MICRO-CREDIT AND GROWTH OF SMALL AND MEDIUM ENTERPRISES

MICRO-CREDIT AND GROWTH OF SMALL AND MEDIUM ENTERPRISES 



1.0 INTRODUCTION

1.1 Background of the Problem

The importance of financial services to Small and Medium Enterprises (SME’s) cannot be overemphasized. Small and medium enterprises, particularly those in developing countries need a range of enabling and sustainable financial services in order to enable them to effectively exploit abundant resources in their areas and fulfill their productive potential (Nwanna, 2000; and Akisimire, 2010). It has however been noted by scholars like Hogan (2001) that the financial service sector focuses its success on the effective management of credit risk. This has therefore triggered financial services providers to put more emphasis on credit terms while lending to clients especially the SME borrowers. This is because MFIs consider lending to small businesses as profitable though a risky business. This leaves MFIs with no option but to lend to SMEs though at unfavorable credit terms.

Cobboldet al. (2008) argue that Small and Medium Enterprises are particularly important in supporting economic growth and livelihoods in developing countries. There is also a consensus that if all stakeholders are to show serious commitment to the development of the Small and Medium Enterprises sub-sector, it follows that the economy must necessarily witness meaningful transformation and prosperity. Small and Medium Enterprises are described as efficient prolific job creator, the seed of big businesses and the fuel of national economic engine (Abor andQuartey, 2010).

In Tanzania, small and medium business contributes substantially to the country’s Gross National Product and employment in the country (Olomi, 2001;and URT, 2001). Whereby the sector contributes about 1/3 of the Gross Domestic Product of the country and that about 20% of the labor force is employed by the sector (URT, 2001)

However, the generation of self-employment in the Small and Medium Enterprises requires investment in working capital, at low levels of income, the accumulation of such capital may be difficult.

Under such circumstances, loans can help the poor to accumulate capital and investment in employment generating activities (Hossain, 1988). According to Grade(1984) loans enable the individual’s member or enterprises to enjoy the benefit of economies of scale and new technology. Availability of credit to small business and low income households could greatly enhance their economic strength and eventually break the vicious circle of low income, low saving, low investment, low income (Yunus, 1984).

Therefore, by extending credit to Small and Medium Enterprises will offer so many benefits that is, creation of employment, expanding business, improving standard of living, capacities in investing as well as saving to the people in the country hence development of the nation.

 

 

1.2 Statement of the Problem

Small and Medium Enterprises’ need both financial and non-financial services to enhance their productivity, profitability and growth. Sievers and Vanderberg (2004) hold the view that accesses to financial and business development services are essential for growth and development of Micro and Small Enterprises.

The Microfinance industry has become a major backbone in the sustenance and survival of Small and Medium Enterprises in Tanzania. Microfinance Institutions (MFIs), as part of their core business, provide credit to Small and Medium Enterprises. In addition to these financial services, Micro-finance Institutions also provide non-financial services like business training, financial and business management skills to help improve the capacity of their clients in managing the loan resources granted them. 

Financing has been identified in many business survey as the most important factor determining the survival and growth of small and medium sized enterprises in both developing and developed countries access to finance services allows Small and Medium Enterprises to undertake productive investment to expand their businesses and to acquire the latest technology thus insuring their competitiveness and profitability. Poorly financial systems can seriously undermine the microeconomic fundamentals of a country, resulting in lower growth in income and employment (Chijoriga, 2002).

There has been improved access to credit by Small and Medium enterprises overtime. However, Small and Medium Enterprises have continued to suffer financial challenges. Research conducted by Sendawula (2002) revealed that 50% of the Small and Medium Enterprises operate in a financial deficit and some of the Small and Medium Enterprise owners are still uncomfortable with such credit extended to them.

Micro-credit as an important ingredient to the growth of small and medium enterprise has been given scant attention. Therefore, this study assesses the accessibility of micro-credit and growth of small and medium enterprises using Vision fund Tanzania-Arusha branch as the case under investigation.

1.3 Research Objectives

1.3.1 General objective

The general objective of this study is to determine the impact of micro-credit on growth of small and medium enterprises.

1.3.2 Specific objectives

        i.            To identify the link between access to micro-credit and business performance of small and medium enterprises.

      ii.            To examine the uses of micro-credit on growth of household income of small and medium enterprise owners.

    iii.            To identify challenges Small and Medium enterprises face in accessing micro-credits.

 

 

 

 

1.4 Research Questions

This study tried to answer the following questions

        i.            What is the link between access to micro-credit and business performance of small and medium enterprises?

      ii.            What are the uses of micro-credit on growth of household income of small and medium enterprise owners?

    iii.            Which challenges small and medium enterprises face in accessing micro-credits?

1.5Significance of the Study

First, the study has contributed to the existing literature on access to micro-credit on the growth of Small and Medium Enterprises. Like any other research, the findings will be used as a reference as far as further studies are concerned and spark off further researches in micro-credit and growth of the small and medium enterprise sector. Secondly, a study of this nature is very imperative as it would provide higher learning and government institutions with the needed information in designing a policy framework to enhance the development of the SMEs industry. It would also enlighten the public on the impact of micro-credits play in the SMEs sector. Lastly, the study hasshed light to SMEs operators to have access of micro-credit as a key element to succeed in their drive to build productive capacity, compete, create jobs and to contribute to their household living standards.

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