Abstract

Financing small- and medium-sized enterprises (SMEs) has remained problematic in Cameroon, in spite of its recognized role in economic growth and poverty alleviation.

This study is to investigate obstacles for financing institutions (FIs) to support entrepreneurs in expansion of SMEs in Mezam Division.

Heads of 15 banks, 26 microfinance institutions (MFIs), 18 njangi groups, 12 private money lenders, and 15 trade creditors purposively selected from the largest urban (Bamenda II) and rural (Bafut) sub-division in Mezam – NW Cameroon, were interviewed using a standard questionnaire.

The running capital of banks was significantly greater than those of all the other types of FIs (α = 0.05). No significant differences were observed between the other financing institutions.

However, financing from njangi tended to be lowest and inadequate to meet the needs of multiple SMEs.

While key clients for 57.7% of MFIs and 53.3% of trade creditors were very small enterprises, those for most of the other FIs were individuals independent of type.

With the exception of 19.2% of MFIs that had individuals as key clients, the remaining 23.1% and 47.7% of MFIs and trade creditors, respectively, were spread among SMEs.

Unlike private money lenders that were indifferent on the type of SME, most FIs within the four remaining types preferred to support trade-oriented SMEs.

For 80% of the types of FIs, ’good credit history’ ranked first among eligibility criteria for financing SMEs.

The ranking of the other criteria varied with type of FI. All private money lenders demanded only ‘land as security’ from SMEs in exchange for financing.

Apart from private money lenders that were dissuaded by ‘limited collateral’, ‘failure to respect loan repayment deadlines’ was the  key obstacle hindering the majority of the other FIs from supporting SMEs. In spite of the difficulties, all FIs would like to continue financing SMEs.

CHAPTER ONE

INTRODUCTION

Finance has been identified in many business surveys as the most important factor determining the survival and growth of small- and medium-sized enterprises (SMEs) in developing countries (ITC, 2009).

Access to finance allows entrepreneurs to undertake productive investments to expand both large businesses and SMEs, and to acquire latest technology to ensure competitiveness (UNCTAD, 2001).

In spite of their numerical strength and importance in job creation and in its contribution to economic growth especially in developing countries, SMEs find it difficult to secure financial resources from available sources (ITC, 2009).

A very recent research  in Mezam Division of the North West Region (NWR) of Cameroon supports this conjecture, as a majority  (83.3%) of entrepreneurs  surveyed highlighted lack of finance as the most  crucial factor  hindering the expansion of SMEs in the agriculture, manufacturing, information and technology, recreation, service and trade sectors.

By definition, a small enterprise in Cameroon encompasses business firms that can employ a maximum of 20 people whereas a medium-sized enterprise has 21 to 100 employees (Law No. 2010/001 of 13th April 2010 to promote SMEs in Cameroon).

A number of informal financing institutions such as village banks, cooperative credit unions and social venture funds provide business and social services that initially target the poor, and provide savings and credit services for SMEs (Germidis et al. 1991; Heidhues et al. 2002). However, research has shown that enterprises are more likely to fail under such a system (Maloney, 2003).

Those who are gainfully employed in these enterprises will lose their jobs in an event of business failure and thus become even poorer. Recently, microfinance institutions have gained increasing recognition in the country as important institutions to support the government’s strive for constant economic growth (Yunus, 2003).

The role of SMEs in improving livelihoods in Cameroon in general and in the NWR in particular has been overwhelming. For instance, inhabitants of Mezam Division of the NWR operate, and work in, various forms of small businesses which include restaurants, fuel pumping stations, supermarkets, animal/crop farms, bakeries, tailoring workshops, saw mills, quarries, garages, hotels, inns, bars, and cabarets, among others. The enterprises constitute an important part of the economy of this administrative division.

However, the survey indicates that entrepreneurs find it difficult to meet the criteria that govern provision of funds by financing institutions. High interest rates and collateral requirements have been identified as key underlining factors for the difficult access to finance (Banji, 2006).

In addition, there seems to be some degree of reluctance on the part of financing institutions in funding SME activities for reason(s) yet unclear (ITC, 2009). This study is designed to explore the obstacles hindering the flow of funds from financing institutions to entrepreneurs for the expansion of SMEs in Mezam Division.

This research, therefore, contributes knowledge useful in the development of a strong SME base for strengthening the economy and improving livelihoods in the research region.

1.1.  Statement of the problem

Funding for SMEs remains one of the most critical factors for economic growth in developing countries. However, entrepreneurs do not find it easy to tap sufficient and timely funds from available sources for the development of businesses (Thurik and Wennekers, 2004). In Mezam Division, entrepreneurs find it difficult to attract funds from financing institutions.

This problem seems to be widespread in developing economies (Bangi, 2006). In addition, the findings of our recent studies in Mezam conclude, that financing institutions often express reluctance in providing funds for the development of SMEs (ITC, 2009).

This research seeks to answer questions relating to why these enterprises find it difficult to acquire funds from the SMEs perspective, and why financing institutions generally accumulate a high degree of reluctance in funding SMEs.

This research aims at bridging this knowledge gap. It is hoped that by exploring this crucial issue, the research will generate new knowledge that is vital for the development of SMEs in the research region in particular, and in developing countries in general, where SMEs are responsible for the livelihoods of a significant part of the population.

1.2. Objectives of the study

The overall objective of this work is to explore financing constraint(s) between financing institutions and SMEs to facilitate the flow of funds for expansion of the latter in Mezam Division.

The specific objectives are:

1. To identify financing institutions available to SMEs in Mezam Division
2. To examine conditions specific to the different types of financing institutions for funding the activities of SMEs
3. To investigate reasons behind the reluctance of financing institutions in supporting SMEs

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