CHAPTER ONE

INTRODUCTION

1.1Background of the Study          

In recent years, both developed and developing countries’ support for small businesses’ development and growth has increased. This is because of the contribution of small businesses to employment creation. Evidence shows that a dynamic and growing business sector can contribute to the achievement of a wide range of development objectives, including the attainment of income distribution and poverty reduction (DFID, 2000); creation of employment ( OECD, 1996); savings mobilization (Beck et al., 2005); and production of goods and services that meet the basic needs of the poor (cook &Nixson, 2000). Phillips & Kirchhoff (1989) found that young firms that grow have twice the probability of survival as young non-growing firms. It has also been found that strong growth may reduce the firm’s profitability temporarily, but increase in the long run (Pasanen, 2003). The growth of small businesses is believed to be a desirable end and as the key drivers of employment and economic development.

World Bank (2013) defines small and medium size businesses (SMBs) as businesses that have relatively small share in terms of number of employees, sales turnover, ownership and assets of their market place. Those that are managed by owners or part owners in a personalized way and not through the medium of formalized management structure and are independent in the sense of forming a large enterprise. SMBs provide employment and improve the living standards of individuals, both employers and employees. They are the major sources of entrepreneurial skills and innovations.

Small and medium size businesses are the backbone of many economies in sub-Saharan Africa and they hold the key to possible revival of economic growth and the limitation of poverty on a sustainable basis. According to the 2016 annual statistics of the Ministry of Small and Medium Sized Enterprises, Social Economy and Handicraft (MINPMEESA), Cameroon’s small and medium sized enterprises considered as the main engine for economic growth, currently contribute about 36 percent to the Gross Domestic Product (GDP), though they have the potential to contribute more. This contribution highlights the existence of key hindrances such as high taxes, insufficient infrastructure, and difficulty to access financing, administrative bottlenecks and bureaucracy, corruption, insufficient technical assistance. Despite the substantial role of small and medium size businesses in these economies, there is inadequate official support, particularly credit from financial institutions that provide funds to small size businesses. 

Credit accessibility refers to the ability of individuals or enterprises to obtain funding to enable them ease cash flow problems (Osoro & Muntari, 2013). Credit can be either short term or long term, depending on the lender’s assessment of the borrower’s ability to repay. Financial systems, the world over, play fundamental roles in development and growth of the economy. The effectiveness and efficiency in performing these roles, particularly the intermediation between the surplus and deficit unit of the economy, depends largely on the level of development of the financial systems. It is to ensure the soundness that the financial sector appears to be the most regulated and controlled by the government and its agencies. Generally, the stage of development and thus, the efficiency of the system varies among countries and changes over time in the same country. The more developed and sophisticated financial systems tend to be associated with the mature economies. As a process, the financial system adjusts to changes in the real economy just as the economy responds to development in the financial sector. All over the world, size has become an important ingredient for success, the banking sector included. The last few years have witnessed the creation of banking groups through mergers and acquisitions.

The model about credit accessibility at start-up period indicated that the SMBs network with lenders (except social bank officials) plays a significant role in determining the access to different sources of credit for SMBs start-up financing. Furthermore, SMBs are more likely to borrow from informal sources if their owners are younger, less educated and experienced. The model also found evidence that the size of a business significantly affects SMBs credit access.  

Stiglitz and Weiss (1981) observed that small and medium size businesses with opportunities to invest in positive net present value projects, may be blocked from doing so because of adverse selection and moral hazard problems. Adverse selection problems arise when potential providers of external finance cannot readily verify whether the firms have access to quality projects. Nonetheless, the liquidity ratio of the financiers plays a major role. Moral hazard problems are associated with the probability of small and medium size businesses diverting funds made available to them to fund alternative projects or develop the propensity to take excessive risks due to some pervasive incentive structure in the system. 

Despite the significant contribution of SMBs to social and economic development, they confront many obstacles compared to large firms. Results from the Doing business Report, covering 190 countries in 2020 on constraints facing firms and businesses across all sizes demonstrates that financing and getting credit is the biggest obstacle for small and medium scale businesses (world bank group, 2020). In other words, SMB’s credit accessibility plays a crucial role for both business start-up and operation. Access to finance is important as credit is considered a factor of production. Access to credit allows small and medium scale businesses to utilize productive assets to enhance productivity and economy of scale (Kira & He, 2012). Further, credit accessibility encourages market entry, facilitates growth, reduces risks, and fosters innovation and entrepreneurial activity.

However, Cameroon, a country with different regions, is characterized by different forms of investments, with SMBs being one of the main domain of investment in the Northwest region and an integral part of the economy and in Bamenda particularly. Small and medium size businesses in Bamenda are generally considered to be riskier than large enterprises because they have lower survival rate and larger variance of profitability and growth (OECD, 1998). SMBs are characterized as the “missing Middle” because the amount lend to small and medium size businesses from banks is too small to offset transaction cost and screening cost (Shinozaki, 2012). The availability and accessibility of external financing has positively impacted on the growth and performance of any business (Osoro and Muntari, 2013). Financial institutions have packaged different credit facilities that are aimed at different forms of businesses. These products when offered to SMBs help them improve their performance; by raising productivity, improving returns on investment, and increasing incomes (Njeri, 2012). The trainings that some financial institutions provide to their clients help entrepreneurs to understand basic issues like record keeping which in turn help them better understand their business operations. Trainings add to the skills of the entrepreneurs, change their attitude on how to perceive and conduct business activities and in turn enhance the ability of their firms to perform better. A financially literate entrepreneur can make better decisions regarding utilization of external financing services like saving more, taking full advantage of credit facilities, and mitigating risks through the utilization of insurance services( Andoh & Nunoo, 2011).

1.2 Statement of the Problem

Like any other country in sub-Saharan Africa, small and medium size businesses have been highly conducive to economic development and Gross Domestic Product (GDP) in Cameroon. In addition, SMBs also play a significant role in terms of government’s revenue contribution and employment generation. Compared to the businesses sector as a whole, SMBs exhibit higher growth rate in taxes and other payables. The significant contributions that SMBs have on development of a nation are enormous: They have assisted in regional and local development as they help accelerate industrialization in rural areas by linking them with other sectors in the urban areas. Given the importance of small and medium size businesses to economic and social development, it is undoubtedly true that they should be encouraged. Improving credit access by SMBs is crucial in fostering competition, growth, innovation and entrepreneurship in Cameroon. Accessibility to credit is important as it reduces the impact of cash flow problems and ensures flexibility in resource allocation (Bigsten, et. Al., 2000). External financing is mostly limited by the fact that commercial banks are often willing to lend on a short term basis because they receive deposits on demand which therefore cannot be lent out on a long term basis as the need of the SMBs may demand.

Most of the businesses in Bamenda can be classified under SMBs category based on the sizes of their capital size and annual turnover. With the availability of sufficient credit and other sources of external financing, some of these SMBs grow, others stay at break-even point and others wind down, Thus, the factors identified, as influencing these behaviors include accessibility of capital, collateral requirements for credit, cost of capital, and information access, capital management. Lack of financial literacy especially as to where to obtain and how to utilize financial services reduce entrepreneurs’ ability to grow. Availability of saving facilities and easy access to credit from financial facilities has been found to accelerate households’ abilities to grow. Andoh & Nunoo (2011) studied impact of financial literacy on the utilization of services of financial institutions by SMBs where they concluded that financial literacy is crucial for overall financial development. Hasnah, et. Al. (2013) and Fatoki and Asah (2011) all carried out studies touching on credit access by SMBs where they concluded that lack of collateral amongst other challenges were limiting SMBs access to credit from financial institutions.  

Njeru (2014) and Kinyua (2014) are amongst those who have carried out studies touching on credit services and SMEs. Njeri (2012), Mwewa (2013), and Wanjiku are some of the researchers who have carried out studies touching on micro finance services and SMBs growth and performance. Although several research works have been undertaken that greatly focused on financial credit facilities and SMBs, they have not been conclusive. The main purpose of this study therefore is to establish the influence of accessibility to credit on the growth of small and medium size businesses s in Bamenda.

1.3. Research Questions

The following research questions will be used to guide this study

1.3.1 Main Question

1. How does credit accessibility influence the growth of Small and Medium Sized businesses?

1.3.2. Specific Questions       

1. How does interest rate influence growth of Small and Medium Sized businesses?
2. How does financial literacy of business owners influence growth of Small and Medium Sized businesses?

• How does collateral influence growth of Small and Medium Sized businesses?

1. How does the number of lending institutions influence growth of Small and Medium Sized businesses?

1.4 Research Objectives

1.4.1 Main Research Objective

1. To ascertain the influence of credit accessibility on the growth of Small and Medium Sized businesses.

1.4.2 Specific Research Objectives

1. To ascertain the influence of interest rate on the growth of Small and Medium Sized businesses.
2. To determine the influence of financial literacy of business owners on the growth of Small and Medium Sized businesses.

• To establish the influence of collateral on the growth of Small and Medium Sized businesses.

1. To ascertain the influence of the number of lending institutions on the growth of Small and Medium Sized businesses.