CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The microfinance movement began in the 1970s with the pioneering work of Muhammad Yunus in Bangladesh, who introduced the Grameen Bank model to provide collateral-free loans to the poor, especially women, to enable self-employment and income generation (Yunus, 1999). This model rapidly gained popularity and was adopted in many developing and transitional economies as a tool for poverty alleviation and economic empowerment. Over the decades, the scope of microfinance services expanded to include savings, money transfer and capacity-building initiatives. Consequently, researchers and policymakers began to explore the link between microfinance services and the performance of SMEs, investigating how financial access impacts business growth, income levels, sustainability, and job creation (Ledgerwood, 2013). This global trend laid the foundation for examining the effects of microfinance beyond mere poverty alleviation, especially concerning the development of the SME sector.

In the African context, the relevance of microfinance to SME development is particularly pronounced. Africa has one of the highest rates of informal economic activity and a rapidly growing youth population, yet access to credit remains a substantial barrier to entrepreneurial growth (Akinwale & Olawale, 2020). As formal banking systems often fail to accommodate the financing needs of micro and small enterprises, MFIs have become essential in bridging the financial gap. Governments and non-governmental organizations across Africa have increasingly supported the expansion of microfinance as a strategy for inclusive economic growth. In countries such as Kenya, Ghana, Nigeria, and South Africa, studies have shown that microfinance services contribute significantly to SME profitability, asset acquisition, and employment creation, although the impact varies depending on the structure and sustainability of the microfinance programs (Abor & Quartey, 2010; Kipesha, 2012).

The topic has continued to gain prominence due to mixed empirical findings on the effectiveness of microfinance services in enhancing SME performance. While some studies report positive outcomes such as increased business revenue, improved working capital, and business expansion (Banerjee et al., 2015), others argue that microfinance alone is insufficient without complementary support like financial literacy, market access, and infrastructural development (Cull et al., 2009). These divergent results highlight the complexity of microfinance impacts and the need for more context-specific studies, particularly in Africa, where cultural, regulatory, and economic environments differ significantly from global norms. Therefore, exploring the effects of microfinance institution services on SMEs continues to be a critical area of research aimed at informing policy and improving economic development strategies worldwide and within the African continent.

The growing recognition of SMEs as a crucial engine for economic development, job creation, and poverty reduction in developing countries. In Cameroon, SMEs represent over 90% of the private sector and contribute significantly to the gross domestic product (GDP), yet they face substantial challenges in accessing formal financial services due to limited collateral, high risk perception, and complex banking procedures (World Bank, 2020). To address this gap, microfinance institutions (MFIs) emerged as alternative financial intermediaries aiming to provide accessible financial services—such as microcredit, savings and business advisory—to economically active but underserved populations. The rapid expansion of MFIs since the 1990s in Cameroon reflects a strategic governmental and donor-supported initiative to promote inclusive finance and support the informal and semi-formal economic sectors (Njong, 2019).

Despite the proliferation of MFIs and their purported mission to alleviate financial constraints faced by SMEs, empirical studies have yielded mixed results regarding their actual impact on enterprise performance. While some studies suggest that access to microfinance services improves business income, productivity, and sustainability, others argue that the benefits may be short-lived or insufficient to address broader structural challenges such as market access, poor infrastructure, and limited managerial capacity (Echu & Tita, 2021). This divergence in outcomes has sparked scholarly interest in understanding the specific mechanisms through which MFI services influence SME growth and sustainability. Moreover, the relevance of this topic has grown in light of global economic uncertainties and post-COVID-19 recovery efforts, which have disproportionately affected SMEs in Cameroon. Thus, investigating the effect of microfinance on SME performance is timely and necessary for informing policies aimed at economic resilience and inclusive growth.

Furthermore, the choice of Cameroon as the context for this topic is informed by the country’s unique microfinance landscape and the institutional frameworks governing financial inclusion. The Cameroonian government, through the Ministry of Finance and the Central African Banking Commission (COBAC), has enacted regulatory reforms to formalize and monitor MFIs, leading to a dynamic yet complex microfinance sector (Tchamyou, 2019). At the same time, man SMEs continue to struggle with limited access to affordable capital and capacity-building services, thereby limiting their ability to expand or compete in regional markets. This paradox underscores the need for academic inquiry into whether MFIs are effectively fulfilling their developmental role. By focusing on the interplay between microfinance services and SME performance, this topic contributes to the broader discourse on sustainable development, financial inclusion, and economic empowerment in Sub-Saharan Africa.

1.2 Statement of the Problem

 Small and medium-sized enterprises (SMEs) are widely recognized as essential contributors to economic growth, employment creation, and poverty alleviation in Cameroon. Despite their significance, these enterprises often face serious financial constraints due to limited access to formal banking services, which hinders their capacity to expand and remain competitive (Njong, 2019). In response to this financing gap, microfinance institutions (MFIs) have been established to provide financial support to SMEs through microcredit, savings, and other related services. Although MFIs are theoretically positioned to empower SMEs, the actual outcomes have been inconsistent. Some researchers argue that MFIs have had a positive impact on SME profitability, working capital, and business survival, while others contend that the high cost of borrowing, short repayment cycles, and weak financial literacy among SME owners undermine the effectiveness of these services (Echu & Tita, 2021; Fonchamnyo & Agyapong, 2017). Furthermore, the regulatory and institutional environment under which MFIs operate in Cameroon presents additional challenges, such as limited supervision, operational inefficiencies, and regional disparities in service delivery (Tchamyou, 2019). These issues raise critical concerns about the actual contribution of microfinance services to SME development in the country. As such, there is a pressing need to empirically investigate the extent to which microfinance services influence the performance of SMEs in Cameroon, in order to provide evidence-based recommendations for improving the design and delivery of financial interventions targeting the sector

1.3 Research Questions

This research will be guided by the following research questions.

 1.3.1 Main Research Question

The main research question to be answered in this study is: What is the effect of microfinance institution services on the performance of small and medium size enterprises in Cameroon?

1.3.2 Specific Research Questions

The following specific research questions will guide the answering of the main question above:

What is the effect of loan granting on the performance of small and medium size enterprises in Cameroon?

What is the effect of savings on the performance of small and medium size enterprises in Cameroon?

What is the effect of money transfer on the performance of small and medium size enterprises in Cameroon?

1.4 Objectives of the study

 1.4.1 Main Objective

 The main objective in this study is to; Assess the effect of microfinance institution services on the performance of small and medium size enterprises in Cameroon.

1.4.2 Specific Objectives

To archive the main objective above the following specific objectives will be puesued:

1. To assess the effect of loans granting on the performance of small and medium size enterprises in Cameroon

• To assess the effect of savings on the performance of microfinance institution services in Cameroon
• To assess the effect of money transfer on the performance of small and medium size enterprises in Cameroon