CONTRIBUTION OF MICROCREDIT ON FINANCIAL PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES
CONTRIBUTION OF MICROCREDIT ON FINANCIAL
PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES
INTRODUCTION
Introduction
This chapter gives the introduction to the proposed
study by describing the background information, statement of the problem,
objectives of the study with both general and specific objectives as well as
research questions.
1.1 Background
Information
Microfinance has become a vital tool for poverty
reduction in many parts of the world especially in developing economies for
providing financial services. Lack of access to credit is generally seen as one
of main reasons why many people in developing economies remain poor (Hermes and
Lensink, 2007). Poverty reduction has been the foremost target of Microfinance
Institutions (MFIs); therefore, an increase in number of MFIs is an indicator
for the growth and success of micro-finance especially in the rural areas
(Ullah and Routray, 2007). MFIs target poor through innovative approaches which
include group lending, progressive lending, regular repayment schedules and
collateral substitute (Kimando, Kihoro and Njovu, 2012; Thapa, 2006).
Tanzania
is a small-sized economy, with a large portion of population below the poverty
line of $2 a day, particularly in rural areas (Marr and Tubaro, 2011).
Agriculture is the backbone of the economy in the country. In 1991, the
government initiated financial sector reforms in order create an effective and
efficient financial system (United Republic of Tanzania [URT], 2000). MFIs
activities are directed towards the provision of financial services for working
poor or small and micro-enterprises. These services comprise of micro loans,
savings, micro leasing, micro insurance and other forms of financial services
(PRIDE Tanzania, 2005). However, among these services micro loans and mandatory
savings are the major services offered to the MFIs clients in Tanzania.
Tanzania
in response to economic crisis of 1980’s adopted macroeconomic stabilization
policies and structural reforms which led to the transformation of the economy
from socialist to the market oriented economic system. One among the strategies
employed was financial liberalization initiative of 1991 which resulted into
the increase of commercial banks. However, the access of credit by Small and
Medium Enterprises (SMEs) from these commercial banks was still limited to poor
citizens (World Bank, 2011). This problem was also reported by Randhawa and
Gallardo (2003), that bank lending in Tanzania is extremely biased against the
poor because they do not possess valuable physical collaterals to pledge as
loan security. It is for this reason the
Government of Tanzania (GoT) created an environment that paved a way to the
growth of MFIs throughout the country so as to complement the formal financial
institutions (World Bank, 2011).
Poverty
eradication is at the forefront of Tanzania’s development strategy. The long-term
vision to this phenomenon is to provide sustainable financial services to the
economically active poor (the majority of Tanzania’s population) who lack
access to the services from the main stream of financial services. Access to
well-functioning and efficient financial services can empower SMEs economically
and socially, allowing them to better integrate into the country’s economic
activity and actively contribute to economic growth and thus poverty reduction
(Morwa, 2006).
SMEs
play a crucial role in the overall economy in providing a broad range of goods
and services both for domestic and foreign consumption, in so doing, small and
medium enterprises provide important sources of income and jobs creation in
Tanzania. (URT, 2003) SMEs all over the world and in Tanzania in particular,
can be easily established since their requirements in terms of capital;
technology, management and even utilities are not as demanding as it is the
case for large enterprises. These enterprises can also be established in rural
settings and thus adding value to the agro products and at the same time
facilitating the dispersal of enterprises. Indeed, SMEs development is closely
associated with more equitable distribution of income and thus important as
regards to poverty alleviation. At the same time, SMEs serve as a training
ground for emerging entrepreneurs. (URT, 2003).
Despite
the crucial role SMEs play, the full potential of the SME sector in Tanzania
has, yet to be tapped due to the existence of a number of constraints hampering
the development of the sector these include: Unfavorable legal and regulatory
framework undeveloped infrastructure, poor business development services,
limited access of SMEs to finance, ineffective and poorly coordinated
institutional support framework (URT, 2003). The difficulty on accessing
finance is arguably central among SMEs (World Bank, 2009). For example, in
Tanzania it was found that 63% of SMEs consider difficulties in accessing
finance from financial institutions as the major constraint to their
development (Satta, 2003). In some cases the problem of financing is aggravated
by the strict credit terms especially penalties on failure to repay their loans
on time which affects their profitability because whatever they could have
saved as profit is paid back in fines and other penalty related costs(Ullah and
Routray, 2007).
1.2
Statement of the Problem
Microcredit
is a part of poverty reduction. In the process of dealing with this problem,
the government of Tanzania has put in place poverty reduction policy for
ensuring implementation. In implementing poverty reduction strategies,
microfinance banks and financial Non-Government Organizations (NGOs) have
considered to be among the effective and efficient mechanism. These
institutions work hand in hand with the government by extending small loans to
economically active poor to avoid total risk/loss of their funds. These groups
use the small loans to establish micro business or enrich already existing
small businesses.
Access
to finance is necessary to create an economic environment that enables SMEs to
grow and prosper (Woradithee, 2011). SMEs in developing countries, however,
face significant barriers to finance. Financial constraints are higher in
developing countries in general, and in particular SMEs were constrained by
gaps in the financial system such as high administrative costs, high collateral
requirements and lack of experience within financial intermediaries
(Woradithee, 2011). Increased access to finance for SMEs can improve economic
conditions in developing countries by fostering innovation, macro-economic
resilience, and GDP growth. Inadequate access to credit is one of the more
common complaints.
Insufficient
of information concerning cost of finance gives a reason for a lot of unknowingly
cots to SMEs before and even after disbursement. But there are another cost
such as contract costs, cost of entry , cost of passbook and loan application
form as well as security cost which should be deposited before disbursement
date. Hence, SMEs incurred all interest rate cost in order to obtain loan and
sometimes can be termed as transaction cost.
Ojo (2013) and Waithanji (2014) studied on the
financial challenges faced by SMEs and found that inadequacies in access to
finance are key obstacles to SMEs growth. Subrahmanya (2015) studied on the
relationship between microfinance (services) and financial performance of SMEs.
The findings were that positive and significant relationships have been
established between MFIs loans and SMEs performance. Gathongo (2014) in a study
on the impact of microfinance services on women empowerment found that
microfinance has led to expansion of freedom of choice of women.
Despite the SME development policy strategies, still
SMEs performance remains poor as it is faced with numerous challenges include
unfavorable policy, access to financial services and markets, inadequate
business know-how, limited accessto business related information. Therefore,
this study intends to assess the contribution of microcredit on performance of
small and medium enterprises in Mbeya municipality.
1.3
Objectives of the Study
1.3.1 General
research objective
To assess the contribution of
microcredit on financial performance of SMEs in Tanzania.
1.3.2 Specific
research objectives
specific objectives of the study will be to
:
- The s To assess whether or not microcredit helps SMEs to improve size
and growth of the firm.
- Examine the extent to which SACCOS services affect
SMEs business performance .
- Establish the constrains to SMEs access to SACCOS
services .
- Examine the extent to which
SACCOS services affect employements growth through financial services
1.4 Research Questions
- How microcredit helps SMEs to
improve size and growth of the firm?
- How SACCOS services affect
SMEs business performance?
- What
are the constrains facing SMEs after deliver microcredit to Amkeni SACCOS?
- How SACCOS service affect employment
growth through financial services?
INTRODUCTION
Introduction
This chapter gives the introduction to the proposed
study by describing the background information, statement of the problem,
objectives of the study with both general and specific objectives as well as
research questions.
1.1 Background
Information
Microfinance has become a vital tool for poverty
reduction in many parts of the world especially in developing economies for
providing financial services. Lack of access to credit is generally seen as one
of main reasons why many people in developing economies remain poor (Hermes and
Lensink, 2007). Poverty reduction has been the foremost target of Microfinance
Institutions (MFIs); therefore, an increase in number of MFIs is an indicator
for the growth and success of micro-finance especially in the rural areas
(Ullah and Routray, 2007). MFIs target poor through innovative approaches which
include group lending, progressive lending, regular repayment schedules and
collateral substitute (Kimando, Kihoro and Njovu, 2012; Thapa, 2006).
Tanzania
is a small-sized economy, with a large portion of population below the poverty
line of $2 a day, particularly in rural areas (Marr and Tubaro, 2011).
Agriculture is the backbone of the economy in the country. In 1991, the
government initiated financial sector reforms in order create an effective and
efficient financial system (United Republic of Tanzania [URT], 2000). MFIs
activities are directed towards the provision of financial services for working
poor or small and micro-enterprises. These services comprise of micro loans,
savings, micro leasing, micro insurance and other forms of financial services
(PRIDE Tanzania, 2005). However, among these services micro loans and mandatory
savings are the major services offered to the MFIs clients in Tanzania.
Tanzania
in response to economic crisis of 1980’s adopted macroeconomic stabilization
policies and structural reforms which led to the transformation of the economy
from socialist to the market oriented economic system. One among the strategies
employed was financial liberalization initiative of 1991 which resulted into
the increase of commercial banks. However, the access of credit by Small and
Medium Enterprises (SMEs) from these commercial banks was still limited to poor
citizens (World Bank, 2011). This problem was also reported by Randhawa and
Gallardo (2003), that bank lending in Tanzania is extremely biased against the
poor because they do not possess valuable physical collaterals to pledge as
loan security. It is for this reason the
Government of Tanzania (GoT) created an environment that paved a way to the
growth of MFIs throughout the country so as to complement the formal financial
institutions (World Bank, 2011).
Poverty
eradication is at the forefront of Tanzania’s development strategy. The long-term
vision to this phenomenon is to provide sustainable financial services to the
economically active poor (the majority of Tanzania’s population) who lack
access to the services from the main stream of financial services. Access to
well-functioning and efficient financial services can empower SMEs economically
and socially, allowing them to better integrate into the country’s economic
activity and actively contribute to economic growth and thus poverty reduction
(Morwa, 2006).
SMEs
play a crucial role in the overall economy in providing a broad range of goods
and services both for domestic and foreign consumption, in so doing, small and
medium enterprises provide important sources of income and jobs creation in
Tanzania. (URT, 2003) SMEs all over the world and in Tanzania in particular,
can be easily established since their requirements in terms of capital;
technology, management and even utilities are not as demanding as it is the
case for large enterprises. These enterprises can also be established in rural
settings and thus adding value to the agro products and at the same time
facilitating the dispersal of enterprises. Indeed, SMEs development is closely
associated with more equitable distribution of income and thus important as
regards to poverty alleviation. At the same time, SMEs serve as a training
ground for emerging entrepreneurs. (URT, 2003).
Despite
the crucial role SMEs play, the full potential of the SME sector in Tanzania
has, yet to be tapped due to the existence of a number of constraints hampering
the development of the sector these include: Unfavorable legal and regulatory
framework undeveloped infrastructure, poor business development services,
limited access of SMEs to finance, ineffective and poorly coordinated
institutional support framework (URT, 2003). The difficulty on accessing
finance is arguably central among SMEs (World Bank, 2009). For example, in
Tanzania it was found that 63% of SMEs consider difficulties in accessing
finance from financial institutions as the major constraint to their
development (Satta, 2003). In some cases the problem of financing is aggravated
by the strict credit terms especially penalties on failure to repay their loans
on time which affects their profitability because whatever they could have
saved as profit is paid back in fines and other penalty related costs(Ullah and
Routray, 2007).
1.2
Statement of the Problem
Microcredit
is a part of poverty reduction. In the process of dealing with this problem,
the government of Tanzania has put in place poverty reduction policy for
ensuring implementation. In implementing poverty reduction strategies,
microfinance banks and financial Non-Government Organizations (NGOs) have
considered to be among the effective and efficient mechanism. These
institutions work hand in hand with the government by extending small loans to
economically active poor to avoid total risk/loss of their funds. These groups
use the small loans to establish micro business or enrich already existing
small businesses.
Access
to finance is necessary to create an economic environment that enables SMEs to
grow and prosper (Woradithee, 2011). SMEs in developing countries, however,
face significant barriers to finance. Financial constraints are higher in
developing countries in general, and in particular SMEs were constrained by
gaps in the financial system such as high administrative costs, high collateral
requirements and lack of experience within financial intermediaries
(Woradithee, 2011). Increased access to finance for SMEs can improve economic
conditions in developing countries by fostering innovation, macro-economic
resilience, and GDP growth. Inadequate access to credit is one of the more
common complaints.
Insufficient
of information concerning cost of finance gives a reason for a lot of unknowingly
cots to SMEs before and even after disbursement. But there are another cost
such as contract costs, cost of entry , cost of passbook and loan application
form as well as security cost which should be deposited before disbursement
date. Hence, SMEs incurred all interest rate cost in order to obtain loan and
sometimes can be termed as transaction cost.
Ojo (2013) and Waithanji (2014) studied on the
financial challenges faced by SMEs and found that inadequacies in access to
finance are key obstacles to SMEs growth. Subrahmanya (2015) studied on the
relationship between microfinance (services) and financial performance of SMEs.
The findings were that positive and significant relationships have been
established between MFIs loans and SMEs performance. Gathongo (2014) in a study
on the impact of microfinance services on women empowerment found that
microfinance has led to expansion of freedom of choice of women.
Despite the SME development policy strategies, still
SMEs performance remains poor as it is faced with numerous challenges include
unfavorable policy, access to financial services and markets, inadequate
business know-how, limited accessto business related information. Therefore,
this study intends to assess the contribution of microcredit on performance of
small and medium enterprises in Mbeya municipality.
1.3
Objectives of the Study
1.3.1 General
research objective
To assess the contribution of
microcredit on financial performance of SMEs in Tanzania.
1.3.2 Specific
research objectives
specific objectives of the study will be to
:
- The s To assess whether or not microcredit helps SMEs to improve size
and growth of the firm.
- Examine the extent to which SACCOS services affect
SMEs business performance .
- Establish the constrains to SMEs access to SACCOS
services .
- Examine the extent to which
SACCOS services affect employements growth through financial services
1.4 Research Questions
- How microcredit helps SMEs to
improve size and growth of the firm?
- How SACCOS services affect
SMEs business performance?
- What
are the constrains facing SMEs after deliver microcredit to Amkeni SACCOS?
- How SACCOS service affect employment
growth through financial services?
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