CHAPTER ONE

INTRODUCTION

 1.1. Background of The Study

Microloans have emerged as a pivotal tool in fostering the growth of small businesses, particularly in the context of developing economies. Microloans, according to Muhammad Yunus, the founder of Grameen Bank, are “small collateral-free loans given to poor people to help them generate self-employment income” (Yunus, 2003) Small and medium scale enterprises (SMEs) are lifeblood of most economies. On average SMEs represent over 90% of the enterprises and account for 50 to 60% of employment in most African countries. Empirical evidence shows that a dynamic and growing Micro and Small Enterprises (SMEs) sector can contribute to the achievement of a wide range of development objectives, including: the attainment of income distribution and poverty reduction, Kessy and Temu (2010), creation of employment Daniels and Ngwira (1993); savings mobilization Beck et al (2005); and production of goods and services that meet the basic needs of the poor, Cook and Nixson (2000). Despite of SMEs large contribution in countries development and economic growth, their growth and development in developing countries were 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 SME 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). In a study done by Rweyemamu et al. (2003) revealed that, formal financial institutions have failed to serve the SMEs in both urban and rural communities. Financial problem of most SMEs arise due to poor financial management; existence of information asymmetry and bank credit rationing, Chijoriga and Cassimon (1999). Ogawa and Suzuki (2000) pointed out that bank do not want to offer loans to SMEs because the nature of loans 2 required is too small and those banks find it more expensive to offer such loans. According to Chijoriga and Cassimon (1999), most formal institutions regard low income households as too poor to save, and are not personally known to them , do not keep written accounts or business plans, they usually borrow small and uneconomic sums, while administration and carrying costs are almost as high as for large loans, Kuzilwa and Mushi (1997). Commercials banks, which were traditionally looked upon as powerful catalyst of economic development through mobilization and the provision of credit to profitable ventures do not offer credit to the rural poor or small business. According to Wangwe and Semboja (1997), SMEs in Tubah Sub Division Sub division contribute 16% and 34% of rural and urban employment respectively as well as up to 32% of the country GDP.

According to Ahsan et al. (2019), small and medium enterprises (SMEs) account for a significant portion of employment and GDP in many developing countries. However, access to finance remains a major barrier to their growth. Microloans, characterized by their small size and accessibility, have been touted as a means to bridge this gap and empower entrepreneurs with the necessary capital to thrive. Research by Li et al. (2020) emphasizes the importance of tailored financial products to address these varying requirements effectively. Start-up microloans provide crucial support during the early stages of business formation when capital is scarce, enabling entrepreneurs to overcome initial hurdles and establish viable ventures. On the other hand, expansion microloans facilitate business growth by providing capital for investment in equipment, inventory, marketing, or expansion into new markets.

Rahman et al. (2018), highlight the positive impact of microloans on business expansion, citing increased revenue, employment generation, and asset accumulation among loan recipients. Conversely, other research, such as that conducted by Bhuiyan et al. (2021), suggests that microloans may not always translate into sustainable growth, with factors such as over-indebtedness and limited financial literacy potentially undermining their benefits.

Contextual factors play a crucial role in shaping the outcomes of microloan interventions. Cultural norms, regulatory environments, and market conditions can significantly influence the effectiveness of microfinance programs (Papadimitriou et al., 2019). For instance, in societies where informal lending networks are prevalent, the uptake of formal microloans may be limited. Similarly, stringent regulatory requirements or volatile economic conditions can affect the ability of small businesses to leverage microfinance effectively

Self-employment generation within small business, requires basic skills and investment in working capital, as a result of low level of income whereby capital accumulation may be difficult. Therefore, through loans the poor can accumulate such capital and expand investment in employment generation activities (Hossain, 1988). Loan is important in improving living standard of majority of the peoples within the societies. Therefore, loans allow the households or enterprises to get the satisfaction of economies of scale and new technology benefits.

In Tubah, microloans play a crucial role in supporting small and medium-sized enterprises (SMEs). According to research conducted by Njong and Fomba in 2018, microfinance institutions in Tubah Sub Division are crucial in providing financial assistance to SMEs, especially those in marginalized areas. These loans serve as essential financial aid for entrepreneurs who may otherwise struggle to secure funds from traditional banks, as highlighted by Mouzong and Sikod’s study in 2017. Furthermore, microfinance institutions customize their loan offerings to suit SMEs’ specific requirements, offering flexible repayment terms and reasonable interest rates. Despite facing challenges such as limited capital and infrastructure access, microloans significantly contribute to Tubah Sub Division’s local economy by fostering entrepreneurship and generating employment opportunities within the community.

 1.2. Statement of the problem

Accessing credit is considered to be an important factor in increasing the development of SMEs. It is thought that access to credit increases income levels, employment and thereby alleviates poverty. It is believed that access to credit enables poor people to overcome their liquidity constraints and undertake some investments such as the improvement of farm technology inputs thereby leading to an increase in agricultural production, Hiedhues (1995). The main objective of microloans according to Navajas et al, (2000) is to improve the welfare of the poor as a result of better access to small loans that are not offered by the formal financial institutions. Diagne and Zeller (2001) argue that insufficient access to credit by the poor just below or just above the poverty line may have negative consequences for SMEs and overall welfare. Access to credit further increases SME’s risk-bearing abilities; improve risk-copying strategies and enables consumption smoothing overtime. With these arguments, microfinance credit is assumed to improve the welfare of the poor.

Despite the acknowledged significance of microfinance in fostering entrepreneurship and SME development, there is a lack of empirical evidence regarding how start-up and expansion micro loans differ in their impact on SME growth. Understanding these distinct effects is crucial for policymakers and MFIs to devise targeted interventions that effectively support SMEs across their lifecycle. By exploring the unique dynamics of start-up and expansion micro loans,

According to Chijoriga and Cassimon (1999), long procedures and time is required for loan processing. The transaction cost involved in the process of getting finance from MFIs based on procedure and time. It was further revealed that there is strictly monitoring and supervision imposed by institutions due to existing of high asymmetric information among clients and their finance institution. Under the business environment of high transaction cost still SMEs manage to utilize the services, due to this point it was worth asking if the micro credit have an impact in the performance of SMEs at enterprises and household level considering the actual cost of finance institution.

The influence of working capital loans on the growth of Small and Medium Enterprises (SMEs) is a complex and significant factor. These loans are important for improving liquidity and operational efficiency, yet their impact on SME growth requires thorough investigation. SMEs often encounter challenges in securing adequate working capital due to strict lending requirements, limited collateral, and high interest rates, which can restrict their ability to expand, innovate, and capitalize on market opportunities. Understanding how working capital loans affect SME growth is essential for policymakers, financial institutions, and entrepreneurs aiming to promote sustainable economic development.

Despite the potential benefits of microloans in fostering economic development and alleviating poverty, entrepreneurs in Bamenda face significant challenges in accessing these financial services due to barriers such as stringent lending criteria, limited outreach of microfinance institutions, and inadequate financial literacy among potential borrowers

1.3.Research questions

1.3.1.Main Research Question

• What is the effects of microloans on the growth of small and medium size Enterprises in Tubah Sub Division Subdivision?

1.3.2.Specific Research Question

• What effect does start-up microloan have on the growth of small and medium sized enterprises in Tubah Sub Division Subdivision?
• What role does Expansion Microloans play on the quality of services offered by small and medium sized enterprises in Tubah Sub Division Subdivision?
• What effects does Working capital loans have on the growth of SME’s in Tubah Sub Division

1.4. Objectives of the Study

1.4.1. Main Research Objective

• To examine the effects of microloans onthe growth of small and medium size Enterprises in Tubah Sub Division

        1.4.2       Specific Research objectives

• To assess effects of start-up microloasion ns on the growth of small and medium sized enterprises in Tubah Sub DiviSubdivision
• To determine the role of expansion microloans on the quality of services provided by SME’s in Tubah Sub Division Subdivision
• To investigate the effects of Working capital loans on the growth of SME’s in Tubah Sub Division