and growth of small scale enterprises in Buea Municipality .

Firstly, it was established that, there is low accessibility of microfinance services provided by MSLCS  among the small scale enterprises. However, it was noted 70% clients who access loans from MSLCS  do not have appropriate business education hence there is need for MSLCS  to enhance its access through providing enterprising education to its clients. 

CHAPTER ONE

INTRODUCTION

1.0 Back ground of the study

The microfinance industry worldwide has been recognized as an instrumental tool for poverty alleviation and economic growth. There socio-economic transformation effort of low income and poor community has been possible through accessing semi-formal and informal financial products and services.

The pivotal role of microfinance has helped foster the growth and development of SMEs in the world by providing Start-Up and business expansion capital among other financial services.

Microfinance institutions target the poor who are considered risky but the repayment rate tends to be positive as compared with the regular commercial banks (Zeller and Sharma 1998).

Microfinance dates back to the 19th century when money lenders informally perform the role of new formal financial institutions. The informal financial institutions constitute of village banks, cooperative credit unions, state owned banks and social venture capital funds to help the poor.

These institutions provide savings and credit services for SMEs. They mobilized savings 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 MEs in developing countries and it’s known that these SMEs are more likely to fail (Maloney 2003). The creation of SMEs generates employment but these enterprises may not survive longer and consequently are bound to die after a short while causing those who gain jobs or positions to lose them and even go poorer than they were.

(Hanohan 2004) alludes that a well-functioning financial system is linked to foster an equitable growth. He argues that access to finance by the poor and small enterprises from formal and informal sources is a prerequisite for poverty reduction and social cohesion.

Hence access to finance has become an integral part of efforts to promote inclusive growth and empowerment of the vulnerable groups. Therefore financial inclusion in any development sector leads to high levels of socioeconomic development and ultimately reduces the poverty levels in an economy.

(Atiur 2009) however states financial inclusion is a tool for combating poverty and a key element of social inclusion making people to contribute and to benefit from the process of social and economic development. Through increased access to savings accounts and other financial services, the poor can build financial security, manage risks against adverse shocks and even invest in new business opportunities. Hence financial inclusion is essential for inclusive growth, which is necessary for sustainable overall economic growth.

(Chibba 2009) emphasizes the importance of financial inclusion especially from semi – formal financial institution by stating that although the chosen and conventional approaches to tackle poverty and millennium development goals (MDGs) are useful and necessary, they are not sufficient to address the human development challenges. Financial inclusion offers incremental and complementary solutions to tackle poverty, to promote inclusive development and to address the millennium development goals.

In addition, microfinance gives people new opportunities by helping them to get and secure finance so as to equalize the chances and make them responsible for their own future. It broadens the horizon and thus plays both economic and social rates by improving the living standard of the people. These improvements are on a nutshell to alleviate poverty, boost production and according to this project; it will be seen from the point of the development of SMEs.

SMEs play a major role in economic development in every country including African countries. Studies indicate that in both advanced economies and developing countries SMEs contributes on average 60% of total formal employment in the manufacturing sector. The authors argue that for African economies the contribution of SMEs sector to job opportunities is even more important. Taking into account the contribution of the informal sector, SMEs account for about ¾ of total employment in the manufacturing sector.

Microfinance institutions in Cameroon consist of money lenders, microfinance agencies, non – governmental organizations (NGOs), and rural farmer’s scheme and savings societies that provide savings and/or credits facilities to micro and small scale business people who have experience difficulties in obtaining such services from the formal financial institutions. Their range of activities include deposit taking, savings schemes, small scale enterprises, agriculture, real estate, group lending, retail financial services, giving advice on financial matters and training in business management. For developing countries small scale business would generally mean enterprises with less than 50 workers and medium size business would mean those with 50 – 99 workers. In Cameroon a small scale business is an enterprise employing at least 6 but with a maximum of 20 employees, with the value of assets and working capital of less than or equal to 100 million FCFA. A medium size business is considered a firm which employs between 21 – 100 workers with an annual turnover income between 100 million to one billion FCFA.

This study will be looking at the impact of Microfinance services case study MSLCS Buea branch services on the growth of small and medium size enterprise in Buea Municipality.

Mutengene Savings and Loans Cooperative Society (MSLCS) was created in the early 1990s as a discussion group in Pa Fortoh’s premises at Tiko Road  Mutengene.  Its common bond was later extended to almost all the inhabitants of Mutengene at that period both farmers and civil servants. This credit union is a micro finance institution affiliated to the Cameroon Cooperative Credit Union Limited (CamCCUL Ltd), the idea of this institution was brought in to Mutengene by few who had knowledge of the existence of Credit Union in other towns and became anxious to create one in their town. 

Over a period of about 30 years, the credit union has had some remarkable growth such as amalgamation and evolution of membership, shares, savings, and reserves and increase in the number of branches.

The evolutionary chart of the credit union shows a tremendous increase in branches such as the creation of the Mutengene, Douala, Buea and Limbe as well as Mile 14 Dilbanda.  Membership, shares savings, and deposits have equally weakness a remarkable growth since 1990 to present date.

The credit union now possess a membership of about 7500 shareholders and a share capital of about 1.3billion CFA francs.

The members are of both sexes and even groups are included. With this development, money transfer has been made possible.

All the branch offices table its own financial report to the main office for a consolidated financial report to be prepared. Another important event in the life of the credit union is the computerization of the system. MSLCS now operate a computerized system which ease the operations of the credit union. It uses alpha software. 

1.1 Statement of problem

The concept of business growth is still a grey area as there is yet to be a conclusive approach and definite indicators of business growth despite the fact that it is every entrepreneur’s wish to have their businesses grow. Thus the subject of business growth is a fertile area for a study in the Cameroonian context. (Kemei2011).

Reviews examining impacts of microfinance have concluded that, rigorous quantitative evidence on the nature, magnitude and balance of microfinance impact is still scarce and inconclusive. It is widely acknowledged that no well-known study robustly shows any strong impacts of microfinance (de Aghion and Morduch 2010). Various studies have been done on SMEs and how they are influenced by microfinance services; 

In Kenya, (Mutuku 2010) studied on the impact of microfinance institutions on MSMEs in Kenya and found out that they had a great impact on employment creation and poverty alleviation.

In Ethiopia, different MFIs are to influence artisanal mining cooperatives in improving modes of gold production. The ministry is in talk with the MFI in the procedures of lending money to cooperatives who will use the money to buy gold ore producing machines.

Tamrat  Madjo, Dedebit Credit and Savings S.C, Oromia Credit and Savings, Omo microfinance and Amkara Savings, are MFIs that will disburse loans to the cooperatives engaged in the production of alluvial gold. This will affect their economic growth in the long run

Microfinance industry has become increasingly important world over as a major strategy in the development agenda for poverty reduction and in the promotion of SMEs.

The industry is seen as paramount in augmenting private sector leading growth through supporting the SME sector.

The microfinance institutions resource base can provide a platform for the growth of SMEs and contribute to the fight against poverty. Some studies argue that microfinance has indeed many positive impacts.

In Cameroon the microfinance industry is playing a critical role in providing a range of financial services to both urban and rural communities. The services are through the products such as loans, deposits, savings, micro- insurance money transfer services and financial education.

The provision of such services is expected to contribute to the growth of SMEs in terms of business capital and increase in employment levels to improve household incomes.

However the is no adequate empirical evidence available to vindicate the contribution of microfinance services in bridging the growth gap of SMEs.

The study therefore is geared towards establishing the impact of microfinance services case study MSLCS on the growth of SMEs in Buea. In other to critically examine the impact this services have on the growth of SMEs in Buea the following question will be answered;

    What are the effects of MSLCS on the financial performance of SME’s in Buea Municipality?

• What is the contribution of micro saving services offered by MSLCS on the growth of small and medium size enterprises in Buea?

• What are the contributions of microcredit service offered by MSLCS on the growth of small and medium size enterprises in Buea?

In other to answer this question the following objective will be taken into consideration

1.2 Objectives of the Study

Main Objective

To analyse the effect of microfinance on the financial performance of SME’s in Buea Municipality.

Specific Objective

To analyse the effects of MSLCS on the financial performance of SME’s in Buea municipality.

• To make recommendation based on the findings.

1.3 Research Hypothesis

The following hypothesis will be tested and will be tested in the Null (Ho) and Alternative (H1) form.

H1:  MSLCS seems to significantly affect the growth of SMEs in Buea Municipality

H0: MSLCS seems not significantly affect the growth of SMEs in Buea Municipality