INFLUENCE OF MICRO FINANCE INSTITUTION ON THE PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES (SMEs)

A CASE STUDY OF PRIDE MICRO FINANCE BANK, BUKOTO BRANCH

ABSTRACT

The topic of study was the influence of micro finance institution on the performance of small and medium enterprises (SMEs). The objectives of study were; to analyze the Benefits of loans to SMEs, to examine the challenges to the performance of SMEs and to analyze the different ways of improving the performance of SMEs.

Qualitative and quantitative research designs were used, The study selected a sample size of 30 respondents that consisted mainly of target Administrators, finance officers, and procurement officers out of the total population of 35 Employees.  The study used purposive sampling, the sample targeted 30 respondents that was selected in a way that 15 respondents’ were from finance department, 5 were from key administrators and 10 respondents who are from procurement department. While carrying out research, purposive sampling was applied to the above different categories of respondents.

The results indicates that the benefits of loans to SMEs include; maintenance of complete control over business , the provision of good environment for business growth, provision of capital, acquisition of machinery and lastly achievement of financial freedom by business.  The study findings also further show that there are many challenges facing SMEs and these include; high interest rates is one of the main challenges facing the performance of SMEs, the difficulty in acquisition of loans, lack of affordable voluntary savings product and limited resources and poor government policies.

The results indicate that training of SMEs owners on financial management is essential in the growth of SMEs, proper financial management by the business owners is essential to enhance the growth of SMEs, leadership skills to the management of SMEs is essential, improvement in the credit management systems and lowering of interest rates by financial institutions.

The results indicates that SMEs should be given enough loans so that they maintain complete control of their business and more to that SMEs need to be provided with enough capital to be able to grow. The study results also indicate that SMEs need to be charged with fair interest rates so that they are able to operate and compete. SMEs owners also need to be trained on how to manage their business. SMEs need to be given loans to be able to operate these results shows that financial institutions should relax their policies so that it can favor SMEs to get loans and be able to grow.

The researcher made the following recommendations; the influence of technology on the performance of financial institutions, the impact of management skills on the growth and development of SMEs and the impact of taxation on the growth of SMEs.

CHAPTER ONE

1.0 Introduction

This chapter will include; background of the study, statement of the problem, purpose of the study, objectives of the study, research questions, scope of the study , significance of the study and operational definition of key terms.

1.1 Background to the study

Globally, the concept of performance of small enterprises developed in the 17th and 18th centuries as the public grew to overcome great hardships to carve a home and a way of life out of the wilderness (Ayyagari et al. 2011). Still according to Donald(2011) as the nation’s population grew and cities assumed increased economic importance, the dream of being in business for oneself evolved to include small merchants, independent craftsmen, and self-reliant professionals as well that conceptualized the emergence of small enterprise growth and performance (Donald, 2011).

Furthermore, facts show that prior to the late 19th century, cottage industries, mostly small scale businesses controlled the economy of Europe (Céline, 2005). The industrial revolution from 1750 to 1850 changed the status quo and introduced mass production. The twin oil shocks during the 1970s undermined the mass production model, which triggered an unexpected reappraisal of the role and importance of small sized enterprises in the global economy (Céline, 2005).           On a global view, Banks have been faced with the challenge of credit risk management and the aftermath of the credit crisis whose roots started with the bursting of the housing bubble and high default rate on sub–prime mortgages in the United states, a situation that was a result of high appetites for credit and weak credit controls that saw Lehman Brothers collapse while Merrill Lynch and Bear Stearns were sold at fire sale prices (The Economist, 2009).

Most of the business in African countries a face a challenge of lack of enough financial resources to be able to enhance the performance of SMEs therefore the financial institutions enable this SMEs be able to access cheap finance and be able to grow, according to (Céline, 2015), Loans from micro finance institution enables the poor and excluded section of people in the society who do not have an access to formal banking to build assets, diversity livelihood options and increase income, and reduce their vulnerability to economic stress.

Micro finance institutions play a very important role in the economic resource allocation of countries and they determine the development of both small and big business in a country. They channel funds from depositors to investors continuously after generating the necessary income to cover their operational cost they incur in the due course of their business (Ongore and Kusa, 2013).

Although small and medium-sized enterprises (SMEs) typically employ a major share of an economy’s total employees in East africa, SME management suffers from an insufficient business-related knowledge base that top managers in SMEs possess. Indeed, formal plans or cost controls are often only provided on an irregular basis and planning instruments are usually only used by a small number of individuals and developed rather intuitively (Brinkmann, 2002), in addition to that (Berger & Udell 2006.) further asserts that Small and Medium-sized Enterprises make significant contribution to the socio-economic and political infrastructure of developed and developing countries. Vibrant and expanding SMEs sector is very important for continual competitive advantage and economic growth for nations.

The vast majority of firms around the East Africa fall into the category of micro, small- or medium-sized enterprises (SMEs). In terms of enterprises, more than 95 percent fall into this category, but even in terms of employment in East africn countries, more than 50 percent of employees work in companies with fewer than 100 employees (Ayyagari, Demirguc-Kunt and Maksimovic, 2011).  East africa’s financial systems are small, shallow and costly, with limited outreach. This is not just reflected in aggregate financial development indicators but also in firm and household data gauging the use of formal financial services; however this has had an effect on the performance of most of the SMES in the continent leading to unemployment and poverty (Beck & Cull, 2014).

In Uganda the SME sector contributes 20% to Gross Domestic Product and it provides employment to over 1.5 million people which accounts for 90% of total non-farming private sector workers (ADB, 2012).

A number of obstacles have continued to constrain the financiers’ further engagement with the SME segment in Uganda. According to the National-Small-Business Survey-report (2015), the key constraints to growth which SMEs feel confront them are financial. They centre on both ‘limited access to finance’ (74.3%), and the ‘cost of finance’ (73.2%). Above and beyond, Nahamya (2013) and Atupele (2013) have advanced that the fundamental challenge of SMEs is the extent to which financial institutions have stringent requirements around security (collateral) which SMEs are not able to meet.

Basing on this background this study intends to investigate into influence of micro finance institution on the performance of SMEs with specific reference to pride micro finance.

1.2 Statement of the problem

SME owners (91%) raise their own start-up capital compared to only 9% who take a loan to start the businesses in Uganda. Accordingly, the National Small Business Survey report emphasizes that those who take loans mostly rely on family and friends (39%), money lenders (26%), SACCOs (13%) but very few take loans from financial institutions (10%).

There has been a growth in loan portfolio of most of the Uganda’s micro finance institutions however some MFIs have been making profits; on the same there has been considerable growth in the number of small and medium enterprises.

Despite the above strategies and the fact that small and medium enterprises constitute a large population of the private sector from which income and more jobs are created in Uganda, the performance of small and medium enterprises remains relatively low compared to other countries and with a business failure rate of 60% before they reach five years according to UBOS (2015).This leaves some information gap on what could be the influence of micro finance institution on the performance of small and medium enterprises (SMEs). This therefore necessitates an investigation through a study research in order to get empirical evidence on this scenario for better management and performance of small enterprises.

Against this Background this study therefore intended to investigate into influence of micro finance institution on the performance of SMEs.

1.3 Objectives of the study

1.3.1 General objective

The purpose of study was to examine and investigate into the influence of micro finance institution on the performance of SMEs.

1.3.2 Specific objectives

1. To analyze the Benefits of loans to SMEs.
2. To examine the challenges to the performance of SMEs.

• To analyze the different ways of improving the performance of SMEs?

1.4 Research questions

1. What are the Benefits of loans to SMEs?
2. What are the challenges to the performance of SMEs?

• What are different ways of improving the performance of SMEs?

1.5 Scope of the study

This section included content scope, time scope and geographical scope.

1.5.1 Content scope

This study included the influence of micro finance institution on the performance of small and medium enterprises (SMEs).

1.5.1 Time scope

The study covered a period of five years from 2014 to 2018.

1.5.2 Geographical scope

The study was carried out in pride micro finance Bank, Bukoto Branch located at Plot 6-9, Ben Kiwanuka Okot Close.

1.6 Significance of the study

1. The study will enable the policy makers have information regarding the challenges to the performance of SMEs.
2. The study will also provide information on the different ways of enhancing the performance of SMEs.

• The study will also provide the future academicians with information on the relationship between loan performance and development of SMEs.

1. The study will enable the administrators have information on the factors that determine the performance of SMEs.

CHAPTER TWO

LITERATURE REVIEW

2.0 Introductions

This chapter discusses what various scholars have written about; influence of micro finance institution on the performance of small and medium enterprises (SMEs) and presented under research objectives such as;

2.1 Benefits of loans to SMEs

The first advantage is maintenance of complete control over the business. The lender charges a company interest for the use of a loan, but the lender does not have the right to say how a company should manage its business. The ownership of the business stays completely in the hands of the corporate directors and shareholders. This also means that lenders will not be entitled to any of the profits that companies make from the business; the borrowing company is merely required to repay the loan within the fixed time period (Thassanabanjong et al., 2009).

Cecchetti et al. (2011) observe that a reasonable debt level improves welfare and enhances growth but high level debts can lead to a decline in growth of a firm. Reinhart et al. (2009) reinforces this assertion by arguing that debt impacts positively to the growth of a firm only when it is within certain levels. He opines that a firm becomes vulnerable to financial crisis when the ratio goes beyond certain levels. Stern Stewart and Company shares a similar view that high level of debt increases the probability of a firm facing financial distress. Therefore Cecchetti et al. (2011) contends that over borrowing by a firm can cause bankruptcy and financial ruin. Accumulating high levels of debt by a small scale enterprise will constrain its ability to undertake project that are likely to be profitable, however it also helps the business to retain its autonomy.

Credit is appropriate for companies which pursue an aggressive growth strategy, especially when they have access to low interest rates. Though a company may lose some of its assets if it is unable to repay its loans, the company won’t lose corporate control or ownership to outsiders. Companies wishing to make use of debt financing are recommended to seek appropriate legal advice from the company’s lawyers and accountants for better information on asset protection.

Boah, (2010) adds that a credit policy is the primary means by which management and the board of an institution guides the lending activities. It therefore, provides the scope for achieving the loan portfolio quality and returns, guides the risk tolerance levels in a manner commensurate with the institution’s strategic direction. The credit policy also addresses the procedures of recovering loan from customers which are due for payment but stuck in the portfolio (Zeller, 2010)

Companies can deduct their interest payments (but not the principal repayments) as a business expense. The interest rate which a company pays is usually based on the prime interest rate, and the interest that the company has to pay on a company loan is tax-deductible. This means that debt financing covers up part of a company’s business income from taxes and reduces the company’s tax liability Soumadi & Hayajneh (2012) . A study by Ahmad et al.(2012) in Malaysia which sought to investigate how capital structure impacts on a firm’s performance by analysing the relationship between return on assets (ROA), return on equity (ROE) and short-term debt and total debt established that short-term debt and long-term debt had significant relationship with ROA.

Credit helps the organization to be able to improve on its cash management policies which helps it to improve on its performance. cash management may be defined as an activity at serving the dual purpose of increasing sales revenue by extending credit to customers who are deemed a good credit risk and minimizing risk loss from bad debts by restricting or denying credit to customers who are not good credit risk. It is also directly related to operation, quality, sales and the effectiveness of credit control lies in procedures employed for judging a prospect’s creditworthiness, rather than in procedures used in extracting the owed money also called credit management (Keneth, 2004).

Credit enables the business organization to be able to build a good Character, which improves on managerial performance. This evaluates the applicants’ traits to analyze the willingness to meet the credit obligations. (Kakuru, 2000) highlighted the following variables to consider when analyzing applicant’s character. This is done considering the applicant’s banking behavior from the bank records, the level of education, mental status, operation stability, contact, attachment to government agencies and the previous dealing with bank. This is done to ascertain the applicant’s honesty.

Maintenance of ownership, a primary advantage of issuing bonds and borrowing money from lenders is that a company maintains complete ownership. This is not the case with equity financing because stockholders have ownership rights in a company. The benefit of maintaining ownership is that management has complete control over the decisions made on behalf of the company. Management also has the ability to choose its own board members. The only obligation a debtor has to a lender is to pay back the principal and interest. When the business pays back its loan in full it maintains ownership of its business (Marital, 2012).

Tax benefits are received by the organization, another advantage of Credit is that companies receive tax deductions for the interest paid on debt. In most cases, the Internal Revenue Service considers the interest paid a business expense and allows businesses to deduct the payments from their corporate income taxes. This is beneficial for businesses because it allows them to use the money saved to grow the business (Fosu, 2013).

Achievement of greater financial freedom, Businesses using Credit to raise capital have more flexibility than those using equity financing because they are only obligated to the investor or lender for the repayment period. After all money is paid back, the business is completely free from its obligation. Companies also have greater flexibility because the paperwork to obtain debt financing is less complicated and less expensive than equity financing of (Thevaruban, 2009).

Credit rating, another disadvantage is that Credit affects the credit rating of a business. A company that has a significantly greater amount of debt than equity financing is considered risky. A company with a lower credit rating that issues bonds typically will have to pay a higher interest rate to attract investors. Companies who have to pay more in interest may experience a cash flow problem in the future (Suwastika & Anand, 2012).

Cash qualifications, Companies seeking debt financing must meet the lender’s cash requirement, which means companies must have sufficient cash on hand. This is difficult for businesses depending on debt financing for a cash infusion. Some companies may have to put up collateral to qualify for financing, which puts assets at risk if they fail to repay the debt (Datta, 2010).

It improves on the capacity of the organization; This evaluates the applicants’ ability to pay the debt when advanced in the required period. This is ascertained by evaluating the value of customer’s capital and asset offered as collateral against the loan. This may be judged by assessing the customers’ capital and assets which may act as security.

2.2 Challenges to the performance of SMEs

High Interest rates

According to Kikonyogo (200), interest rate is the percent charged or paid for the use of money. It is charged when the money is being borrowed and paid when it is being loaned. The interest rate that the lender charges is a percent of the total amount loaned (Kikonyogo, 2000). Similarly, the interest rate that an institution, such as a microfinance institution pays to hold a client’s money is a percent of the total amount deposited. In Uganda the interest rates that financial institutions charge make loans more expensive (Muhammad, 2007). When interest rates are high, that means fewer people and businesses can afford to borrow (PMA, 2010). High interest rates on savings however, encourage more people to save (if they can) because they receive more on their savings rate (Kikonyogo, 2000).

One of the principal challenges of microfinance is providing small loans at an affordable cost. The global average interest and fee rate is estimated at 37%, with rates reaching as high as 70% in some markets (Helms, 2006).  Helms (2006) further states that the reason for the high interest rates is not primarily cost of capital but rather, the main reason for the high cost of microfinance loans is the high transaction cost of traditional microfinance operations relative to loan size.

Difficulty in acquisition of Loan facilities

According to Kikonyogo (2000), a loan facility is basically an arrangement in which a lender gives money or property to a borrower, and the borrower agrees to return the property or repay the money, usually along with interest, at some future point(s) in time. Kikonyogo further asserts that usually, there is a predetermined time for repaying a loan, and generally the lender has to bear the risk that the borrower may not repay a loan. Access to loan facilities is so crucial to the performance of small business enterprises. Small business in Uganda can rarely meet the conditions set by micro financial institutions, which see small enterprises as a risk because of poor guarantees and lack of information about their ability to repay loans. Therefore, improving business conditions, boosting the capacity of small enterprises, expanding the financial sector and strengthening links between firms will permanently increase small enterprises’ access to finance (Kauffmann, 2005).

It is generally acknowledged that the ability of small enterprises and rural households to invest for the long term and make calculated decisions for risky income flows is partly shaped by microfinance institutions and the services they offer (Ocaya,2002). Ocaya still says that despite some development in this service sector, in Uganda the majority of the small enterprises remain without access to the credit services they need to compete in the market and to improve their livelihoods.

Lack of affordable Voluntary savings products

The term saving means withholding something of value for future use and it is intended for a better tomorrow (PML product manual, 2010). It can be in cash or material goods whose market value appreciates over time. But it entails discipline and sacrifice. Voluntary saving products (VSP) are crucial for the performance of small enterprises. This is because it provides a basis for interest free capital to small enterprises and therefore brings about rapid growth and performance (PML product manual, 2010). Kasekende (2003) notes however, that Uganda’s saving/GDP ratio is about 12%, including both private and public sector savings compared to the continental average of 17.7%. The ratio of money supply to GDP is only12%. There is only one financial institution per 180,000 people in Uganda, compared to an average of 7,000 per financial institutions in the Common Market for East and Southern Africa (COMESA) countries. Moreover, microfinance institutions are concentrated in the urban centers. Out of 123 branches studied in Africa, 64 are found in the 4 largest urban areas. This limits access by the small business enterprises and therefore reduce chances of having such capital that is interest free and good for business growth (Kauffmann, 2005).

Limited resources

Internal resource mobilization (saving) is one of the cardinal steps to self-reliance and overall sustainability for small enterprises and farmer groups (FAO, 2002). Saving is for the future and involves anticipating risks and emergencies (a bad harvest, sickness, or death), preparing for upcoming events and expenditures (payment of school fees, a marriage, old age, or funeral). Through small but regular saving, small enterprises can gradually build up capital to enable them invest in profitable economic activities or expand existing ones. This is the basis of “a savings first approach” to enterprise development. When individuals save in groups they can rapidly build up capital that can profitably be invested in individual or group enterprises (FAO, 2002).

While accessing the “A savings first” approach, FAO found out that it is based on the fact that even poor people understand the importance of saving and in small amounts which is done individually or as a group in cash or in kind e.g. livestock, produce or any other items that have monetary value. Pooling resources as a group is based on the fact that it is more efficient as members build up a larger pool of resources in a shorter time than if done individually.  This approach to enterprise development is therefore being widely promoted. Only when groups have shown strong signs of growth and individual or group enterprises have been fully developed, should groups be encouraged to borrow from other sources (FAO, 2002).

Poor Infrastructure

While the economic policy debate has gone through cycles of arguing for and against state intervention, the provision of infrastructure has always been regarded as one of the main tasks of the state according to Kikonyogo (2000). Kikonyogo (2000) further argues that the private sector can participate in making the infrastructure effective, but its regulation is above all a state function. The importance of this function has increased in recent years, because of the changing nature of competition in regional and global markets. Speedy and punctual delivery of manufactured goods has become a major parameter in the new competition. Kikonyogo (2000) further stresses that a well developed infrastructure – for moving goods from factories to ports and for rapid international communication significantly reduces the transaction costs involved in exporting.

Unfavorable laws

There is need for an impartial legal system according to Kauffmann (2005) that can help settle contract disputes, commercial law reform and drafting and clarifying land titles, as well as effective bankruptcy procedures that are vital for growth of the business sector. A country’s tax laws can either coax small businesses into the formal sector of the economy or keep them out of it. Governments should also make sure that they pay small enterprises promptly, since public contracts are vital to the financial security of these firms (Hill, 2001).

Poor government policies

According to Richards (2010), proper government administration in regard to policies is key for the better performance of small enterprises since it facilitates good policy formulation and implementation. He further asserts that centralized administration is a major challenge in the growth of small enterprises in Uganda since, regulations and policies have to be implemented by administrative institutions and authorities.

In many developing countries, bureaucracy has displayed a high degree of centralisation of resources and decision-making. Initiatives by local authorities to promote small enterprises activities are often stifled by a centralized decision-making process and lack of financial resources at the local level (David, 2011).

2.3 Different ways of improving the performance of SMEs

Training SME owners on financial management

Financial management plays a big role in the growth of small enterprises. Financial management involves all the activities like monitoring, control, budgeting and evaluation that enable an enterprise to obtain capital for growth, allocate resources efficiently, maximize the income potential of the business activity and monitor results through accounting documents. Such management requires a well-written, comprehensive financial management plan clearly outlining the assets, debts and the current and future profit potential of the enterprise (Bryan Ziegler, 1990). Note should be made to the effect that small enterprises hardly keep proper records that are crucial in directing business growth.

Proper financial management requires adequate financial control which Stonner (2002) defines (financial control) as the process of regulating an organization’s financial resources and activities such that actual performance conforms to the standards set.  Koontz and Heinz (2003), argues that the task of control is to make plans succeed; and normally control must reflect plans, and planning precedes control.  They further observe that a budget is a widely used device for managerial control, and argue that budgeting is the formulation of plans for a given future period in numerical terms. Mohsin (2002), also assert that financial control must complement financial planning, and that the control function is composed of four distinct phases i.e. determination of operational standards, evaluation of the enterprise progress in relation to pre-determined standards, investigation of organization financial function and taking corrective action in event of deviation, and lastly follow up actions by the executive personnel to ascertain whether corrective actions are effective.

Capacity Building, The growing competition, poaching of staff and lack of training and increasing demand for higher pay levels make human resources one of the most intractable problems in the sector. Capacity building in the form of a skilled and professional human capital base and adequate access to funding is essential for the building of a sustainable and efficient microfinance sector (Vento 2004).

Improvement of infrastructure, Inadequate and expensive Infrastructure base, Inadequate and expensive infrastructure such as communication, information technology, roads and electricity results in high operational cost within the microfinance sector. The current limited supply of these resources limits operations and drives up cost. In respect of infrastructure development, there is the need to establish a solid base and provide adequate logistics such as telecommunications and information technology to support the operations of microfinance institutions to make them more efficient (Murray & Boros 2002)

Improving on the level of funding, The key challenges confronting the microfinance institutions in developing countries such as Ghana include Inadequate funding for capacity building, inadequate and expensive infrastructure base, Inadequate credit delivery and management, the inability to target the vulnerable and the marginalized, information gathering and dissemination, regulation and supervision, consumer protection and research, monitoring and evaluation. Norell, (2001)

Developing cheap ways of gathering information, Armendariz et al, (2010) stated that the information asymmetry problems could potentially be eliminated if lenders had cheap ways to gather and evaluate information on their clients and to enforce contracts. However, lenders typically face relatively high transactions costs when working in poor communities since handling many small transactions is far more expensive than servicing one large transaction for a richer borrower. Another potential solution would be available if borrowers had marketable assets to offer as collateral. In this sense, any problem on the loan was covered by the borrower’s asset. Thus, the lender could lend without risk. But the starting point for microfinance is that new ways of delivering loans are needed precisely because borrowers are too poor to have much in the way of marketable assets. However, Behrman and Srinivasan (1995) stated that one way for the government to improve enforcement conditions for credit markets is to improve the possibilities for usable sources of collateral like implementation of land registration.

Improvement in credit management systems, Inadequate Credit delivery and management, the mechanism for credit delivery within the microfinance sector is inadequate and the microfinance institutions do not have the expertise to categorize their client into the various poverty categories so as to meet their specific needs. (NBE, 2010).

Regulation and Supervision Microfinance institutions in the formal sector operates within a rigid regulatory and supervisory environment which presents some challenges for innovation, outreach and overall performance of the institutions. There is also an absence of specific BoG regulatory guidelines for the apex bodies in the semi-formal and informal sectors for the supervision of their members, (Najoragan, 2000).

Better information gathering and Dissemination, Lack of adequate and reliable information remains a challenge to the microfinance industry. These problems adversely affect the ability to properly target the right clients in order to meet the specific needs of such clients. There is also a paucity of information on microfinance institutions and their operations. (MFRC, 2002)

Creation of better ways of generation of information from lenders, Karlan & Zinman (2006) stated that better understandings of information asymmetries are critical for both lenders and policymakers. For instance, adverse selection problems should motivate policymakers and lenders to consider subsidies, loan guarantees, information coordination, and enhanced screening strategies. On the other hand, moral hazard problems should also motivate policymakers and lenders to consider legal reforms in the areas of liability and enhanced dynamic contracting schemes.

CHAPTER THREE

METHODOLOGY

3.0 Introduction

This chapter presents the methodology which consists of the research design, area of study, study population, sample population and selection, sampling technique, data collection method, data quality control, data collection procedures and limitations of the study.

3.1 Research design

Qualitative and quantitative research designs was used, the researcher used the above methods because many aspects were covered in the study concerning the influence of micro finance institution on the performance of SMEs given the complex nature of the pride micro finance qualitative research method was used because it collects information within a short time while quantitative was through interview to cross check what has been given.

3.2 Study population and sample size

The study selected a sample size of 30 respondents that consisted mainly of target Administrators, finance officers, and procurement officers out of the total population of 35 Employees.

3.3 Sampling Design techniques

According to (Amin, 2005) sampling involves selecting a sample of the population in such a way that samples of the same size have equal chances of being selected.

3.3.1 Sampling Technique

Sekaran (2003) defines a population as the entire group of people, events or things that a researcher wishes to investigate.

The study used purposive sampling, according to Barbie, (2001) Purposive sampling is one that is selected based on the knowledge of a population and a purpose of the study.

The study used purposive sampling on all the respondents this is because purposive sampling helps the researcher to get specific information on influence of micro finance institution on the performance of SMEs also because it helped the researcher get people who are well experienced and have enough knowledge about the problem under the study.

3.3.2 Sampling size

The sample targeted 30 respondents that was selected in a way that 15 respondents’ were from finance department, 5 were from key administrators and 10 respondents who are from procurement department. While carrying out research, purposive sampling was applied to the above different categories of respondents.

Table: Sample size of the respondents

Source: primary data

3.5 Sources of data collection

Source of data was from both primary and secondary sources.

(a) Primary data

Primary data was obtained from the questionnaires administered on the target respondents who included administrators, procurement staff and finance officers, to gain opinions and practices on influence of micro finance institution on the performance of SMEs.

(b) Secondary sources

Secondary data is data which has been collected by individuals or agencies for purposes other than those of a particular research study. It is data developed for some purpose other than for helping to solve the research problem at hand (Bell, 1997). This comprised of literature related to influence of micro finance institution on the performance of SMEs in relation to the case study. Secondary data shall be obtained from, published articles, journals, News Papers, Text Books, publications relating to influence of micro finance institution on the performance of SMEs. Secondary data was sourced because it yields more accurate information than obtained through primary data, and it is also cheaper.

3.6 Data Collection Instruments

The study used questionnaire as data collection method. The questionnaire provided respondents with ample time to comprehend the questions raised and hence, they were able to answer factually.

3.6.1 Questionnaires

The questionnaire was used to collect quantitative data. The researcher administered the questionnaires to respondents in different respondents including, administrators, fiancé officers, and procurement staff, which was designed basing on study objectives and questions. Respondents read and wrote the questionnaires themselves. The questionnaires were close ended and were considered convenient because they were administered to the literate and its anonymous nature fetched unhindered responses.

The questionnaire was used because of the following advantages

• Saves time in answering
• The respondents are provided with options to choose work from

However the questionnaire also has got the following disadvantages

• Questionnaire only favors those who can read and write
• The researcher doesn’t have access to facts on the ground.

3.7 Data collection procedures

Upon receiving the University permission to carry out research, the area of study was visited for purposes of familiarization.  The researcher sought permission from administrators and once allowed to proceed with research, questionnaires was issued and interviews were carried out with the selected respondents.

3.8 Quality control of data instruments

The instrument was taken to the supervisor to check its correctness there after pilot study was carried out to find out if it measures what it is meant to for.

3.8.1 Validity and Reliability

The data a collection tools shall be pre-tested on a smaller number of respondents from each category of the population to ensure that the questions are accurate clear and in line with each objective of the study.

3.8.1 Validity

It is the degree to which results obtained from the analysis of the data actually represents the phenomenon understudy, (Mugenda & Mugenda, 2003).  To ensure validity of instrument close guidance of the supervisor was adopted. This helped to identify ambiguous questions in the interval and be able to re-align them to the objectives.

3.8.2 Reliability

Reliability tests and analysis were carried out.

3.9 Data processing and analysis

The raw data was coded, edited, and arranged ready for analyzing only completed raw data was analyzed using statistical package for social scientist (SPSS) where data was presented inform of tables and graphs.

3.10 Limitations of the study

The researcher faced the following challenges in the course of the study;

• The researcher did not get enough time to interview all the respondents, but this was solved by budgeting for the time appropriately.
• The researcher may also faced challenges in language as other respondents felt comfortable expressing themselves in local languages like luganda.
• Other researchers also asked for money from the researcher, this did not affect the study as the respondents were persuaded that the research is meant for academic purposes.

CHAPTER FOUR

PRESENTATION, ANALYSIS, INTERPRETATION

OF FINDINGS

4.0 Introduction

This chapter presents the results in reference to objectives in chapter one, Gender of    respondents, Age of respondents, education level of respondents, to analyze the Benefits of loans to SMEs, to examine the challenges to the performance of SMEs and to analyze the different ways of improving the performance of SMEs.

4.1 Presentation of findings

Table 1: Showing gender of respondents

Source : primary data

According to table the findings in the study it is evident that (74%) representing (22) of the respondents were male while (26%) representing (8) of the respondents were female, from the above findings it is evident that majority of the respondents in pride microfinance Bank were male, this findings implies that male gender accepted to respondents to the questionnaires asked by the researcher. The results further specifically showed that the male gender had better knowledge regarding the topic of the study therefore they were able to answer the questions asked in the questionnaire, it also helped the researcher get  the right information from well informed respondents without the need to explain to them how to answer the questions.

Table 2: Showing duration of respondents in the organization

Source: primary data

According to the results in the study, most of the respondents (38%) had had worked for 5-7 years, (24%) worked for 3-4 years, (22%) worked for 8 years and above and only (16%) worked for 0-2 years, this results implies that most of the respondents are well conversant with the operation of pride microfinance and therefore they were able to give correct answers due to their experience with the organization.

Table 3: Showing educational level of respondents

Source: Primary Data

According to the findings in the study (58%) of the respondents hold degrees, (22%) of the respondents were diploma holders, (12%) of the respondents were master’s degree and (8%) of the respondents were certificate holders, from the results in the study above it is evident that most of the respondents were degree holders this implies the pride microfinance employees well educated employees and therefore this enabled the researcher to collector easily since the respondents could read and answer the questionnaires themselves.

Table 4: Showing Benefits of loans to SMEs.

Source: primary data

According to table the results indicates that majority 38% of the respondents assert that maintenance of complete control over business is one of the main benefits of loan. The results also shows that 16% of the respondents stated that growth of business, 10% provision of capital, 22% acquisition of machinery and lastly achievement of financial freedom by business is achieved.14% of the respondents stated that loans enables business to achieve financial freedom.

Table 5: Showing Challenges to the performance of SMEs

Source: Primary Data

The results from the study indicates that majority of respondents stated that high interest rates is one of the main challenges facing the performance of SMEs. The study findings further shows that difficult in acquisition of loans, lack of affordable voluntary savings product, limited resources and poor government policies.

Table 6: Showing Different ways of improving the performance of SMEs

Source: Primary Data

The results indicate that majority 23% of the respondents stated that training of SMEs owners on financial management is essential in the growth of SMEs. 20% of the respondents stated that proper financial management by the business owners is essential to enhance the growth of SMEs, 17% stated that provision of leadership skills to the management of SMEs is essential, improvement in the credit management systems and lowering of interest rates by financial institutions.

CHAPTER FIVE

DISCUSSION, CONCLUSIONS AND RECOMMENDATIONS

5.0 Introductions

This chapter presents the discussion, conclusions and recommendations.

5.1 Discussion

5.1.1 Benefits of loans to SMEs.

According to the findings business maintains complete control over business, this is also in line with Thassanabanjong et al., (2009) indicates that when a business gets a loan the first advantage is maintenance of complete control over the business the lender charges a company interest for the use of a loan, but the lender does not have the right to say how a company should manage its business. The ownership of the business stays completely in the hands of the corporate directors and shareholders. This also means that lenders will not be entitled to any of the profits that companies make from the business; the borrowing company is merely required to repay the loan within the fixed time period.

The results in the study indicates that the provision of loans enables growth of business this is also in line with Cecchetti et al. (2011) observe that a reasonable debt level improves welfare and enhances growth but high level debts can lead to a decline in growth of a firm. Reinhart et al. (2009) reinforces this assertion by arguing that debt impacts positively to the growth of a firm only when it is within certain levels. He opines that a firm becomes vulnerable to financial crisis when the ratio goes beyond certain levels. Stern Stewart and Company shares a similar view that high level of debt increases the probability of a firm facing financial distress.

The results further indicates that acquisition of machinery is one of the main benefits of loans to SMEs this is also in line with Boah, (2010) who credit organizations provide loans that enables business to be able to achieve. It therefore, provides the scope for achieving the loan portfolio quality and returns, guides the risk tolerance levels in a manner commensurate with the institution’s strategic direction. The credit policy also addresses the procedures of recovering loan from customers which are due for payment but stuck in the portfolio.

The results in the study shows that loans enables business to achieve financial freedom this is also in line with (Keneth, 2004) who indicates that credit helps the organization to be able to improve on its cash management policies which helps it to improve on its performance. cash management may be defined as an activity at serving the dual purpose of increasing sales revenue by extending credit to customers who are deemed a good credit risk and minimizing risk loss from bad debts by restricting or denying credit to customers who are not good credit risk.

5.1.2 Challenges to the performance of SMEs

The results from the study indicates that majority of respondents stated that high interest rates is one of the main challenges facing the performance of SMEs, this is also in line with Kikonyogo (200), who indicates that interest rate is the percent charged or paid for the use of money. It is charged when the money is being borrowed and paid when it is being loaned. The interest rate that the lender charges is a percent of the total amount loaned. Similarly, the interest rate that an institution, such3 as a microfinance institution pays to hold a client’s money is a percent of the total amount deposited.

The study findings further shows that difficult in acquisition of loans affects the performance of SMEs this is also in line with Kikonyogo (2000) who indicates that a loan facility is basically an arrangement in which a lender gives money or property to a borrower, and the borrower agrees to return the property or repay the money, usually along with interest, at some future point(s) in time. Kikonyogo further asserts that usually, there is a predetermined time for repaying a loan, and generally the lender has to bear the risk that the borrower may not repay a loan. Access to loan facilities is so crucial to the performance of small business enterprises.

The result shows that lack of affordable voluntary savings product is one of the main challenges facing SMEs in Uganda PML product manual, (2010) the results further indicates that voluntary saving product is one of the main products needs needed for the development of SMEs. This is because it provides a basis for interest free capital to small enterprises and therefore brings about rapid growth and performance (PML product manual, 2010).

The results who indicate that limited resources and poor government policies are one of the main challenges facing the development of SMEs in Uganda, This findings show that the government should design for appropriate government policies.

5.1.3 Different ways of improving the performance of SMEs

The results indicate that training of SMEs owners on financial management is essential in the growth of SMEs. This findings indicates that SMEs need to be trained on the business management skills this results is also in line with Kauffmann, (2005) who indicates that most of the SMEs in the rural areas do not have the necessary knowledge to be in position to manage their business professionally.

The study also is in line with Kikonyogo (2000) who indicates that most of the SMEs owners in rural parts of india do not have the basic knowledge to manage their businesses therefore they need to be trained to enable them be able to run their businesses successfully.

The findings in the study show that proper financial management by the business owners is essential to enhance the growth of SMEs. This results shows that management of businesses by the owners is one of the main challenges facing SMEs. This views are also in line with Ocaya, (2002) who states that it is generally acknowledged that the ability of small enterprises and rural households to invest for the long term and make calculated decisions for risky income flows is partly shaped by microfinance institutions and the services they offer and most importantly the financial management skills needed to be given to the owners.

The results shows that improvement in the credit management systems and lowering of interest rates by financial institutions this results indicates that Karlan & Zinman (2006) stated that the interest charged by financial institutions are so exorbitant that it breaks the business this prevents. They further indicate that interest rates in financial institutions need to be put an affordable to avoid breaking the business in their infant stage.

5.2 Conclusion of the study

The results indicates that the benefits of loans to SMEs include; maintenance of complete control over business , the provision of good environment for business growth, provision of capital, acquisition of machinery and lastly achievement of financial freedom by business.

The study findings also further show that there are many challenges facing SMEs and these include; high interest rates is one of the main challenges facing the performance of SMEs, the difficulty in acquisition of loans, lack of affordable voluntary savings product and limited resources and poor government policies.

The results indicate that training of SMEs owners on financial management is essential in the growth of SMEs, proper financial management by the business owners is essential to enhance the growth of SMEs, leadership skills to the management of SMEs is essential, improvement in the credit management systems and lowering of interest rates by financial institutions.

5.3 Recommendations of the study

The study made the following recommendations to SMEs.

The results indicates that SMEs should be given enough loans so that they maintain complete control of their business and more to that SMEs need to be provided with enough capital to be able to grow.

The study results also indicate that SMEs need to be charged with fair interest rates so that they are able to operate and compete. SMEs owners also need to be trained on how to manage their business.

SMEs need to be given loans to be able to operate these results shows that financial institutions should relax their policies so that it can favor SMEs to get loans and be able to grow.

5.4 Areas of further research

The researcher made the following recommendations;

• The influence of technology on the performance of financial institutions
• The impact of management skills on the growth and development of SMEs
• The impact of taxation on the growth of SMEs.

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APPENDIX I: QUESTIONNAIRE

TOPIC: INFLUENCE OF MICRO FINANCE INSTITUTION ON THE PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES (SMEs)

A CASE STUDY: PRIDE MICRO FINANCE BANK, BUKOTO BRANCH.

Dear respondent

I am NANYONJO MARTHA a student of Kyambogo University, am carrying out a study on the above stated topic. You are one of the respondents randomly selected to participate in the study. The information given shall be treated with utmost confidentiality and shall only be used strictly for academic purpose.

GENERAL DATA

SECTION A:            

• Gender: Male              female

• Age a) 18 -29 b) 30 – 39 c)  40 and above

3. Educational level

Master’s degree           Bachelor’s degree                   diploma                       others

4. For how long have you been working with Pride Micro Finance Bank?

1. a) 3-5 years

1. b) 6-10 years c) 10 above

SECTION B: Benefits of loans to SMEs

What are the Benefits of loans to SMEs.

1. ………………………………………………………………………………………………
2. ………………………………………………………………………………………………

• ……………………………………………………………………………………………

1. ………………………………………………………………………………………………………………………………
2. ……………………………………………………………………………………………………………………………
3. …………………………………………………………………………………………………………………………….

• ………………………………………………………………………………………………………………………………
• ………………………………………………………………………………………………………………………………

SECTION C:   CHALLENGES TO THE PERFORMANCE OF SMES

What are the challenges to the performance of SMEs.

1. ………………………………………………………………………………………………
2. ………………………………………………………………………………………………

• ……………………………………………………………………………………………

1. ………………………………………………………………………………………………………………………………
2. ……………………………………………………………………………………………………………………………
3. …………………………………………………………………………………………………………………………….

• ………………………………………………………………………………………………………………………………
• ………………………………………………………………………………………………………………………………

SECTION D: Different ways of improving the performance of SMEs

What are the different ways of improving the performance of SMEs?

1. ………………………………………………………………………………………………
2. ………………………………………………………………………………………………

• ……………………………………………………………………………………………

1. ………………………………………………………………………………………………………………………………
2. ……………………………………………………………………………………………………………………………
3. …………………………………………………………………………………………………………………………….

• ………………………………………………………………………………………………………………………………
• ………………………………………………………………………………………………………………………………

THANKS FOR YOUR COOPERATION

APPENDIX II: TIME FRAME

APPENDIX III: BUDGET ESTIMATES

BUDGET ESTIMATES