CHAPTER ONE

INTRODUCTION

1.1 Introduction

The economic environment in Africa is plagued by low income, low level of savings, and low investment, which makes it a challenge for the financial system to mobilise and provide financial services that will aid in the growth of micro and small size enterprises (MSE). Micro and small size enterprises are one of the major engines in an economy and mostly emerging economies like Cameroon. According to World Bank reports (2018) MSEs account for about 90% of businesses and more than 50% of employment worldwide, whereby formal MSEs make up to 40% of the national income in emerging economies.

 With this in mind, this work is structured into five (5) different chapters. Chapter one provides the general introduction about the whole research, the background of the study, the statement of the Problem and research questions, also it gives the aim, objectives and hypothesis of the study and finally, the significance, scope of the study. Chapter two describes the review of related literatures. This review tackles aspects of the Conceptual framework, theoretical review, empirical framework and finally. The research gap. Chapter three provide detail description of the methodology employed by the researcher in collecting data. Chapter four contains presentation of findings. Finally, the last chapter talks about the discussion of findings, conclusion and gives relevant recommendations based on the findings.

1.2 Background to the Study

The informal financial sector is an age-long one, an ancient one that dates back at least to the 16th century; the activities predate those of the formal financial system but are not subjected to Government regulation (Iganiga & Asemota, 2008). The most cited differences are probably that the informal sector has an easier time dealing with problems regarding information and enforcement of contracts, while the formal sector can take advantage of economies of scale and the intermediation of funds over a longer period of time (Jain & Mansuri, 2003).  Traditionally, formal financial institutions have been providing funds to customers in developing countries, but currently, it an alternative source of money for firms in both developed and developing countries (Allen, Carletti, & Valenzuela, 2013). Informal financial services are the alternative channels to the formal financial sector (e.g., banks), and they are very critical to economic growth and development of any country (Allen et al., 2013).

Informal financing is globally accepted such that even in areas with high formal finance saturation, informal lending is still prevalent due to its benefits such as immediate accessibility, approval of loans based on character and sequential access to facilities. Given that Micro and Small Enterprises (MSEs) are considered as the pillar of economic growth of many developed and developing countries across the globe, this sector accounts for about 55 per cent of Gross Domestic Product (GDP) and 65 per cent of job opportunities in high income economies (Anshika, Singla & Mallik, 2021).  In Asia, for instance, MSEs account for 90% of all enterprises and create 50–80% of all jobs (Tambunan, 2008). In Vietnam, MSEs represent 97% of total enterprises, contribute 46% of GDP, and account for 59% of total employment. Indeed, this sector has substantially contributed to the development of the national economy through various major socio-economic aspects, including GDP growth, job creation, manufacturing and poverty reduction (CIEM, 2014).

Informal financial services play a vital role in mobilizing savings and advancing credit facilities to MSEs operating in both rural and urban settings (Pagura & Kirsten, 2010). The informal financing accords women a lot of benefits such as training and credit facilities without necessarily requiring any collateral because the borrowers belong to a registered self-help group where personal trust and family ties determines lending (Kurgat, Kibas, & Otuya, 2018). Kurgat et al. (2018) opine that the informal lending does not involve complicated loan processing, but it only requires the borrower to make simple commitment either through writing or verbal agreement. Mostly alternative finance institutions arise in an environment where there are unmet needs due to weak formal financial institutions. The alternative channels of funds encompass non-bank and non-market sources such as money obtained from money lenders, friends or relatives, rotating savings and credit associations (ROSCA) and cooperative societies.

In the world at large, the growth of micro and small enterprises is a general call for concern. Several limitations hamper the growth of Micro and Small Enterprises (MSEs). These limitations may vary from region to region, between different sectors, or even between individual enterprises within the same sector. Previous studies came out with a list of common constraints to all MSEs (for instance, Bekele and Worku (2008); Das and Mohiuddin (2015); Moustafa and Santos (2016); Oyelana and Adu (2015); Roy and Wheeler (2006); Thapa (2013)) which include lack of capital, difficulties in marketing, government policies or regulations which often generate an unfavorable business environment. Access to modern technologies, skilled workers, and institutional support. According to Zeinab and Zenathan (2020), most of MSEs’ owners claimed that they had many difficulties in running their businesses. These challenges are concentrated in three main areas, the difficulty in (i) getting funds, which represented 41.5%, either for working capital or purchasing new machines; (ii) marketing amounted at 23%; and (iii) getting raw material (21%). The difficult in getting funds, particularly from formal sources, is caused by various factors, such as unstable types of businesses, poor credit history, and no valuable assets as sufficient collateral. This lack of accessible capital for these enterprises threatens their continuous existence (Abe et al., 2015).

In this study, informal finance is considered as small, unsecured and short-in-maturity funding capital sourced from private moneylenders, the relatives and friends of the business owners and Rotating Savings and Credit Associations. Informal finance is found to be positively associated with firm growth and performance in several developing countries, including China, India, Thailand, Madagascar, Egypt, Nepal and Vietnam, Kislat (2015). The informal sources of finance are vital to meeting the needs of the poor in both the developed and the developing countries. These needs are grouped into three categories: managing basics (for example cash-flow management to transform erratic income flows into a reliable resource to meet daily needs), coping with risk, and raising lump sums to cover big expenses.

Micro and small businesses perform a significant duty in social and economic growth of a country such as contributing to the growth of self-employment (Mungiru & Njeru, 2014) which leads to an increase in the capacity of the economy to produce goods and services within a specific period of time. According to Ariyo (2000), micro and small businesses assist in contributing 30% of the global gross domestic product (GDP) through generating employment, act as an income generator by providing employment opportunities resulting to rural development through the shifting of businesses to rural areas due to available resources in terms of land, cheap labour and raw materials. This has enabled development of the location in which these businesses operate. Along with that, micro and small size enterprises facilitate in the proper utilization of local resources as well as industrialization and economic growth (Ozigbo &Ezeaku, 2009) which further results in higher living standards. Employment is generated because with unemployment on an increase, most of the youths, school graduates and retired people are now opting to entrepreneurship. Thus unemployment is substantially decreasing through entrepreneurship in many countries. Along with that, government and other multilateral institutions are ready to educate people regarding entrepreneurial development. The growth of these Micro and small enterprises (MSEs) also plays a vital role in stimulating government finances by enhancing tax revenues. This enables the government to earn extra income for the further development of an economy.

In order to perform the above duties, the enterprises have to be financially viable because finance is one of the main factors that determines the growth of an enterprise hence financial access is an essential aspect for the growth and sustainability of any business venture. Loan repayment period is very critical and micro and small enterprises (MSEs) clients prefer long duration because it is associated with affordable instalments (Babajide, 2012).

In an African perspective, most MSEs in the continent lack the capacity in terms of qualified personnel to manage their activities (Coleman, 2000). As a result, they are unable to publish the same quality of financial information as those big firms and as such are not able to provide audited financial statement, which is one of the essential requirements in accessing credit from the financial institution. This is emphasized by the statement that privately held firms do not publish the same quantity or quality of financial information that publicly held firms are required to produce. As a result, information on their financial condition, earnings, and earnings prospect may be incomplete or inaccurate. Faced with this type of uncertainty, a lender may deny credit, sometimes to the firms that are credit worthy but unable to report their results (Coleman, 2000). This will affect the growth of the small and micro enterprises.

In a study in Ghana, Malawi, Nigeria and Tanzania, it was emphasized that informal finance is an important vehicle for mobilizing household savings and Informal sources of finance can be divided into three broad categories: group finance (for example Rotating savings and credit associations [ROSCAs] and accumulating savings and credit associations [ASCAs]), reciprocal/individual finance (for example neighbours, friends, family) and commercial finance (money lenders) Steel et al (2007)

Needs of their children. The Informal Financial Sector is a practice that is widely known in majority of francophone African countries as “Tontines”, which derives from the name of Lorenzo Tonti who vulgarized a similar but not identical practice in France in 1653. In the IFS, individuals with a common social link gather together and pay an amount of money either in tontines (collecting money for one member) or in savings in order to help each other. They can also put goods or services (soap, oil, dishes, food, and labor force) in tontines. The basic element of this practice is trust built through familiarity. Originally popular in West-Cameroon, Tontines (associations) have spread throughout the country. Today 50% of Cameroonians participate in the IFS, including businessmen, individuals with middle- and low-income revenues, and above all, women (Naphta, 2020). Tontines today play an important role in the development of Cameroonian society in social, economic, financial and entrepreneurial domains. They strengthen social relations and trust among their members, and promote cultural identity. They are the primary source of credits for many poor people in Cameroon, especially for women and young people.  These groups are typically excluded from the formal financial sectors as they cannot fulfill the credit obligations they require. IFS financing empowers women and young people economically, enabling them to undertake small trading, farming and livestock rearing. These undertakings increase their revenues and enable them to meet the basic needs of their families and the educational

Cameroon has a rigid business environment that hinders the development of local small enterprises and entry opportunities for foreign investors, and as a result, selected indicators of the business environment and investment climate of the country are not robust (World Bank, 2008). Conditions for doing business in Cameroon have deteriorated significantly especially in the Anglophone regions due to the present Anglophone crises.  Buea municipality, being located in the South West region is deeply affected by the socio-political crises in the country. This crisis affects the growth of micro and small enterprises.  The fact that some owners of micro and small enterprises do not open their shops business premises on some days reduces their profit and growth in a considerable manner. This crisis reduced the availability of funds whether through formal or informal financing to micro and small enterprises in the Buea municipality considerably. With the COVID-19 pandemic which affected both the formal and informal financial institutions together with the socio-political crisis micro and small enterprises find it difficult to have access to funds.

1.3 Problem Statement

Micro and small enterprises are the engine of the Cameroon economy as they can be found virtually everywhere and these enterprises employ a great number of youths and graduates from the universities each year. The Anglophone crises that stormed the Northwest and the Southwest regions of Cameroon saw the collapse of so many MSEs which have not been able to recover mostly because of the lack of finance (Smith and Doe,2022). Despite being the engine of Cameroon’s economy, small businesses face several constraints to their growth and effective performance both at the operations and start up levels (World Bank ,2019). There is strong evidence that access to markets, inadequate financing, access to credit facilities, managerial skills, lack of proper education and training, poor decision-making and corruption are major setbacks for the growth of these enterprises (Cook, 2010). Since 2016, the growth of businesses in the Buea municipality have been retarded due to the Anglophone crisis and small and micro enterprises are not exempted (World Bank, 2021). Sourcing for funds to increase the growth of these MSEs have been difficult as the formal sector (commercial banks and MFIs) feel reluctant to lend their money in such an uncertain environment to MSEs in the Buea municipality. Most recently, within the period of (2023/2024), Cameroon have been facing energy crises with frequent power outages impacting production and  adding to the operational cost for MSEs, also Cameroon have been experiencing extreme climate change which results to frequent droughts and floods affecting agriculture and impacting the livelihoods of MSEs in rural areas. Without funds, these MSEs cannot grow to their desired levels. In addition to the socio-political crisis that is affecting the Buea municipality, we have the COVID-19 pandemic that has affected the growth of MSEs in Buea. With respect to the COVID-19 pandemic, it restrained the movement and contact of people from places to places that could aid them to source for funds to expand their businesses. All these negatively affects the growth of MSEs in the Buea municipality.

In a quest to solve the problem of growth of MSEs in the Buea municipality, Supplementary studies executed recommend that finance is the most imperative requirement for the MSEs sector (Green et al.,2018) and this sector have extremely narrow rights to use financial services from formal financial institutions due to weak credit worthiness and lack of collateral since they are not yet established (Kessy and Temu, 2017). Benjamin (2019) carried a study on effect of informal financial services on financial performance of micro and small enterprises in Nairobi County, Kenya where he established that Weak purchasing power and an ever-increasing standard of living has resulted in dwindling disposable income. This makes it difficult for small businesses to raise capital to move their businesses forward. This is made worst by lack of collateral security required by banks as prerequisite for credit facilities. High rates of interest, additional bank charges, inability to evaluate financial proposals are similar obstacles. These are further compounded by administrative bottlenecks, corruption, and delay in setting up a business. These difficulties which MSEs face in their growth process brings our rationale for this study and helps us to answer the following questions.

1.4 Research Questions

The main research question of this study is; To what extend does informal financing influence the growth of micro and small enterprises in the Buea Municipality?

The specific research questions include the following;

• To what extent does money lenders financing effect on the growth of MSEs in the Buea Municipality?
• What effect does Rotating Savings Credit Associations (ROSCAs) financing have on the growth of MSEs in the Buea Municipality?
• What is the effect of Family and Friends financing on the growth of MSEs in the Buea Municipality?

1.5 Objectives of the Research

The main objective of the study is; To examine the effects of informal financing on the growth of MSEs in the Buea municipality.     

The specific objectives of the research are;

1. To assess the effect of Money Lenders financing on the growth of MSEs in the Buea Municipality.
2. To evaluate the effect of Rotating Savings Credit Associations (ROSCAs) financing on the growth of MSEs in the Buea Municipality.

• To investigate the effect of friends and family financing on the growth of MSEs in the Buea Municipality.