Abstract 

The aim of this study is to determine and investigate the impact of insurance companies on the sustainability of SMEs. For this to be accomplished, relevant literature was reviewed and necessary theories such as Cramér–Lundberg model and Expected discounted penalty function (theory) were stated.

The objectives were guided by a hypothesis stated both in the null and alternative form. The area under review was the Buea municipality. Thirty business establishments were taken as case studies and questionnaires were issued.

The data collected was processed using the spreadsheet after coding had been done. From the analysis, it was discovered that the influence and impact of insurance companies on the sustainability of SMEs seem to be undergoing a metamorphosis.

This is viewed as the percentage of response to the positive influence on sustainability seems to be lower than average.

However, comparatively on the response of positive impact as against the nonimpact of insurance companies on the sustainability of SMEs, the positive impact out wares the negative impact.

This, therefore, brings us to accept the hypothesis that insurance companies have a significant impact on the sustainability of small and medium-size enterprises.

This paper recommends that Insurance schemes should be well designed to suit the taste of business operators and Permanent communication should be established between the insurance companies and the already registered business establishments.

CHAPTER ONE

GENERAL INTRODUCTION

1.1 Background of the study

At the dawn of modern human history, widely dispersed groups of tightly knit kin, whom we today refer to collectively as hunter -gatherers, relied almost exclusively on clan relatedness as their only bulwark against the ever – present risk of death, debilitating injury, and starvation.

For these early ancestors, the concept of risk can be thought of almost exclusively in terms of the physical persons of individuals, mitigated by the guarantee of personal and kin relationships, rather than objects and possessions (Buckham et al., 2010).

Ever since, individuals have recognized their need to mitigate risks that have the potential for ruin, either as a result of the assets they hold or simply by the fact of their existence in this world, in other words, a means was required for individuals to achieve at least a primitive form of financial diversification.

Because risk is non fungible at the individual level but the outcome of loss is transferable in aggregate, individuals exposed to losses through common risks naturally formed themselves into groups to aggregate those risks, price the risk, and eventually even sell it to investors (Buckham et al, 2010).

The insurance industry, with the following types of insurance; property insurance, asset insurance, life insurance, building insurance, personal insurance and technical insurance is therefore a strong lever for implementing sustainability due to its size, the extent of its reach into the community via hundreds of millions of policies, and the role it plays in the economy.

In 2005, the worldwide premium volume of the insurance industry exceeded USD 3.4 trillion, roughly split 60/40 between life and non-life business, making it the largest industry in the global economy.

Global assets under management are far greater. In 2005, the figures stood at USD 16.6 trillion for insurance, USD 20.6 trillion for pension funds and USD 17.8 trillion for mutual funds (Paul Clements-Hunt, UNEPFI).

This market is estimated at 130 million clients and stands for approximately $180 billion in family income in 2012.

The function of insurance is strongly related to sustainability. In the life and pensions branch, insurance covers serious risks to human well-being and provides post-retirement income far into the future for savers who have entrusted their funds.

On the non-life side (also termed as property and casualty), insurers protect businesses and individuals against risks to assets, loss of income and third party liability, among others. Insurance is essential for a viable economy.

Without it, businesses and individuals would be unable to take risks and protect their assets. Insurance removes the fear of catastrophic losses from fire and natural hazards and allows businesses to budget without unexpected variations in expenses, thus helping allocate funds for growth and development. Insurance can also directly underpin innovation by accepting certain risks that could deter entrepreneurs (Paul Clements-Hunt, UNEPFI, 2009)

For individuals, the availability of insurance encourages them to acquire assets and invest for the future instead of simply consuming their income. Non-life insurance allows victims of accidental losses to recover financially through the payment of their claims.

When claims are settled, funds are transferred to local businesses such as repair shops and building contractors for the purchase of goods and services.

Life insurance helps households manage their finances in the face of death and disability by minimizing disruption to a wage earners dependents.

Annuities reduce the likelihood that a retiree will run out of money. By providing a measure of financial security to individuals, life insurance products help stabilise the economy.

Finally, with the premiums they receive for providing protection, insurers are also major contributors to the economy through their substantial investments, enabling large scale projects and operations to take place.

Insurance Law in Cameroon is governed by the CIMA code known in French as “Code des Assurances des Etats membres de la CIMA”. CIMA is the Central insurance supervisory authority in Sub-Saharan French speaking African countries.

Presently, it groups: Benin, Burkina Faso, Cameroon, Congo-Brazzaville, Mali, Niger, Senegal, Togo, Equatorial Guinea and the Comoros Islands (Nico Halle and Co. Law Firm, 2011).

This Law has the added advantage of having a comprehensive policy of control in insurance companies and operations throughout the member States. All member States have a common curriculum to train Insurance Experts and to meet up with new areas of insurance in African States. (Nico Halle and Co. Law Firm, 2011)

The SME market sector consists of a range of enterprises of various sizes (as defined by number of employees, working capital, and/or annual revenue) and operating in a variety of sectors.

At one end of the range, companies can be slightly larger than microenterprises and at the other; companies can be almost the size of large corporation.

This category can be further narrowed by distinguishing SMEs from microenterprises by having a minimum number of employees. SMEs can be further divided into small enterprises (SEs) and medium enterprises (MEs).

Alternative criteria for defining the sector include annual sales, assets, and size of loan or investment.

The monetary cut-off for classifying a company as an SME generally varies by country, by market, and financial institution.

Global Financial Markets categorizes its clients’ sub-borrowers according to the following definitions:

1). Microenterprise if loan < US$10,000 at origination  2). Small Business if loan < US$100,000 at origination 3) Medium Business if loan <US$ 1 million at origination (US$2 million for more advanced countries)

Technically, the above definitions are a proxy for the official IFC definition, based on an enterprise qualifying under two of the following three indicators, as follows:

Total assets of < $100,000, annual sales of <$100,000 and with employees of <5 persons represents a micro enterprise.

Total assets of $100000 to <$3million, annual sales exceeding $1million and employees of ≥6 but ≤50.

Total assets of $3million to ≤ $15 million, annual sales of ≥ $3 million, with employees of < 50 but not exceeding 300. (Source: IFC’s Working Definition for SMEs)

According to the Cameroon investment code (“decree no 90/007 of the 08/11/1990”) an enterprise is considered as SME if: At least 35 percent of its share (at least) is/are owned by Cameroonian(s).  Investment is less than or equal to 1, 5 billion FCFA”.

According to FOGAPE (“decree no 84/510 of the 13 June 1984”) an enterprise is considered as SME : 1)If the capital turnover is less than or equal to 1 billion FCFA per year. 2) If the total investment is more than 500 million FCFA per year. 3) If the short-term credit is less than 200 million FCFA.

According to BEAC (“decree no 71/MINFI/DCE/D of the 16/06/1989”), a SME is an enterprise where: The majority of the capital turnover is owned by and the manager is a Cameroonian. Own participation is less than 100 million FCAF. The total credit is less than 100 million FCFA.

The economic and social concern however gives a more explicit definition. According to the latter, a small enterprise is an enterprise with: 1).The majority of share is owned by a Cameroonian. 2) The majority of managers are Cameroonians; 3) Limited income; 4) Employing less than 10 persons. 5) The total investment is less than or equal to 20 million FCFA.

A medium enterprise is an enterprise with: 1) A capital turnover is less than or equal to 1, 5 billion FCFA. 2) Number of employees is between 10 and 100. 3) Capital turnover is less than or equal to 1, 5 billion FCFA.

1.2 Statement of the problem

It has been observed that as a vital tool for the management of risk by both individuals and organizations, whether private or public, insurance plays an important role in the economic, social, and political life of all countries.

Quantifying the contribution of insurance to the sustainability of SME is, however, far from simple. Sustainability is a business strategy that drives long-term corporate growth and profitability by mandating the inclusion of environmental and social issues in the business model.

With the business models and the complex role of insurance on the stability of SME, it is imperative to check the full impact of insurance on corporate growth, profitability, environment and social issues. The growth / sustainability of SME have by-effects on the environment.

Also the corporate social responsibility of the business entities has got to be measured. Again, social responsibilities need to be covered by SME such as the provision of roads, water, schools, as well as other needs for the internal and external sustainability of the SMEs. In an attempt to fulfill these objectives, cost is borne by the SME, as well as externalities to the environment and to the business.

These externalities constitute a risk to the business environment such as health risk, asset risk, personnel risk, technical risk as well as life and financial risk. For sustainability to be ascertained there is need for risk cover.  This risk cover can only be done by the insurance.

However, the ability of the insurance to cover and sustain the SMEs is dependent on how the risk constitutes a hazard to the profitability, corporate sustainability with the inclusion of corporate social responsibility. Since insurance is an imperative regulation, it is necessary for it to operate on guided principles and tools to supports its vision in covering risk.

As a result, insurance companies are a key link in the investment chain that enables firms to finance investment and savers to smooth income over their lifetimes.

The operation of the investment chain is critical to the efficient allocation of capital across the economy and therefore to improving productivity and competitiveness.

Cameroon has put in place a number of tools to support the growth of SMEs, such as the CIMA code. This Law has the added advantage of having a comprehensive policy of control in insurance companies and operations throughout the member States.

All member States have a common curriculum to train Insurance Experts and to meet up with new areas of insurance and policies related to economic sustainability of enterprises such as SMEs in African States (Nico Halle and Co. Law Firm, 2011).

Despite the effort of the government in order to improve the SMEs in Cameroon, the country still has a rigid business environment in regards to insurance companies that seem to hinder the development of local small enterprises and entry opportunity for foreign investors.

The challenge is to establish an insurance environment allowing the SME in conditions that guarantee its sustainability and growth, in strict conformity with the law and with business and insurance codes and ethics.

According to World Bank, the protection of investors in the country is getting worse and worse. There is lack of confidence in the judicial system in the country.

This makes things difficult for SMEs and affects their ability to get credit from banks or other financial institutions hence they may consider the option of the insurance companies.

The case then is to know how insurance companies have impacted the sustainability of Small and medium size enterprises in Cameroon and Buea in particular.

Besides the general problem, the following specific questions will also guide our research.

1. What is the impact of financial insurance on the sustainability of SMEs?
2. What is the impact of social insurance on the sustainability of SMEs?

1.3 Objectives of the research

This research will be guided by a main objective and specific objectives.

The main objective of this research is as follows:

1) To investigate the impact of insurance companies on the sustainability of small and medium size Enterprises.

The specific objectives are as follows.

1. To examine the influence of financial insurance on the sustainability of SMEs
2. 2)To identify the impact of social insurance on the sustainability of SMEs.
3. To make appropriate management policy recommendations.

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