CHAPTER ONE

GENERAL INTRODUCTION

1.1 Background of the Study

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. They mobilize rural savings and have a simple and straight forward procedure that originates from local cultures and are easily understood by the population (Germidis et al., 1991). These funds are to finance the informal sector SMEs in developing countries and it is known that these SMEs are more likely to fail (Maloney, 2003).

The creation of SMEs generates employment but these enterprises are short live and consequently are bound to die after a short while causing those who gained job positions to lose them and even go poorer than how they were. It is not until recent that microfinance had gained recognition thanks to the noble prize winner Yunus Muhammad of the Grameen Bank.

 It should be noted that microfinance 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 be granted a loan or to be provided with the bank services. The lack of financial power is a contributing factor to most of the societal problems. These problems emanate from 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, Microfinance has proved this bank concept to be wrong. They target the poor who are considered. risky 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 equalize 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 urban areas. The UN millennium goal to alleviate poverty by the year 2015 is far from fetch despite the enormous works that microfinance institutions are doing to contribute in this domain (Hiderink and Kok, 2009). The main challenge facing the poor is to gain financial power to enable them boost their income generating activities (Yunus, 2003).

Over the years, the microfinance sector has thrived and evolved into its current state, thanks to the various financial sector policies and programs undertaken by different governments since independence. 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 is still needed to boost this sector, which is considered very vital in the economic life wire of the state. A recent development in this sector has been the increasing involvement of NGOs and the microfinance institutions in the process of enhancing the development of SMEs particularly at the rural level. The question now is; why microfinance at this point in time? 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 (www.CamCCUl.org). 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          

Microfinance institutions have become increasingly important worldwide over the major strategy of the development agenda for poverty reduction and in the promotion of small and medium size enterprises. MFI’s resource base can provide platform for the growth of SME’s and contribute to fight against poverty. (Holcombe, 1995, Otero and Rhyne, 1994) argue that microfinance has indeed many positive impacts.

Microfinance is a source of financial services for entrepreneurs and small businesses lacking access to banking and related services. SMEs 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. MFIs have become a major backbone in the sustenance and survival of SMEs in Mezam by providing credit to SMEs. In addition to financial services, they provide business training, financial and business management to help improve the capacity of their clients in managing the loan resources granted to them. Entrepreneurs often asserted to the fact that they are face with challenges of inadequate capital in their businesses that inhabits their growth, and they face difficulties in accessing capital from microfinance institutions and their inflexible processes. SMEs face challenges due to lack of managerial and business skills which also inhabits their growth, while some MFIs believe that credit obtained by SMEs where misappropriated. There is need to build these capacities in addition to financial resources in order to achieve growth.

The study is designed to analyze the effects of MFIs lending policy on the growth of SME in Cameroon and to propose a more effective approach that MFIs can adopt in order to meet the growth oriented needs of SMEs.

1.3 Research Questions

The study was guided by the following;

1.3.1 Main Question

How does the Lending Policy of Micro Finance Institutions influence the Growth of Small and Medium-Sized Enterprises in Mezam Division?

1.3.2 Specific Questions

1. What are the effects of microfinance lending policy on the growth of SMEs in Mezam division?
2. How does microfinance institutions, improve on the growth of SMEs in mezam?

iii. What is the influence of microfinance institutions lending policy on the growth of small and medium size enterprises in Mezam?

1.4 Objectives of the Study

1.4.1 Main Objectives

To assess the influence of the Lending Policy of Micro Finance Institutions on the Growth of Small and Medium Sized Enterprises in Mezam Division

1.4.2 Specific Objectives

1. To identify the roles of microfinance institutions lending policies on the growth of SMEs in Mezam.
2. To access the challenges faced by small and medium size enterprises in accessing credit in mezam.
3. To examine the utilization of credit by SMEs for business growth in mezam.