CHAPTER ONE

INTRODUCTION

• Background of the Study

In Cameroon, just like in most developing countries of the world, Small and Medium-Sized Enterprises (SMEs) are generally regarded as the driving force of economic growth, job creation, and poverty reduction. They have been the means through which accelerated growth and rapid industrialization have been achieved (Koech, 2011). Small and Medium-Sized Enterprises (SMEs) have been recognized as socioeconomic and political development catalysts in both developed and developing economies (Waswa, 2010). This is apparently the case in Cameroon where Small and Medium-Sized Enterprises (SMEs) contribute significantly to employment creation, income generation and stimulation of economic growth in both urban and rural areas. The SMEs nomenclature issued to mean small and medium-sized enterprises (ILO, 1998).

The growth of SMEs has been in the recent past of great concern to many government policy makers and researchers globally because of the realization of their economic contribution to Gross Domestic Product (GDP) and economic growth. As such they are no longer viewed as “stepping stones” to real business but as a means of industrial and economic growth and as well as tools of poverty eradication (ILO, 1986). According to Organization for Economic Co-operation and Development (OECD, 2004), Small and Medium-Sized Enterprises (SMEs) are known to contribute to over 55% of Gross Domestic Product (GDP) and over 65% of total employment in high-income countries. They also account for over 60% of Gross Domestic Product (GDP) and over 70% of total employment in low-income countries.

Small and medium-sized enterprises (SMEs) offer many advantages to the community including the creation of jobs in both the rural and urban areas, support for larger industries including the agricultural sector and the utilization of local resources. These types of businesses require very little capital to create jobs, rely primarily on family savings and often provide their own skill training at no cost to the government (Maithaet al., 1997).

In addition, development of Small and Medium-Sized Enterprises (SMEs) facilitates distribution of economic activities within the economy and thus fosters equitable income distribution. Furthermore, Small and Medium-Sized Enterprises (SMEs) technologies are easier to acquire, transfer and adopt. Also, SMEs are better positioned to satisfy limited demands brought about by small and localized markets due to their lower overheads and fixed costs. Moreover, SME owners tend to show greater resilience in the face of recessions (URT, 2002). Through business linkages, partnerships and subcontracting relationships, SMEs have great potential to complement large industries requirements. A strong and productive industrial structure can only be achieved where SMEs and large enterprises not only coexist but also function in a symbiotic relationship.

The Small and Medium-sized Enterprises sector, just like most sectors of activities in Cameroon, is faced by many challenges such as limited access to finance and lack of enterprise culture. To address these challenges, that is where Microfinance Institutions (MFIs) come in. Microfinance Institutions (MFIs) are the primary source of finance to Small and Medium-sized Enterprises and are also contributing towards promotion of the enterprise culture by offering various forms of training to SMEs. According to Chijoriga (2000), MFIs help to promote enterprise culture among SMEs by providing various financial services to SMEs. These services include; advancing loans and provision of credit management training to SMEs and holding their deposits. These services together help to promote enterprise culture which encompasses savings culture, investing culture and entrepreneurial skills.

Credit provision is absolutely crucial to the success of Small and medium enterprises’; it directly impacts on their day-to-day operations, and, in turn, their profitability (Lam & Burton, 2005).The concept of Micro financing can be traced back to an obscure experiment in Bangladesh 30 years ago. It has since become a worldwide movement as a development activity, as a way of helping poor people out of poverty (Dicher, 2006). Buckley (1997) captures their prominence role in development of economies; he describes them as the newest darling of the donor community. Other authors have described them as the newest silver bullet for alleviating poverty (Karmani, 2007) while Greer (2008), Gupta and Aubuchon (2008) claim that microfinance shines as a proven way to improve the lives of the poor.

Perkowski (2012:1) said that “access to finance is a challenge for businesses in any country”. Entrepreneurs in developing countries in general and Cameroon in particular require micro-credit and other services from micro-finance institutions for several reasons; to speedily expand their operations, for start-up capital, for working capital or for other purposes. Providing micro-credit and other services to small and medium enterprises has traditionally been challenging for micro-finance institutions. On the one hand, the challenge may be related to a lack or non-existence of financial history and the inability to provide required collateral among small and medium enterprises. On the other hand the absence of credit bureau data and regulatory bodies at national level is challenging. In addition, Suberu et al. (2011) stated that a shortage of both debt and equity financing is one of the major barriers to rapid development of the small and medium enterprises.

• Statementof Research Problem

As eluded earlier, Small and medium-sized enterprises (SMEs) are the major agents of economic growth and employment in most developing countries including Cameroon.Small and Medium-Sized Enterprises are a major source of entrepreneurial skills, innovation and employment. They are the main source of employment in developed and developing countries alike, comprising over 90% of African business operations and contributing to over 50% of African employment and GDP (Okafor, 2006). In Cameroon, they play an important role in creating employment at low levels of investment per job, leading to increased participation of indigenous people in the economy, using mainly local resources; promote the creation and use of local technologies, and providing skills training at a low cost to society.

Despite the large contributionof SMEs in countries development and economic growth, their growth and development in developing countries are mainly inhibited by access of finance, poor managerial skills, lack of training opportunities, and high cost of inputs (Cook and Nixson, 2000). Further studies conducted suggest that finance is the most important constraint for the Small and Medium-Sized Enterprise sector (Green et al 2002). The SMEs have very limited access to financial services from formal financial institutions to meet their working and investment needs (Kessy and Temu, 2009).

Acknowledging the importance and role played by Small and Medium-Sized Enterprises (SMEs) in the country, and recognizing the problems faced by them, the governmentcreated the Ministry of Small and Medium-Sized Enterprises in 2004, which has the responsibility to design and implement Small Medium-Sized Enterprises policies. The creation of a separate Ministry is indicative of the importance of an expanding SME sector for Cameroon’s economy. Also, the government, through the Ministry of SMEs, has come up with policies aimed at encouraging the growth of SMEs such as reducing the procedures and duration (less than 7days) of creating an enterprise and also provided tax concessions to young and micro enterprises (Ministry of SMEs, 2016).

However, despite government efforts in most developing countries including Cameroon to promote SMEs activity, not much progress seems to have been achieved, judging by the performance of the informal sector (Nkonoki, 2010). When the state of the macro economy is less favorable, by contrast, the opportunities for profitable employment expansion in SMEs are limited. SME’s need both financial and non-financial services to enhance their productivity, profitability and growth. Sievers and Vanderberg (2004) hold the view that access to financial and business development services are essential for growth and development of Micro and Small Enterprises.

The Microfinance industry has become a major backbone in the sustenance and survival of SMEs in Cameroon in general and in the Bamenda Municipality in particular. Microfinance Institutions (MFIs), as part of their core business, provide credit to SMEs. In addition to these financial services, MFIs also provide non-financial services like business training, financial and business management to help improve the capacity of their clients in managing the loan resources granted them.

The number of MFI institutions in Bamenda municipality continues to grow rapidly. However, their wide presence does not correspond with the extent of reduction in the major challenges that affect the growth of SMEs in the country. This study is designed to analyze the impact of MFIs on the growth of SMEs in the Bamenda municipality and to propose a more effective approach that MFIs can adopt in order to meet the growth-oriented needs of SMEs.

• Research Question

1.3.1 The Main Research Question

The main reseach question of this study is to examine the effect of microfinance institutions (MFIs) on the growth of small and medium-sized enterprises (SMEs) in the Bamenda municipality.

1.3.2 Specific Research Questions include;

• What are the challenges faced by SMEs in the Bamenda municipality?
• To what extend does MFI services affect the growth of SMEs in the Bamenda municipality?
• What recommendations can be made to encourage the growth of SMEs in the Bamenda municipality?           

• The Research Objectives

1.4.1. TheMain Objective

The main objective of this study is to examine the effect of microfinance institutions (MFIs) on the growth of small and medium-sized enterprises (SMEs) in the Bamenda municipality.

1.4.2. Specific Objectives

• Identifying the problems associated with the growth of SMEs in the Bamenda municipality,
• Examining the effect of MFI services (micro-credit, micro-insurance, training, consultancy and savings account) on the growth of SMEs in the Bamenda municipality, and
• Providing suitable policy recommendations.