Abstract

This study looks into how microfinance services help small and medium-sized businesses (SMEs) in Buea, Cameroon, grow. Recognizing that SMEs are vital for economic development, this research explores how microfinance institutions (MFIs) influence the growth trajectory of these enterprises.

The objectives of the study were to investigate the contributions of micro-credits, micro-savings and insurance services contribute to the growth of SMEs in Buea. A quantitative research approach was adopted, with a population size of 209 SMEs in Buea. A structured questionnaire was used to gather data, and the Statistical Package for Social Science (SPSS 23.0) was used for analysis. The data analysis included both descriptive and inferential statistics.

The dependent and independent variables, as well as the demographic traits of the respondents, were described using descriptive statistics. The Pearson correlation coefficient(r) and Simple Linear Regression were used to determine the effect between the independent variable and the dependent variable.

The findings reveal a significant positive relationship between microfinance services and the growth of SMEs. Specifically, access to microcredit enhances working capital and operational capacity, while micro-savings contribute to financial stability and investment potential. Additionally, the provision of insurance services mitigates risks associated with business operations, further promoting sustainability.

The study concludes that microfinance plays a crucial role in fostering entrepreneurship and economic resilience in Buea. It suggests that to assist the expansion of small and medium-sized businesses in Buea and further the objectives of economic development, policymakers and microfinance management should improve the accessibility and scope of financial services. This research adds to the existing literature on microfinance and entrepreneurship, highlighting the importance of tailored financial solutions for SMEs in developing contexts.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The survival of any economy depends greatly on the development of various sectors, especially the sector of small and medium-sized enterprises. This is especially because the sector contributes greatly to reducing unemployment and contributing to the gross domestic product of every nation. The Government of every economy has put in place different measures to make sure these enterprises grow, (Gherghina, et al, 2020). Despite this, globalisation and intense competition have also pushed most small and medium size enterprises to improve their development by rethinking how they can easily get products into the hands of their customers and how they can quickly respond to their customers’ needs in a constantly changing environment.

As a result, recognizing the contributions of microfinance institutions is critical for small and medium-sized businesses to grow and remain competitive in today’s global and dynamic market. Micro-finance institutions not only contribute to the development of these entities but also provide financial services and products to some of these small and medium-sized enterprises that were initially excluded from the financial services of formal finance houses (Mago & Modiba, 2022).

Microfinance institutions are entities engaged in the provision of financial services such as savings and loans to low-income people living in both urban and rural areas who are unable to obtain such services from the formal financial sectors. According to Messomo (2020), Modern microfinance has its roots in Bangladesh, as it emerged in the 1970s. This was based on the concepts of Muhammad Yunus and the Grameen Bank.

Microfinance evolved globally, with institutions such as Opportunity International and Pro Mujer in Latin America and MicroEnsure in Africa, among others, providing financial services to impoverished communities. The concept of microfinance spread to Africa in the 1980s, with NGOs providing microfinance services to the poor, as governments were unable to. By the early 2000s, Africa had more than 300 MFIs providing financial services to millions of people, contributing to poverty alleviation and economic growth (Mwita, 2021).

In Cameroon, MFIs started around September 1963 with the St. Anthony’s Discussion Group, as noted by Singhe (2020). Jansen was the mastermind behind this idea. This concept was launched at Njinikom in the North West Province of Cameroon, where 16 members of this discussion group began with some tiny contributions. Since then, micro finance institutions began gaining their ground within the country. In the late 1980s, commercial banks in Cameroon experienced a serious crisis, with many major banks becoming illiquid and/or insolvent, this gave micro finances institutions within the country to gain ground from this period.

Today, micro finance institutions have evolved into licensed financial institutions that provide microfinance services and have increased in number. They operate by offering small loans and other financial services to low-income individuals and small businesses, to alleviate poverty and promote economic growth. MFIs’ accomplishments in Cameroon include employment creation, poverty alleviation, and improved access to financial services.

In developing nations like Cameroon, where most small and medium-sized enterprises lack

Banking services and financial inclusion is an urgent issue. Yet, MFIs have played a crucial role in promoting financial inclusion in Cameroon for growing small and medium-sized businesses. Micro-finance organizations (MFIs) offer a variety of service of financial, primarily payment services, microinsurance, microcredit, and micro-savings. Many MFIs also offer social intermediation administrations, for example, monetary proficiency programs, capacity building, and financial advice, in addition to financial intermediation (Kinyua, 2020). This alone has made a significant contribution to the development of the country’s small and medium-sized firms.

It is widely acknowledged that small and medium-sized businesses are the foundation of any country’s industrial development, particularly in a typical developing country. There is no generally accepted definition of SMEs. Small and medium enterprises are business ventures on a small and medium scale based on the volume of capital base and the number of employees of the organisation.

They are typically characterized by their smaller size, entrepreneurial nature, and flexibility. The growth and recognition of SMEs as significant contributors to economies gained prominence globally around the post-World War II era. They have become increasingly important due to their ability to adapt quickly to changing market conditions and their potential for innovation and entrepreneurship (Nassuna, Jeppensen, & Balunywa, 2022).

In Cameroon, SMEs have emerged as a key driver of economic growth and poverty reduction. They have gained recognition for their potential to promote inclusive development, create employment opportunities, and stimulate local economies. The growth of SMEs in Africa can be attributed to factors such as urbanization, population growth, technological advancements, and policy reforms aimed at promoting entrepreneurship and private sector development. According to the African Development Bank, SMEs in Africa account for about 90% of all businesses and contribute to approximately 50% of employment opportunities in the formal sector. They have become increasingly diverse in terms of sectors and activities, ranging from manufacturing and services to agriculture and technology (Ajide & Dada,  2023).

The government has recognized their importance and has implemented policies to support their establishment and growth. The evolution of SMEs in Cameroon can be traced back to the economic reforms initiated in the 1990s, which aimed to liberalize the economy and promote private sector development. Since the majority of people in Cameroon are impoverished, SMEs are quite prevalent there.

This has significantly boosted the economy by enabling enterprises and individuals to access goods and services, as well as by fostering innovation and growth in society. These small-scale businesses are often considered to be less powerful, have low productivity, employ few workers, less sophisticated businesses. Unlike large firms where productivity and every other aspect is done on a large scale, they enjoy economic of scale because of large-scale production (Varga, 2021).

SMEs in Cameroon faced various challenges, including limited access to finance, inadequate infrastructure, bureaucratic hurdles, and a lack of skilled labour. These challenges have limited their performance, thus affecting their development. SME development refers to the growth, expansion, and improvement of small and medium-sized businesses. It involves enhancing their productivity, competitiveness, and sustainability through various means, including access to finance, technology, markets, and business support services (Nji, 2022). SMEs are considered the backbone of many economies as they contribute to employment generation, income generation, innovation, and overall economic development.

However, the availability and assistance of microfinance institutions (MFIs) are directly related to the growth of small and medium-sized businesses (SMEs). Microfinance institutions play a vital role in the development of SMEs by providing access to finance, promoting financial inclusion, and mitigating risks. By addressing the financial needs and challenges faced by SMEs, MFIs contribute to their growth, sustainability, and overall economic development (Akinadewo, 2020).

Numerous empirical findings have substantiated the connection between microfinance institutions and the growth of small and medium-sized businesses. Examples of such findings include the results from the findings of Engwa, Yakum and Mukah (2021) which revealed that Banking Institutional Services positively affect the Sustainable growth of SMEs in Cameroon. This was also supported by the findings of Audu, Abubakar, and Baba (2021), which revealed that small and medium-sized enterprises are dependent on microfinance services for their growth.

On the contrary, Yerima, Gambo and Umar (2022), revealed that Microfinance Institutions do not significantly contribute to Small and Medium Enterprises (SMEs) Growth In Taraba state of Nigeria. Therefore, discrepancies, in conclusion, leave the idea of microfinance institutions and the expansion of small and medium-sized businesses open to more research.

Theoretically, this study is anchored under the foundation of several theories. Some of these theories include the pecking order hypothesis, which was popularised by Myers and Majluf (1984). This theory would be adopted to explain the fact that the financial needs of small and medium businesses are met in order of hierarchy, and stating that businesses mostly obtain funds internally, but if there is no availability of such funds, the business would then result to sourcing of fund through debt financing as its first step before going for equity financing as an external financing source.

The Financial Growth Theory of Berger and Udell (1998) is another example of such a theory. The idea would be used to explain how small businesses, which are involved in financial demands and financing options that change as the firm expands, relate to financial growth.

However, it’s also important to note that while these studies provide valuable insights, they also highlight the complexities and challenges of small and medium size development as a result of micro finance institutions’ contribution.

Despite their attempts to address these constraints to the development of SMEs, they generally addressed the relationship between small business performance and financial support, which is a narrow perspective in evaluating factors that influence the development of SMEs. None of these acknowledged studies attempted to investigate the contribution of MFIs to the growth of SMEs, in the case of Buea municipality. It is on this background that this study is out to investigate the contributions of micro finance institutions on the growth of micro finance institutions in Buea.

1.2 Statement of the Problem

SMEs are now a major force behind economic expansion and the fight against poverty. The growth of small and medium-sized businesses is crucial to Cameroon’s economy. Micro finance institutions contribute so greatly to reducing unemployment and contributing to the gross domestic product of every nation. In reality, 99.8% of Cameroon’s economy is made up of SMEs, with 79.32% being Very Small Enterprises (TPE), 19.43% being Small Enterprises (PE), and 1.25% being Medium Enterprises (ME).

They have gained recognition for their potential to promote inclusive development, create employment opportunities, and stimulate local economies. SMEs in Cameroon contribute 60% of total employment and 40% of GDP (Tafor, 2020).  The growth of these SMEs in Cameroon is attributed to factors such as urbanization, population growth, technological advancements, and policy reforms aimed at promoting entrepreneurship and private sector development. According to a report from the ministry of small and medium size enterprises, social and economy and handicraft, SMEs alone contributed to about 324,250 million FCFA in terms of value added in 2021, and about 349,722 million FCFA in 2022. With an annual GDP growth rate of 3.5%.

Even though SMEs are crucial for economic development, they have been struggling with growth, as many tend to collapse within a year after being established (Kindström, Carlborg & Nord, 2024). According to the OECD (2020), most small and medium-sized businesses fail in their first year of operation, while only a very few numbers of small and medium-sized businesses remain in operation after the first five years. This high rate of failure is a result of the challenges faced by these small and medium-sized businesses, especially the challenge of financial constraints.  In search of solutions to the financial constraints faced by SMEs, MFIs become the plausible alternative. The MFIs were established to serve individuals who could not access bank services.  Microcredit, saving facilities, and microinsurance are some of the services offered by these MFIs. MFIs have been very important in promoting the growth, thus the development of SMEs, as noted by Lieberman et al. (2020)

Although several studies such as that of Audu, Abubakar, and Baba (2021), and Kisaka and Mwewa (2014), have investigated the contributions of micro finance institutions in the development of small and medium-sized enterprises. Most of these studies have been carried out in Ethiopia, Nigeria and other parts of the world. Even in some of these studies that have been carried out in Cameroon, like that of Ngwa (2019), special attention has not been given to the context of the contribution of microfinance institutions to the development of small and medium-sized enterprises in Buea.

This is a massive gap that raises unsolved issues about the interaction between microfinance institutions and small and medium-sized firms. Thus, the need for this study to determine if microfinance institutions in Buea help the growth of small and medium-sized firms in the municipality.

1.3 Research Questions

1. How does microcredits influence the growth of small and medium-sized enterprises in Buea?
2. How do micro-saving services affect the growth of small and medium-sized enterprises in Buea?
3. To what extent do Insurance services affect the growth of small and medium-sized enterprises in Buea?

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