CHAPTER ONE

INTRODUCTION

• Background to the Study

The term ‘Small and Medium Enterprises’ (SMCs) is defined by commonly used criteria such as the number of employees, total net assets, sales and investment level. The main criteria are the number of permanent employees in an organisation (Aduda, Magutu & Wangu, 2012). Aduda et al. (2012) define SMCs as companies that employ up to 300 employees and have total assets and sales of up to $15 million. Small and medium companies (SMCs) are vital tools to most economies across the world and it has been identified as important catalysts of economic growth owing to its important roles in the global economy (Kamrul, 2019) which is why the governments around the globe are increasingly promoting and supporting it for evidence of its good performance contribution to the growth of nations (Tahir & Inuwa, 2019).

Robust economies like United States of America and the United Kingdom trace their development from growth and development of their SMCs (Olubiyi, 2019). The estimation illustrates the importance of SMCs in shaping emerging economies. SMCs accounts for 52% of the private work force and 51% to United States GDP (Muriithi, 2017) while in the United Kingdom they are associated with 62% of total employment. Like USA and UK, SMCs contribute to 79% of Italian employment, 63% of France and Germany employment respectively (Iyad, & Sa’dun, 2019). Japan has the highest proportion of SMCs among the industrialized countries, accounting for more than 99% of total enterprises (Economist Intelligence Unit, 2010). India, according to its Ministry of Micro, Small and Medium Companies, had 13 million SMCs in 2008, equivalent to 80% of all the country’s businesses (Ghatak, 2015). In Vietnam, SMCs account for up to 98% of the total number of enterprises. They contribute about 48% to the country’s GDP, 20% to export value and provide jobs for 77% of the country’s labour force. However, majority of the SMCs are micro enterprises with very limited access to resources such as advanced technology and formal credit, etc.

Access to credit by small and medium companies (SMCs’) contributes to incremental growth of SMC employment and income. SMCs’ holders are thereby able to increase their stocks as well as increase on sales made periodically. They are able to take bigger risks due to the financial aid given by the micro finance institutions (Chege, 2014). In Kenya, strong SMCs tend to be located in urban and peril-urban centres and are usually registered. However, they face a number of constraints, which include the difficulty in employing competent people with techniques in financial management because of the salaries such people would demand, financial problems arising from late payments by debtors, and inability to raise own finance and access financial services from formal sources. This category of SMC usually looks to the banking sector and other financial Intermediaries for instruments to finance working capital and to provide credit for short-term liquidity management.

The provision of credit has increasingly been regarded as an important tool for raising the incomes of rural populations and urban areas, mainly by mobilizing resources to more productive uses. As development takes place, one question that arises is the extent to which credit can be offered to the small and medium size enterprises to facilitate their taking advantage of the developing entrepreneurial activities. The generation of self-employment in non-farm activities requires investment in working capital. However, at low levels of income, the accumulation of such capital may be difficult. Under such circumstances, loans, by increasing family income, can help the poor to accumulate their own capital and invest in employment generating activities (Atieno, 2001).

Access to financial services by small scale companies is normally seen as one of the constraints regulated their benefits from credit facilities. However, in most cases the access problem, especially among formal financial institutions is one created by the institutions mainly through their lending policies e.g. minimum loan amounts, complicated application procedures and restrictions on credit for specific purposes. The type of financial institution and its policy will often determine the access problem. Where credit duration, terms of payment, required security and the provision of other services do not fit the needs of the customers, potential borrowers will not apply for credit even where it exists and when they do, they will be denied access (Schmidt and Kropp, 2003).

Most of the conditions imposed by formal credit institutions like collateral requirements should not actually stand in the way of small scale borrowers and the poor in accessing credit. The poor can use the loans and repay if effective procedures for obtaining, supervision and repayment have been established. Bank also supports the view that high interest rate credit can help to keep away the influential non-target group from a targeted credit programme (Hossain, 2004). This further demonstrates the need to develop appropriate lending policies for institutions in the delivery of loans to small scale borrowers.

Credit constraints have been defined by the OECD (2006) as occurring when SMCs cannot obtain financing from banks, capital markets or other suppliers of finance even when they have the capability to use those funds productively. In a situation where economically viable projects may have to be restricted or even abandoned because of funding difficulties, this has the potential to have serious negative consequences for ongoing innovation and growth. It is this potential scenario that motivates the concern for identifying and measuring whether bank policies hinders SMCs from accessing credit.

The inaccessibility of credit by SMCs has been a major hindrance to the sector in contributing meaningfully to the growth of the Nigerian economy. Unwillingness of the Deposit Money Banks (DMBs) to grant the much needed credit to the sector, likewise the attitude or the perception of the SMC owners/managers about the banks’ credit facility has partly been responsible for this. Globally, a lot has been said and written on the role of SMEs in the advancement of any economy. In the same token, government in Nigeria has focused on SMEs by formulating policies aimed at enhancing the performance and growth of the sector (Eniola & Entebang, 2015; Ibrahim, 2017).

Deposit Money Banks are known to provide channels for credit delivery through their various financial avenues. However, most of these services have not been performed to expectation due to the fact that they are characterized by cumbersome processes/stringent conditions that rarely favour the SMCs, which have contributed to the poor performance of the sector. The importance of fund/credit to a firm or business (SMCs inclusive) cannot be over emphasized. The provision of funds to the SMCs and the industrial sector as a whole has been of great concern to policy makers in both the private and the public sectors (Alese & Alimi, 2014).

Extant studies including firm–level data from the World Bank Enterprise survey over the years, reveal that financing inadequacy is a greater obstacle for SMCs than it is for large firms, particularly in the developing world, and that inaccessibility to finance constrains the growth of the SMEs sector more than that of large companies (Schiffer & Weder, 2001; Beck, Demirguc-Kunt & Martinez Peria, 2008). Consequently, inability of the SMEs to obtain the needed funds to pursue new businesses and finance expansion hampers their competitiveness thereby leading to their collapses in the countries world over (Kauffmann, 2006; Atieno, 2009).

Several factors have been identified in literature as the causes of credit availability challenges of SMEs. Some of the identified factors include corporate issues, banks points of restriction, and credit establishments (Imoughele & Ismaila, 2014), lack of collateral security (Abosede, Hassan, & Oko-Oza, 2017), inconsistency in government policies, high monetary policy rate, loan diversion, exchange rate depreciation, infrastructural decay and tenor of loans (Ubesie, Onuaguluchi, & Mbah, 2017), informational barriers, lack of management expertise, high default rate, monitoring (Alhassan & Sakara, 2014; Bondinuba, 2012) and so on.

Bondinuba (2012) found that the main challenges that make it difficult for SMCs to access finance include policy regulation, inadequate financial infrastructure, stringent collateral security requirements, and a lack of institutional capacity of the SMEs sector. An empirical study by Adebisi, Alaneme, and Ofuani (2015) on challenges of finance and performance of SMCs in Southwest of Nigeria revealed that high collateral requirements by banks, high interest rates charged by deposit money banks, as well as difficulty in the process of accessing the funds were major constraints to lending to SMEs. Stringent collateral requirements of banks often rule out a large number of SMEs. Eniola and Ektebang (2015) also assert that access to formal finance by SMEs in Southwest Nigeria is poor because of the high interest rate.

Also, Osoro and Muturi (2013) viewed access to credit as the ability of individuals and enterprises to obtain external funding to enable them ease cash flow problems. Credit can be either short term or long term depending on the lender’s assessment of the borrowers‟ ability to repay. Access to credit refers to a situation where a business or a person can obtain loan facility from lenders (Kimaiyo, 2016). Lack or limited access to credit refers to obtaining less
or no loan facility at all due to some reasons. The definition described access to credit as SMEs ability to obtain external financial products and services to enable them to ease their funding problems. According to Manasseh (2004), external financing or credit facility is a kind of finance provided by person(s) other than the actual owner of the company who are the company creditors. Manasseh further added that credit can be in any of the following forms: overdrafts, trade creditors, lease financing, debentures, loans, among others. All these external sources
depend on the enterprise’s creditworthiness.

Discussing the importance of bank credit to SMCs, Ogar, Enya, and Oka (2015) argued that it reactivates, expands and modernizes all types of enterprises which are considered economically feasible and desirable to the achievement of stated economic goals of self-sufficiency in production. Also, credits remove financial constraints faced by SMCs, as it provides incentives to adopt new technologies that would have otherwise been slowly accepted. Thus, credit enables SMCs to switch quickly to new technologies which enhance the achievement of a rapid productivity and growth. Beck and Demirguc-Kunt (2016) further argue that access to finance allows SMCs in developing economies to undertake productive investments to expand their businesses and to acquire the latest technologies, thus ensuring their competitiveness, and fostering innovation, macroeconomic resilience, and GDP growth. Kevane and Wydick (2016) also suggest that provision of credit to micro enterprises encourages economic growth in the
informal sector through promoting increased capitalization of business, creating employment opportunities, and long-term income growth. This is supported by Aghion and Bolton (2017) who argue that more credit means more entrepreneurship, more firm formation, and economic growth.

• Statement of the Problem

SMCs in Bambili have not been able to play significant roles in the economy given the quantum of challenges they face which include inadequate capital, as they are not able to have access to finance from banks, poor operating environments as typified by poor state of infrastructure, low entrepreneurial skills and inconsistent government policies. Even, where they have plenty access like the current opportunity to access various government schemes and intervention funds, credit affordability remains a serious challenge to SMCs. Banks credits unattractive due to prohibitive interest rate, high loan administration costs, stringent credit terms and other cost of credits.

Deposit money banks‟ in Cameroon and Bambili in particular knack to lend out loans are influenced by a lot of reasons such as the existing interest rate, loan administration, the volume of deposits, and the level of their domestic and foreign investment, banks liquidity ratio, reputation and public recognition and other factors. We also have long attributed the reluctance on the part of financial institution to fund SMCs to the insufficient capital base of banks and information asymmetry that often exists between SMCs and lending institution. The information asymmetry between banks and SMCs continue to persist, since the skills needed to set up a business is not the same as those needed to run a business.

Balogun, Agumba, and Ansary (2018) pointed that there was information gap between the deficit unit (SMCs owners) and deposit money banks and that poor credit rationing by the banks to SMCs industry had negatively drop-down SMCs profitability. This caused SMCs businesses to collapsed and unable to contribute to economic activities and create employment. Several studies have investigated credit availability among small and medium companies and performance of SMCs (Kwaning, Nyantaky & Kyereh, 2015; Mole & Namusonge, 2016; Balogun, Agumba, & Ansary, 2018) but few studies have critically employed their effect on SMCs business growth especially SMCs industry in Cameroon and Bamenda in particular. It is on this note that the researcher focus on the effect of access to credit on the growth of small and medium Sized Enterprises in Bambili.

• Research Questions
  • Main Research Question

What is the effect of Access to Credit on the Growth of Small and Medium sized enterprises in Bambili, North West Region of Cameroon?

• Specific Research Questions

1. What is the effect of Collateral on the Growth of Small and Medium sized enterprises in Bambili?
2. What is the effect of Interest Rate on the Growth of Small and Medium sized enterprises in Bambili?

• What is the effect of Number of Lending Institutions on the Growth of Small and Medium sized enterprises in Bambili?
  • Research Objectives
    • Main Research Objective

To examine the effect of Access to Credit on the Growth of Small and Medium sized enterprises in Bambili, North West Region of Cameroon.

• Specific Research Objectives

1. To assess the effect of Collateral on the Growth of Small and medium sized enterprises in Bambili.
2. To evaluate the effect of Interest Rate on the Growth of Small and Medium sized enterprises in Bambili

• To assess effect of Number of Lending Institutions on the Growth of Small and Medium Sized Enterprises in Bambili.
• Research Hypotheses
  • Main Research Hypotheses

H₀: Access to Credit has no significant effect on the Growth of Small and Medium Sized Enterprises in Bambili, North West Region of Cameroon.

• Specific Research Hypotheses

H₀₁: Collateral has no significant effect on the Growth of Small and Medium Sized Enterprises in Bambili.

H₀₂: Interest Rate has no significant effect on the Growth of Small and Medium Sized Enterprises in Bambili.

H₀₄: Number of Lending Institutions has no significant effect on the Growth of Small and Medium Sized Enterprises in Bambili.