CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Microfinance generally refers to providing financial services in small denominations to the poor who typically lack collateral and do not have access to formal financial institutions. Microfinance is not a new concept. It is 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 (SME).  While lending remains the core activity of microfinance, it also includes financial services such as savings, insurance and remittances. Seibel (2005) first coined the term ‘microfinance’ in 1990 to mean the provision of microfinance services, including microcredit and micro savings, to the poorer sections of the population.

Microcredit is a part and the most common form of microfinance. But the two are often not carefully distinguished, and ‘microfinance’ is usually used to refer to ‘microcredit’. In fact, the terms have evolved from microcredit to microfinance. The term ‘microcredit’ was first coined by Professor Yunus who later reflected that the tiny amount he first lent, which was all needed to free 42 women from the clutches of loan sharks, was so small that it could even be called ‘nanocredit’ (Lyman, 2015). Microfinance institutions (MFIs) credit is disbursed in very small sums to very poor people for income generating activities. The idea is that the poor will invest microloans in microenterprises, repay in instalments out of profits and gradually be able to lift themselves out of poverty. Microcredit is different from formal credit as the loans are small and without physical collateral, clients are poor, and techniques are unconventional such as group lending, immediate and frequent repayment in small instalments, progressive loan structure, peer pressure and collateral substitutes. Over four decades, microfinance institutions have evolved and emerged as a promising platform for achieving financial inclusion and poverty alleviation.

Nevertheless, the idea of microfinance has an extended past. It came into its current form through a long history of evolution. Much of microfinance’s history, however, is yet to be documented systematically. In fact, there is no historical investigation so far from the standpoint of microfinance. Issues of finance and small and medium-sized enterprises (SMEs) in developing countries have dominated the research agenda at various policy levels.  It should be noted that microfinance institution is not a panacea but it is a main tool that foster 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 serve as guarantee for a loan to be provided.  The lack of financial power is a contributing factor to most of the societal problems. These problems exacerbate 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, just to name a few.

Microfinance institution has proven its strength to surpass the banking sector. They target the poor who are considered the risky and the most vulnerable ones, 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 equalise 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 SMEs and focusing mostly in the rural areas. Having in mind the Cameroon vision 2035 and the United Nations agenda 2030 for sustainable development aimed at ending poverty in all its form, it is certain that with the endless services of Micro Financial Institutions to Small and Medium-size Enterprise Emerging and Developing countries will stand a chance to attain growth in business and economic sectors in general.

The Evolution of Micro Finance Institutions in Cameroon

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 programmes. In spite of all these attempts, much was still needed to boost this sector, which was considered very vital in the economic life wire of the state. A Roman Catholic priest from Holland by name Rev. Father Anthony Jansen brought the notion of credit unions into the country. This was as 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 for better seedlings.  How then are these microfinance institutions of significance to the sustainable development of the country? Further still, why are farmers not cultivating in large scale to increase their wealth and improve on their living standard? It is important to look at this because even though the government promotes SMEs 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 SMEs are the key sectors to the government and of course has a great influence in the socioeconomic development of the country but productivity and development keeps on dropping with a rising population.

1.2 Statement of the Problem

Cameroon has valuable natural resources for a strong agricultural sector. This resource base should provide a platform for the development of rural SMEs, and contribute to the country’s fight against poverty. Business development, however, requires more than natural resources, and it is not clear what challenges and opportunities in development rural SMEs are facing in Cameroon. What markets are available? Is there sufficient access to technology and labour resources? Do firms have access to financial capital to fund development?  This study will investigate the underlying issues rural small firms are facing in their development. Particular attention will be given to the issue of financing firm development, where the major microfinance institution in Cameroon, NTACCUL, plays an active role. NTACCUL has for many years aimed to support Cameroon’s SMEs with micro-financing, 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.

1.3 RESEARCH QUESTIONS

1.3.1   Main Research Question

What is the effect of microfinance institution on the performance of small and medium size Enterprises?

1.3.2 Specific Research Questions

1. i) How can Small and Medium-size Enterprises have access to financial resources from Micro Financial Institutions?
2. ii) What are the types of funds and services Small and Medium-size Enterprises can benefit from Micro Financial Institutions?

1.4 Objectives of the Study

1.4.1 Main objective

To investigate the effect of microfinance institution on the performance of small and medium size Enterprises

1.4.2 Specific Objectives

1. i) To examine how Small and Medium-size Enterprises can have access to financial resources from Micro Financial Institutions
2. ii) To analyse the types of funds Small and Medium-size Enterprises can benefit from Micro Financial Institutions