Abstract

Many developing countries, particularly in Africa, face a major challenge in developing appropriate development strategies that will address the needs of small and medium-sized enterprises (SMEs), which account for roughly 70% of the business sector. Microcredit to small businesses in developing countries is increasingly being seen as a strategic way to help the working poor.

A significant amount of multilateral and bilateral aid has been channeled into microfinance programs in Cameroon over the past decades, with varying degrees of success.

The SME sector in Cameroon has experienced tremendous growth in terms of employment, income, and business stock. As a result, financial service providers have paid close attention to the sub-sector in order to provide a variety of financial services to the poor. However, little is known about the microfinance industry’s contribution to the growth of the SME sub-sector.

The goal of the study was to determine the impact of microfinance products and service delivery on the growth of SMEs in Cameroon’s southwest region. Multiple regression was used to estimate the effect of financial and nonfinancial characteristics on SMEs growth, while a legit model was used to assess the constraints to access to microfinance products in Buea.

The findings show that, despite performing below a set standard on average due to industry-wide issues, MFIs have had a significant impact in connecting SMEs and the poor to credit sources and contributing to their financial and non-financial growth.

It is suggested that an institutionalized public-private partnership be established in order to create favorable operating conditions for these businesses. This will alleviate many of the challenges that SMEs face, allowing nationals to benefit from their overall contribution to poverty reduction.

Investment in education, the establishment of an authority or coordination center for SMEs, and the promotion of prudential mechanisms by establishing a regulatory and supervisory framework for all Microfinance Institutions are all essential.

CHAPTER ONE

INTRODUCTION

1. 1 Background of the study

Microfinance is not a new concept. It 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 institutions are those that provide savings and credit services for small and medium-size enterprises. They mobilize rural savings and have simple and straightforward 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 Small and medium-sized enterprises in developing countries and it is known that these small and medium-sized enterprises are more likely to fail (Maloney, 2003).

The creation of Small and medium-size enterprises generates employment but these enterprises are short live and consequently 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. It is not until recently that microfinance had gained recognition thanks to the noble prize winner Yunus Muhammad of the Grameen Bank.

It should be noted that microfinance is not a panacea but it is the main tool that fosters development in developing countries. It is known worldwide 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 bank services.  The lack of financial power is a contributing factor to most of 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 (Microfinance Radio Netherlands, 2010).

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 small and medium-size enterprise and focusing mostly on the rural areas.

Since independence, the government of Cameroon has embarked on several attempts aimed at promoting agricultural development in the country. In the first few years after independence in 1961; the government embarked on the policy of “Green Revolution”, which was aimed at encouraging the development of agriculture in the country (Simarski, 1992).

Other efforts included the setting up of agencies like the National Fund for Rural Development (FONADER) and other rural agricultural extension programs. In spite of all these attempts, much is still needed to boost this sector, which is considered very vital in the economic life wire of the state.

A recent development in this sector has been the increasing involvement of  Non Governmental Organization  and microfinance institutions in the process of enhancing the development of Small and medium-size enterprises, particularly at the rural level. The question now is; why microfinance at this point in time? A Roman Catholic priest from Holland by the name of Rev. Father Anthony Jansen brought the notion of credit unions into the country.

This was a result of complaints that were coming up from farmers and inhabitants in the locality in which he was living. Among the difficulties or complaints faced by these locals; was the issue that most of them often save their money by hiding in some parts of the house, in which case ants often eat them up; again some farmers sold their crops before harvest due to fear of the lack of storage facilities.

It was then that, in 1963 the first credit union was formed such that farmers could have a bit of financial power to afford better seedlings (www.camccul.org). How then are these microfinance institutions of significance to the sustainable development of the country?

Further still, why are farmers not cultivating on a large scale to increase their wealth and improve their living standards? It is important to look at this because even though the government promotes Small and medium-size enterprises in the rural areas through different institutions, microfinance institutions are not leaving any stone unturned to make sure that the acute poverty striking the rural population is redressed.

Agriculture and Small and medium-size enterprise are the key sectors to the government and of course, has a great influence in the socio-economic development of the country but productivity and development keep on dropping with a rising population.

1.2 Problem Statement

It should be noted that productivity, performance, and profitability of Small and medium-size enterprise depends much on both financial and non-financial services. According to Mosley (2001), microcredit seems to be a cheap way of getting loans to Small and medium-size enterprises. But it is unclear whether their administrative practices support their efforts or create additional hurdles for rural firms in need of financing for the development of their businesses. The main question that shall guide the research in this project will be:

What are the effects of microfinance institutions on the growth of small and medium-size enterprises in Buea?

The specific questions that shall guide the research in this project are:

1. What are the effects of Microfinance institutions on the financial growth of small and medium-size enterprises in Buea?
2. What are the effects of Microfinance institutions on the nonfinancial growth of small and medium-size enterprises in Buea?

1.3 Objectives of Research

This study is intended to investigate the problems and opportunities that rural 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 rural firms, the study will identify how Non-Governmental Organizations is contributing to the development of rural small businesses and why rural small businesses succeed or fail in their efforts to acquire financing for their development.

This study is focused on the resource needs of developing rural small and medium-size firms, and how micro-finance may be contributing to rural firms’ development, and thus the sustainable development of rural agricultural infrastructure in Cameroon.

Generally, the study seeks to examine the effects of microfinance institutions on the growth of Small and medium-size enterprises in the South West region of Cameroon. The study will specifically seek to:

1. To examine the effects of Micro Finance Enterprise on the financial growth of.
2. To determine the effects of Microfinance institutions on the nonfinancial growth of rural small and medium-size enterprises in Cameroon.

1.4 Working hypotheses

H1: Microfinance institution affects the financial growth of Small and medium-size enterprise in Buea.

H2: Microfinance institution affects the nonfinancial growth of Small and medium-size enterprise in Buea.

The Impact of Micro Finance Institution on the growth of Small and Medium size Enterprise in Buea

Abstract

Many developing countries, particularly in Africa, face a major challenge in developing appropriate development strategies that will address the needs of small and medium-sized enterprises (SMEs), which account for roughly 70% of the business sector. Microcredit to small businesses in developing countries is increasingly being seen as a strategic way to help the working poor.

A significant amount of multilateral and bilateral aid has been channeled into microfinance programs in Cameroon over the past decades, with varying degrees of success.

The SME sector in Cameroon has experienced tremendous growth in terms of employment, income, and business stock. As a result, financial service providers have paid close attention to the sub-sector in order to provide a variety of financial services to the poor. However, little is known about the microfinance industry’s contribution to the growth of the SME sub-sector.

The goal of the study was to determine the impact of microfinance products and service delivery on the growth of SMEs in Cameroon’s southwest region. Multiple regression was used to estimate the effect of financial and nonfinancial characteristics on SMEs growth, while a legit model was used to assess the constraints to access to microfinance products in Buea.

The findings show that, despite performing below a set standard on average due to industry-wide issues, MFIs have had a significant impact in connecting SMEs and the poor to credit sources and contributing to their financial and non-financial growth.

It is suggested that an institutionalized public-private partnership be established in order to create favorable operating conditions for these businesses. This will alleviate many of the challenges that SMEs face, allowing nationals to benefit from their overall contribution to poverty reduction.

Investment in education, the establishment of an authority or coordination center for SMEs, and the promotion of prudential mechanisms by establishing a regulatory and supervisory framework for all Microfinance Institutions are all essential.

CHAPTER ONE

INTRODUCTION

1. 1 Background of the study

Microfinance is not a new concept. It 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 institutions are those that provide savings and credit services for small and medium-size enterprises. They mobilize rural savings and have simple and straightforward 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 Small and medium-sized enterprises in developing countries and it is known that these small and medium-sized enterprises are more likely to fail (Maloney, 2003).

The creation of Small and medium-size enterprises generates employment but these enterprises are short live and consequently 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. It is not until recently that microfinance had gained recognition thanks to the noble prize winner Yunus Muhammad of the Grameen Bank.

It should be noted that microfinance is not a panacea but it is the main tool that fosters development in developing countries. It is known worldwide 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 bank services.  The lack of financial power is a contributing factor to most of 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 (Microfinance Radio Netherlands, 2010).

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 small and medium-size enterprise and focusing mostly on the rural areas.

Since independence, the government of Cameroon has embarked on several attempts aimed at promoting agricultural development in the country. In the first few years after independence in 1961; the government embarked on the policy of “Green Revolution”, which was aimed at encouraging the development of agriculture in the country (Simarski, 1992).

Other efforts included the setting up of agencies like the National Fund for Rural Development (FONADER) and other rural agricultural extension programs. In spite of all these attempts, much is still needed to boost this sector, which is considered very vital in the economic life wire of the state.

A recent development in this sector has been the increasing involvement of  Non Governmental Organization  and microfinance institutions in the process of enhancing the development of Small and medium-size enterprises, particularly at the rural level. The question now is; why microfinance at this point in time? A Roman Catholic priest from Holland by the name of Rev. Father Anthony Jansen brought the notion of credit unions into the country.

This was a result of complaints that were coming up from farmers and inhabitants in the locality in which he was living. Among the difficulties or complaints faced by these locals; was the issue that most of them often save their money by hiding in some parts of the house, in which case ants often eat them up; again some farmers sold their crops before harvest due to fear of the lack of storage facilities.

It was then that, in 1963 the first credit union was formed such that farmers could have a bit of financial power to afford better seedlings (www.camccul.org). How then are these microfinance institutions of significance to the sustainable development of the country?

Further still, why are farmers not cultivating on a large scale to increase their wealth and improve their living standards? It is important to look at this because even though the government promotes Small and medium-size enterprises in the rural areas through different institutions, microfinance institutions are not leaving any stone unturned to make sure that the acute poverty striking the rural population is redressed.

Agriculture and Small and medium-size enterprise are the key sectors to the government and of course, has a great influence in the socio-economic development of the country but productivity and development keep on dropping with a rising population.

1.2 Problem Statement

It should be noted that productivity, performance, and profitability of Small and medium-size enterprise depends much on both financial and non-financial services. According to Mosley (2001), microcredit seems to be a cheap way of getting loans to Small and medium-size enterprises. But it is unclear whether their administrative practices support their efforts or create additional hurdles for rural firms in need of financing for the development of their businesses. The main question that shall guide the research in this project will be:

What are the effects of microfinance institutions on the growth of small and medium-size enterprises in Buea?

The specific questions that shall guide the research in this project are:

1. What are the effects of Microfinance institutions on the financial growth of small and medium-size enterprises in Buea?
2. What are the effects of Microfinance institutions on the nonfinancial growth of small and medium-size enterprises in Buea?

1.3 Objectives of Research

This study is intended to investigate the problems and opportunities that rural 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 rural firms, the study will identify how Non-Governmental Organizations is contributing to the development of rural small businesses and why rural small businesses succeed or fail in their efforts to acquire financing for their development.

This study is focused on the resource needs of developing rural small and medium-size firms, and how micro-finance may be contributing to rural firms’ development, and thus the sustainable development of rural agricultural infrastructure in Cameroon.

Generally, the study seeks to examine the effects of microfinance institutions on the growth of Small and medium-size enterprises in the South West region of Cameroon. The study will specifically seek to:

1. To examine the effects of Micro Finance Enterprise on the financial growth of.
2. To determine the effects of Microfinance institutions on the nonfinancial growth of rural small and medium-size enterprises in Cameroon.

1.4 Working hypotheses

H1: Microfinance institution affects the financial growth of Small and medium-size enterprise in Buea.

H2: Microfinance institution affects the nonfinancial growth of Small and medium-size enterprise in Buea.

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