CHAPTER ONE

GENERAL INTRODUCTION

1.1 Background of the study

The term ‘’Microfinance’’ is generally refer to those financial institutions that are characterized by their commitment to assisting typically poor household and small enterprises in gaining access to financial services. Microfinance can be an extremely positive force on the economic development of individuals who own small businesses, communities and the nation in which they exist. In areas of the world where many do not readily have access to banking services, the presence of microfinance institutions can be an extremely important force in narrowing the gap between the rich and the poor. These institutions 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 which were easily understood by the population (Germidis et al.,1991).These funds were to finance the informal sector small and medium size enterprises(SMEs) in developing countries and it was known that these SMEs were 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 systems, 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  growth of small and medium size enterprises.

   The UN millennium goal to alleviate poverty by the year 2015 is far 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).

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 growth of SMEs particularly at the rural level. 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 SMEs develops especially when it comes to financing their businesses. SMEs are the key sectors to the government and of course have a great influence in the socioeconomic development of the country.

1.2 Statement of the problem

            Small and medium size enterprises play an important economic and social role in the economy as well as in the society and often contribute to innovation. The variance in profitability, survival and growth of SMES compared to larger firm’s accounts for special problems in financing SMES generally tend to be confronted with higher interest rates, as well as credit rationing due to shortage of collateral. Regulatory burdens remain a major obstacle for SMES as these firms tend to be poorly equipped to deal with problems arising from regulations.  Access to information about regulation should be made available to SMES at minimum cost. It is difficult for young entrepreneurs to access credit to start their businesses because of lack of collateral securities. Therefore the coming of microfinance institutions has greatly helped men SMES to grow and develop through the services they provide. Macro finance is the source of financial service for entrepreneurs and small businesses lacking access to banking and related services.The two mechanisms for the delivery of financial services to such clients are: relationship- based banking for individual entrepreneurs and small businesses and group- base models, where several entrepreneurs come together to apply for loan and other services as a group. Macro finance is a way to promote economy development, employment and grow through the support of micro-entrepreneurs and small businesses.

    This study will investigate the underlying issues that are faced by small firm’s growth. Particular attention will be given to this issue of financing from growth, where microfinance institutions play an active role. Therefore this study is out to investigate the role microfinance institutions play in the growth of small and medium size enterprises.

1.3 Research questions

1.3.1 Main Research Question

• What is the role of Microfinance institutions in the growth of small and medium size enterprises in Bamenda?

1.3.2 The specific research questions:

• How do microfinance loans affect the growth of SMEs in Bamenda?
• How do savings in MFIs affect the growth of SMEs?
• How does Education affect the growth of SMEs?

1.4 Objectives of the study

1.4.1 Main objective

This study is intended to investigate the role Microfinance institutions play in the growth of SMEs.

1.4.2 The specific Objectives in this study are:

• To determine the effect of loans in the growth of SMEs.
• To assesses the rate of savings of SMEs owners.
• To examine how Education assist owners of SMEs.

From the above objectives, the following hypotheses were put forward to guide the investigation of this study.