Research proposal writer

  FACTORS AFFECTING THE PERFORMANCE OF SMALL

ENTERPRISES IN UGANDA: A CASE

STUDY OF BUSHENYI DISTRICT

CHARPTER ONE

INTRODUCTION

1.0     Introduction

The study sought to examine the factors contributing to the performance of Small enterprises in Uganda, using a case study of Bushenyi District. The independent variables were the factors whose dimensions under study were microfinance institutions’ practices, government support and organizational management practices while the dependent variable was performance of small enterprises.

This chapter presents the background to the study, the statement of the problem, the purpose of the study, objectives of the study, the research questions, the hypothesis, conceptual framework the scope of the study, the significance, justification and operational definition1

1.1 Background to the Study

1.2.1 Historical Background

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 (Hill, 2001). 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).

According to Kikonyogo (2000), in Uganda small enterprises and businesses were mostly peasant agricultural production based economic activities since pre-colonial times. Despite an active trade in ivory and animal hides linking Uganda with the east coast of Africa long before the arrival of Europeans, most Ugandans were subsistence farmers. After declaring Uganda a protectorate in 1893, Britain pursued economic policies that drew Uganda into the world economy primarily to serve Britain’s late nineteenth -century textile industry. Cotton cultivation increased in importance after 1904 and once it became clear that cotton plantations would be too difficult and expensive to maintain, official policy encouraged smallholder farmers to produce and market their cotton through local cooperative associations. This became the starting point for the development of small business enterprises in Uganda by the introduction of small holder farmers (Kikonyogo, 2000).

The performance of small enterprises in Uganda has been affected by a number of factors that include managerial skills, government support, access to finance and the general business environment (Byaruhanga, 2008). Byaruhanga (2008) asserts that Uganda was once rich in human and natural resources and possessed a favorable climate for economic development, but in the late 1980s it was still struggling to end a period of political and economic chaos that had destroyed the country’s reputation as the “pearl” of Africa. Most of the economic infrastructure, including the power supply system, the transportation system, and industry, operated only at a fraction of capacity. Other than limited segments of the agricultural sector–notably coffee and subsistence production and small enterprise growth was almost at a standstill. And in the wake of the much publicized atrocities of the Idi Amin Dada regime from 1971 to 1979 and the civil war that continued into the 1980s, Uganda’s once flourishing small scale enterprises faced the challenges of reconstruction. Successive governments had proclaimed their intention to salvage the economy and attract the foreign assistance necessary for recovery, but none had remained in power long enough to succeed (Byaruhanga, 2008).

The Government of Uganda launched an Economic Recovery Programme (ERP) in May 1987, followed by a series of rehabilitation and development plans (Kasekende, 2003). Initial efforts were aimed at rehabilitating the production sectors and infrastructure, especially small enterprises on which the economy depended. Problems in the balance of payments were addressed by liberalizing the exchange rate, encouraging exports and seeking donor support. The trade regime has been fully liberalized, and there are no restrictions on both the current and capital accounts. In addition, the government pursued, with vigour, a policy of privatizing parastatals, with the result that more than a half of them have been divested with the intention of promoting the performance of private businesses and enterprises (Kasekende, 2003).

1.2.2 Theoretical background

The study was guided by the systems theory proposed in the 1940’s by the biologist Ludwig von Bertalanffy and furthered by Ross Ashby (1956) in his Introduction to Cybernetics. Von Bertalanffy was both reacting against reductionism and attempting to revive the unity of science. He emphasized that real systems are open to, and interact with their environments, and that they can acquire qualitatively new properties through emergence, resulting in continual evolution. Rather than reducing an entity to the properties of its parts or elements, systems theory focuses on the arrangement of and relations between the parts which connect them into a whole.  Particular organizations determine systems, which are independent of the concrete substance of the elements. Thus, the same concepts and principles of organization underlie the different disciplines, providing a basis for their unification. Systems concepts include: system-environment boundary, input, output, process, state, hierarchy, goal-directedness, and information (Francis et al, 1992).

Systems analysis, developed independently of systems theory, it applies systems principles to aid a decision-maker with problems of identifying, reconstructing, optimizing, and controlling a system, while taking into account multiple objectives, constraints and resources. It aims to specify possible courses of action, together with their risks, costs and benefits. Systems theory is closely connected to cybernetics, and also to system dynamics, which models change in a network of coupled variables (Francis et al, 1992).

Small enterprises thrive and perform based on relationships with the environment they interact with. In the systems theory there is an open and closed system. Small enterprises as a system greatly relate to the elements of an open system. A small enterprise with its management interfaces and interacts with its environment, the government, and microfinance institutions by receiving services and finance that improves their performance and growth. As Francis (1992) puts it, they possess permeable boundaries, which permit interaction across its boundary, through which new information, inputs and ideas are readily absorbed, permitting their incorporation and diffusion. Because of this, small enterprises can adapt more quickly to changes in the internal and external environments for better performance. This allows small enterprises to ultimately sustain growth and better performance so as to have a stronger probability for survival (Francis 1992).

1.2.3   Conceptual background

There is no single universally accepted definition of small enterprises but many vary according to regional differences (Hill, 2001). Gore et al (1992) as cited by Hill (2001) states that Like the proverbial elephant the small enterprise is one of those things that is recognized when seen but difficult to define. The most widely accepted definition was forwarded by the Bolton Committee from an economic perspective which suggested a small enterprise is one that has a relatively small share of the market place; managed by owners or part-owners in a personalized way, and non-formalized management structure; and independent, that is not forming part of a larger enterprise (Hill, 2001). In order to achieve better performance and be able to achieve the set goals and objectives, small enterprises have to maintain good organisational management practices since according to Kauffmann (2005), effective management ensures profitability for the organization and gives a sense of direction to the employees as it binds the employees together and gives them a sense of loyalty towards the business.

According to Hall (2002), microfinance institutions refer to entities that provide financial services to micro-entrepreneurs and small businesses, which lack access to banking and related services due to the high transaction costs associated with serving these client categories. The Financial Institutions Act (2004) gives two main mechanisms for the delivery of financial services to such clients and these are relationship-based banking for individual entrepreneurs and small businesses; and group-based models. In here, several entrepreneurs come together to apply for loans and other services as a group based on the set policies and procedure by the government (Donald, 2011). More so, these microfinance institutions provide account services to small balance accounts for small entrepreneurs  that would not normally be accepted by traditional banks and offers transaction services  for amounts that may be smaller than the average transaction fees charged by mainstream financial institutions (Hong, 1999).

The government is crucial in enhancing better performance of small enterprises since it helps  to improve and develop their businesses by providing business advice, training and finance , build stalls and provide financial support, provide business start-up training, entrepreneurial skills, and mount a proper monitoring system to help in the running of small businesses (Mukras, 2003).

Performance of small enterprises in terms of increased output, revenue, asset base, profitability and business sustainability is the focus of this study. The performance of small enterprises is perceived to be affected by microfinance services, government policies and organisational management to the extent that if each of these variables is delivered to their best, the performance of small enterprises will improve. The most comprehensive summary of factors affecting performance was noted in literature review by Theo, et, al (2007) to include: individual characteristics, parental influence, business motivation and goals, business strategies, goals and motives, networking and entrepreneurial orientation together with the environmental factors.

1.2.4    Contextual background

In Uganda, small enterprises are increasingly taking the role of the primary vehicles for the creation of employment and income generation through self-employment, and therefore, have been tools for poverty alleviation. Small enterprises also provide the economy with a continuous supply of ideas, skills and innovation necessary to promote competition and the efficient allocation of scarce resources (Kasekende, 2003). The strategic importance of small enterprises in Bushenyi district today is highly acknowledged mainly due to their contribution in creating employment at a higher rate than large firms. The private sector and in particular small enterprises form the backbone of the district economy and earnings. They curb the monopoly of large enterprises in the district like Kampala International University (KIU), coffee factories at Bassajjabalaba industrial area and in turn offer them complimentary services and absorb the fluctuations in the economy (Sarapaivanch, 2003).

In Bushenyi, small enterprises are very heterogeneous entities of business usually operating in the provision of goods and different services. These enterprises are usually weak and family owned in nature with an environment that is not so friendly which has caused business failure and stagnation. These enterprises include agribusinesses, manufacturing, trade, handcraft makers, welding as well as medical and education services. Most of these enterprises are dynamic, innovative, performance and growth oriented while others are satisfied to remain small and in most cases family owned (Sarapaivanch, 2003).

Note should be made that small enterprises in Bushenyi face different barriers and challenges in survival, growth and innovation. Research by Larsen and Lewis (2007) found out that the majority of failures in small enterprises performance are due to multiple factors such as under capitalization, short term liquidity problems, insufficient working capital and short term capital, poor financial management as well as lack of overseas markets that limit their financial and human resource development.

To overcome these barriers the government came up with a number of strategies as interventions. The government programmes like the youth fund, NAADS programme, and presidential initiatives on improving plantational agriculture like Matooke farming have not really trickled down to the small enterprise businesses and farmers (Bushenyi District Local Government, 2011). Apart from the main road stretch from Mbarara to Kasese, the rest of the road infrastructure has been ignored or was left to the local authorities to run making them inaccessible and costly to use by small business people. These factors indicate that small enterprises cannot and have not thrived well in Bushenyi district so as to perform as expected of a model district in small enterprise development (Bushenyi District Local Government (2011).

1.3 Statement of the problem

There has been a considerable increase in the number and size of the small scale enterprises in Uganda according to Kasekende (2003). Bushenyi district administration has been implementing measures to address the barriers to performance of small enterprises through the Competitiveness and Investment Climate Strategy (CICS) through physical infrastructure development mainly in energy, water supply from Nyaruzinga with a Matooke factory, improved bi-laws on business and administration (NDP, 2010/11 – 2014/15). NAADS for the agricultural sector was introduced with the aim of providing improved seeds and breeds as well as Uganda Coffee Development Authority (UCDA) that provides training to farmers on how to provide quality coffee for export.

The business environment in Bushenyi can be rated good and small enterprises are supported to perform since there is access to finance through many microfinance institutions, SACCOs and Rotating Savings and Credit Associations (ROSCAs). A one stop centre to provide registration services for the various licenses required to start up small enterprise business was introduced in addition the small enterprises business guide has been developed to provide them with information on available financial, business development services (BDSs), and business licensing information (budget speech financial year, 2012/13).

Despite the above strategies and the fact that small enterprises constitute a large population of the private sector from which income and more jobs are created in the district, the performance of small enterprises remains relatively low compared to other countries and with a business failure rate of 60% before they reach five years in Bushenyi according to UBOS (2009).This leaves some information gap on what could be the factors affecting the performance of small enterprises in Uganda. 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 in Bushenyi.

1.4 Purpose of the study

The purpose of this study was to examine the factors affecting the performance of small enterprises in Uganda.

1.5 Objectives of the study: The study was guided by the following specific objectives

1. To assess the effect of microfinance institutions’ practices on the performance of small enterprises in Bushenyi district.
2. To find out the relationship between government support and the performance of small enterprises in Bushenyi district.
3. To examine the contribution of organizational management practices on the performance of small enterprises in Bushenyi district.

1.6. Research questions

1. To what extent do microfinance institutions’ practices contribute to the performance of small enterprises in Bushenyi District?
2. What is the contribution of government support to the performance of small enterprises in Bushenyi district?
3. Is there a relationship between organizational management practices and the performance of small enterprises in Bushenyi district?

1.7. Research hypothesis

1. Microfinance institutions’ practices positively affect the performance of small enterprises in Bushenyi district.
2. There is a positive relationship between government support and the performance of small enterprises in Bushenyi district.
3. Organizational management significantly contributes to the performance of small enterprises in Bushenyi district.

1.8. Conceptual framework

Figure 1

conceptualized showing relationship between factors and performance of small enterprises

Figure 1: Showing the linkages between factors and performance of small enterprises

Source: Adopted from the Project Excellence Model (Westerveld, 2003) with the modification by the researcher.

The conceptual framework given above shows a hypothesized relationship on the factors that affect the performance of small enterprises. The dimensions of Microfinance institutions, government policies and organisational management will be considered as the Independent Variable (IV) while the performance of small enterprises will be considered as the Dependent Variable (DV) measured in the dimensions of increased output, business sustainability, revenue maximization, profitability and increased asset base. If the dimensions in the IV are full operationalised, it will be assumed that they will lead to better performance of small enterprises in Bushenyi district. However, it will also be assumed that poor operationalisation of the IV will lead to business stagnation, low output, business failure, low revenue , unprofitable businesses and little or minimal asset base and thus under performance of small enterprises. It’s on this basis that any changes in the IV will significantly contribute to the performance of small enterprises in Bushenyi district.

1.9. Significance of the study

The research findings will be useful to stake holders in Bushenyi district because it provides information to both local and central government authorities on the factors affecting the performance of small enterprises.

The findings of the study will enable policy makers, planners and economists especially at national and district level to make informed decisions and plans based on researched information made available by this study.

To the research community, the study will be a basis for future research on how to improve the performance of small enterprises, especially by identifying the knowledge gaps for future research. Besides, it will add on the existing knowledge about performance of small enterprises particularly in Bushenyi district business environment.

1.10. Justification of the study

Whereas studies were carried out on business performance, little effort has been put in place by researchers to find out the factors affecting the performance of small enterprises. Therefore, a deeper understanding of these factors may help the government and the business communities counter the effects of poor performance of small enterprises.

The study findings have provided strategies for closing the gaps on the factors affecting the performance of small enterprise which is a basis of this study.

1.11. Scope of the study

Geographical scope

The study was carried out in Bushenyi district located in south western part of Uganda. It borders with Rubirizi in the north east, Sheema and Buhweju north east, Sheema in the east, Mitooma in the south west and Sheema in the south. This district was chosen because there are limited studies if any on financial management in relation to performance of small enterprises, besides there were gaps which need to be addressed in performance of small enterprises. There are a number of economic activities in the district ranging from agriculture, retail and whole selling, welding and metal fabrication  services to mention but a few. Bushenyi district is composed of three constituencies i.e. Igara West, Igara East, and Bushenyi-Ishaka municipality, with 9 sub counties, and 3 divisions within the municipality, and has total population of 240,150 people, of which 117,000 are male and 124,500 females (UBOS, 2011). Samples were picked from district headquarters within Bushenyi-Ishaka Municipality.

Content scope

The study focused on factors affecting the performance of small enterprises in Bushenyi district with independent variable being factors with its dimensions being microfinance institutions’ practices, government support and organisational management practices. The dependent variable was performance of small enterprises with the dimensions of increased output, business sustainability, revenue/sales maximization, profitability and increase in asset base.

Time scope

The study covered a period from 2007-2011. This period was preferred because it was a period when the government of Uganda adopted the National Development Plan (NDP). Bushenyi district was also assessed by the National Assessment Team (NAT) from the ministries of Planning and Local Government on Minimum Conditions of performance and the government increased significantly funding to the performance of small enterprises in the district (UBOS, 2009). The researcher focused on the time scope in order to get in-depth information regarding the performance of small enterprises during the period of study.

1.12. Operational definitions

Small enterprises: businesses started by an individual(s) for profit making purpose mainly employing few people most of which are family members.

Organizational management practices: The culture, rules and regulations that the small enterprise uses to propel its growth and development.

Government support: Efforts put in place by government to support the performance of small enterprises.

Performance: How well an individual is fulfilling the requirements of the job or the employee output that focuses on quality and quantity of work against the time taken to realise such out puts.

Skills: competence to perform work

Efficiency: optimum use of resources including time and the attainment of organisational objectives, targets or tasks.

Effectiveness: achieving the intended results in terms of quality and quantity in accordance with set standards and time.

CHARPTER TWO

LITERETURE REVIEW

2.0     Introduction

This chapter reviewed relevant literature from different scholars on the factors that affect the performance of small enterprises in Uganda. It contains theoretical review, actual literature review and the summary of literature review. According to Delno, L.A. (2006), literature review is essential in research since it gives the researcher an insight into what has already been done in the selected field, pinpointing its strength and weaknesses. This information guides the researcher in the formation of theory that aims at addressing the identified gaps.

The literature review was done objective by objective based on the independent variables and the dependent variable that is; factors and performance respectively. The researcher reviewed the dimensions of the independent variables which are microfinance institutions’ practices sub divided into interest rates, loans and personal savings products; government support with indicators of infrastructure development, legal framework and administration of government policies plus  organisational management with indicators of financial management and business strategic management

2.1. Theoretical review

The study was guided by the systems theory proposed in the 1940’s by the biologist Ludwig von Bertalanffy and furthered by Ross Ashby (1956) in his Introduction to Cybernetics. Von Bertalanffy was both reacting against reductionism and attempting to revive the unity of science. He emphasized that real systems are open to, and interact with, their environments, and that they can acquire qualitatively new properties through emergence, resulting in continual evolution. Rather than reducing an entity to the properties of its parts or elements, systems theory focuses on the arrangement of and relations between the parts which connect them into a whole. This particular organization determines a system, which is independent of the concrete substance of the elements. Thus, the same concepts and principles of organization underlie the different disciplines, providing a basis for their unification. Systems concepts include: system-environment boundary, input, output, process, state, hierarchy, goal-directedness, and information (Francis et al, 1992).

Littlejohn, (2001) observes that the fundamental systems-interactive paradigm of organizational analysis features the continual stages of input, throughput (processing), and output, which demonstrate the concept of openness/closedness. A closed system does not interact with its environment. It does not take in information and therefore is likely to atrophy, that is to vanish. An open system receives information, which it uses to interact dynamically with its environment. Openness increases its likelihood to survive and prosper. Several system characteristics are: wholeness and interdependence (the whole is more than the sum of all parts), correlations, perceiving causes, chain of influence, hierarchy, suprasystems and subsystems, self-regulation and control, goal-oriented, and interchange with the environment (Littlejohn, (2001).

System theory is the transdisciplinary study of the abstract organization of phenomena, independent of their substance (Infante, 1997). It investigates both the principles common to all complex entities, and the models which can be used to describe them.  Infante, (1997) further states that a system can be said to consist of four things that include the objects first – the parts, elements, or variables within the system. These may be physical or abstract or both, depending on the nature of the system. Second, a system consists of attributes – the qualities or properties of the system and its objects. Third, a system had internal relationships among its objects. Fourth, systems exist in an environment. A system, then, is a set of things that affect one another within an environment and form a larger pattern that is different from any of the parts. This theory can help us understand a wide variety of physical, biological, social and organisations behavioral processes and the factors that affect them (Infante, 1997).

Because of the need for survival and better performance of small enterprises the systems theory was applicable in this study since small enterprises have to relate with other external factors. They have got to deal with internal management as well as deal with the external environment that may include but not limited to microfinance institutions that lend to these enterprises at an interest and provide voluntary savings products. Also, the government has specific areas of intervention for these enterprises in terms of providing a conducive environment for them. Dwivide (2000) affirms that the government holds tremendous authority not only to influence the private business decisions but also to control and regulate, directly and indirectly, the private business activities. By using its powers, the government can enact laws against production, sale, and consumption of certain goods; can prevent the entry of private entrepreneurs to certain industries through its industrial policy. This in effect contributes to performance of small enterprises.

2.2. Microfinance institutions’ practices and performance of small enterprises

2.2.1 Interest rates and performance of small enterprises.

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.

According to Milner (2000), high interest rates by microfinance institutions often discriminate against small enterprises because they are considered high risk clients with little or no resources to provide collateral. In Uganda, interest rates range between 22 and 36 per cent (MOF, 2012/2013). Business owners complain about the inflexibility of microfinance institutions in enforcing onerous collateral requirements for any credit they extend.  In the recently read budget the economy experienced a sharp rise in commercial lending rates with the inter-bank rate averaging about 28% (MOF, 2012/2013). This followed the rise in the lending rate by the central bank which rose by ten percent between July and November 2011 according to the ministry of finance (MOF). This means that small enterprises have little access to finance, which thus hampers their emergence and eventual growth (MOF, 2012/2013).

Microfinance practitioners have long argued that such high interest rates are simply unavoidable, because the cost of making each loan cannot be reduced below a certain level while still allowing the lender to cover costs such as offices and staff salaries. According to Muhammad et al (2007), the result is that the traditional approach to microfinance has made only limited progress in resolving the problem it purports to address: that the world’s poorest people pay the world’s highest interest for small business growth capital. The high interest of traditional microfinance loans limit their effectiveness as a poverty-fighting tool and therefore, offering loans at interest and fee rates of 37% mean that borrowers who do not manage to earn at least a 37% rate of return may actually end up poorer as a result of accepting the interest rates (Helms, 2006).

2.2.2. Loan facilities and performance of small enterprises.

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. These loans are usually acquired by more wealthy and medium enterprises that can obtain large loans at low costs from formal lenders because they can credibly pledge assets or cash flows. Asset poor and small enterprises by contrast are limited to much smaller loans at higher interest rates because they have to turn to lenders who must substitute costly monitoring for collateral. Small enterprises often turn down loans, even if they qualify because they are unwilling to bear the risk of losing collateral. Consequently, this limits the performance of small enterprises since they can’t register growth (MOF, 2010).

There is limited dispersion of the MFI branch network, as most of them prefer to concentrate their activities in the urban areas where they enjoy economies of scale. In addition, there are a few large -scale and viable investment opportunities in the rural areas. Of recent, however, the resulting vacuum in financial services delivery, especially, in rural areas has been partially covered by MFI (Kasekende 2010).

Loan management involves a number of management activities that lead to successful utilisation of the funds and improved business performance (Helms, 2006). It involves having activity business plan before one gets a loan so as to have a clear purpose and means to pay back, there should be no loan diversion since it leads to poor loan payment and enterprise may lose collateral given to lender. Therefore, businesses should get the loan at the right time get the right amount not more or less as business overfunding or underfunding can cause business failure. Helms, 2006 advises that eenterprise owners should continuously save to service the loan. Savings help reduce the loan burden to the business and this encourages timely and prompt loan payments. To this end, one should avoid cumulative interest and fines that are caused by loan defaulting which is always an added expense to the business since all loan recovery cost are taken care of by the enterprise. It’s important to understand the conditions of the loan before taking it. These may include interest, grace period, fines, repayment period, and others like recovery cost and hidden charges like loan monitoring fees (FAO, 2002).

2.2.3. Voluntary savings and performance of small enterprises.

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).

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).

According to Bryan (1990), savings and investment are mutually interconnected economic variables. When examining the importance of savings, it is very essential to understand what the role of investment in one’s business is. In order to achieve higher growth in savings and investment, Microfinance institutions have an important role to play. Microfinance institutions have been playing a vital role in economic development of different countries of the world. Bryan further asserts that an efficient and diversified saving system is a must for promoting savings and thereafter channeling them into investment and helps to achieve a faster rate in enhancing performance of small enterprises. Thus, the good health of small enterprises is reflected in the good health of its savings culture. In modern economies Microfinance institutions are considered to be the dealers of money as well as leaders of development (Bryan, 1990).

2.3 Government support and performance of small enterprises

2.3.2. Infrastructure development and performance of small enterprises

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.

According to Ankole Private Sector Foundation (APSF) 2010, Bushenyi district in general lacks a good road network in the rural areas for proper and efficient transport of agricultural and business products. Only about 40 per cent of the country has pipe-borne water, the provision of electricity is inadequate and very limited in rural areas. In spite of the huge investments in physical infrastructure in the recent past in water from Nyaruzinga and other areas, road expansion and constant road repairs on the tarmac stretch, the district still has very poor and inadequate facilities for industrial development (APSF, 2010). Save for the tea factories in Kyamuhunga and Mashonga trading centers together with the coffee factories (not value adding apart from removing husks) in Bassajjabalaba industrial area, industrial activities are still low and privately initiated (BDLG, 2011).

In order to foster the economic performance and competitiveness of small enterprises in the district, functional, high-quality basic infrastructure is required. An optimal physical and IT infrastructure includes a good, well maintained road network, a stable power supply and an extensive telecommunication network that business friendly. Overall it seems that while considerable progress has been made in reforming the regulatory and policy framework, there has been less progress in improving infrastructure (APSF, 2010).

2.3.3. The legal framework and performance of small enterprises

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).

According to Kauffmann (2005), it’s often argued that, absolute and unfair commercial laws have increased transaction costs for small enterprises (more than for larger firms), thereby hampering their economic performance and competitiveness. However, in countries such as Mauritius and South Africa the legal system appears to be more developed and conducive to small enterprise growth and development.

An appropriate political or consensual environment requires a government’s mediating role in involving the main interest groups in the process of industrial restructuring to discuss problems, to reach commonly agreed action plans and to implement policy recommendations. An inter-institution networking approach creates an atmosphere of trust among the interest groups (Kauffmann, 2005).

According to APSF (2010), in the case of Bushenyi, an extensive number of outdated and cumbersome laws and regulations have increased the transaction costs of small enterprises thereby hampering their economic performance and growth. Evidence shows that the problem has often been the district leadership’s inconsistency and lack of transparency in implementing policies. Corruption diverted the support programmes from the original beneficiaries as projected by the district. Illegal permits and licenses are being given at all levels to family members and friends operating informal micro-enterprises that do not qualify. Consequently, there has been little or no impact on the original target group of small enterprises that prompted entrepreneurs to complain about the complex administrative procedures for trade transactions and the lack of transparency in the processing of administrative matters (APSF, 2010).

However, the government is trying to overcome these obstacles although implementing an appropriate regulatory and policy environment in which business can flourish is a long and costly process that requires the commitment of the different parties involved. Emphasis is being put on targeting those businesses owned and controlled by formerly disadvantaged groups and the marginalized like the youth, women and the disabled. Efforts are being made to reduce business entry barriers, to provide direct tax payments to the authorities’ accounts mainly in URA or Stanbic bank for trading licenses and other legal expenses to encourage start-ups and expand existing businesses, and to reduce the complexity of the formal procedures to register businesses.

To sum up, poor regulatory environment in Bushenyi is characterized by the absence of laws and regulations for small enterprise development; the complexity of such regulations, which substantially increases the transaction costs of small enterprise putting them at a disadvantage vis-à-vis larger national companies like schools, hospitals like KIU, factories and church founded organisations that include those under St. Kagwa catholic parish and Ankole archdiocese (APSF,2010).

2.3.4. Administration of government policies and performance of small enterprises

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). This is followed by the problem of red tape. Procedures to comply with regulations such as registration, taxation, health and environmental regulations and procedures necessary to benefit from government incentives are difficult to comply with partly because of bureaucratic requirements. While large firms have staff specialised in these matters, such requirements represent an enormous burden for small enterprises (Helms, 2006). The required change is therefore, not exemption for small enterprises or complete de-regulation but simplification of procedures (Richards et al, 2010).

2.4. Organizational management practices and performance of small enterprises

2.4.1 Financial management and performance of small enterprises

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.  Mohsin (2002) contends that the control function has to go hand in hand with coordination since the finance aspect affects almost every activity and department in an enterprise that the finance department has to coordinate various departments and activities by ensuring that financial information is availed to them so as to make consistent decisions in an enterprise.

On many instances the business community in Bushenyi has had inadequate financial control that has made their plans fail, despite having good plans and substantial amount of funds at their disposal for better enterprise performance (BDLG, 2011).  For instance the (Daily Monitor 14, June 2011), reported of Activists Suing Bushenyi Authorities over stadium Fund, “Activists sued Bushenyi Local Government demanding them to disclose information pertaining to the nine hundred million shillings expenditure on expansion and support of small enterprises that was not effected”. They went on to argue that the funds are tax payers’ money necessitating value for money and timely services, proper control and accountability.  From this article, one observes that planning could have been done properly but it is more likely that problems arose from financial control aspect, especially controlling expenditure, supervision and monitoring during the implementation of the planned projects, however this remains a question for investigation.

2.4.2. Business Strategy and performance of small enterprises

Over the years, the importance of business strategy in both large and small firms has been continuously emphasized in the strategic management. The business strategy comes from a well defined strategic plan which gives the vision, mission statement goals and strategic objectives of the enterprise. This helps to identify where the small enterprise is going, brings more individuals in the decision making process for the future of the enterprise through setting an organisational culture, proper change management, effective communication, problem solving mechanisms, team building, time management, motivation, and other aspects (Byaruhanga, 2005). Byaruhanga (2005) further states that strategic planning has got to give details on the short term, medium and long term plans of where the business is expected to be.

Firms adopt business strategy to outline the fundamental steps they need to follow in order to accomplish their organizational objectives. This further indicates that organizations can have a single strategy or many strategies, and that these strategies are likely to exist at three levels: corporate level strategies, business level strategies, and functional level strategies. Although this suggests that strategies are developed at the three different levels, theoretical and empirical studies of the relationship between strategy and organizational performance have mainly emphasized on business strategy (Lee, 1987).

2.5     Summary of literature review

Literature has been reviewed on various studies carried out in Uganda and elsewhere concerning the factors affecting the performance of small enterprises in Uganda. Many sources have revealed that small enterprises play a great role in the economy although they operate amongst many constraints and challenges that include but not limited to inadequate services offered by microfinance institutions, government weaknesses as well as inadequate organisational management practices.

In the area of study which is Bushenyi district, no attention has been put to this sector yet it’s the back born of the Districts’ income as shown by the literature. The studies that have been done on this problem were in different geographical setting as than Bushenyi district. Also these studies were done at different time, using different methods and approaches. Therefore this study addressed the gaps left out by other researchers as far as the performance of small enterprises is concerned in Bushenyi district.

CHARPTER THREE

METHODOLOGY

3.0     Introduction

Methodology is defined as an approach a researcher uses to investigate a subject (White, B. 2000). It refers to the philosophical basis on which a research is based. Methods on the other hand are particular techniques used to collect data and information. Therefore, the purpose of this chapter is to describe the methodology used in the study.

This chapter presents the research design , study population, sample size and selection, sampling techniques , and procedures , data collection methods and data collection instruments, validity and reliability, the procedure of data collection , data analysis and measurement of variables.

3.1. Research Design

Research design can be defined as the arrangement of conditions for data collection and analysis of data in a manner that aims to combine relevance to research purposed with economy in procedure (Kothari, 2004).

A cross sectional research design was used in the study. The cross sectional research design was adopted because the study intended to conduct an intensive investigation on the variables under study in a particular setup which was the small enterprises in Bushenyi district (Oso & Onen, 2008).

Cross sectional design was added because data was collected at one point in time from a cross section of respondents (Mugenda, 2003). A cross sectional design was used because it explains the cause-effect relationship, and takes place with minimal interference of natural flow of work in the organizations’ environment.  In addition it is relatively cheaper in terms of time and cost as observed by Mugenda (2003) and Sekaran (2004).

In the study, both qualitative and quantitative approaches were used. The two approaches supplement each other and help to reduce the biases in each approach according to Mugenda (2003). Still, according to Amin (2005) the approaches enables the researcher to have a deeper analysis using the inductive and deductive approaches through qualitative and quantitative perspectives which enable the researcher to analyse data from all angles and give a more concrete and realistic description of the findings.

Therefore, the researcher employed the qualitative approach in order to get the opinions of respondents in relation to the variables under study and their understanding on the factors affecting the performance of small enterprises was sought using interviews and documentary reviews.

The quantitative approach was used to obtain the magnitude of the relationship between the variables and this was mainly through questionnaires to the business people. The study was more quantitative than qualitative because most of the data was got from questionnaires. This was because of the number of respondents that responded to questionnaires against that of key informants.

Data was also got through face to face interviews and documentary review. The quantitative method was used to obtain the magnitude of the relationship between variables.

3.2. Study Population

According to Amin (2005), a population is an aggregate or totality of objects or individuals having one or more characteristics in common and which are of interest to the researcher in a given study.

In this study the target population was 200 people composed mainly of the business people and stake holders. It included agro businesses, retail businesses, welding and metal fabrication, management and staff of Pride Microfinance Ishaka branch. The district planner, chief administrative officer, district chairperson, chief finance officer (CFO), the director Ankole Private Sector Foundation, district engineer and the mayor Ishaka Bushenyi municipality were selected as key informants.

3.3. Sample Size and Selection

The researcher agrees with Mugenda and Mugenda (1999) that collecting data from the entire population is not possible due to cost and time constraints. Therefore by studying the sample, the researcher was able to draw conclusions that can be generalized on the population of interest.

A sample size of 127 respondents was selected from the business community in Bushenyi basing on mathematical approach developed by Krejcie and Morgan cited by Amin (2005).  Therefore, with the study population of 200, the estimated sample was 127. The table bellow summarizes the sample size.

Table 1: Sample Size Determination Table

Source:  from Krejcie and Morgan (1970), as cited by Amin E. (2005).

The sample size was chosen because it is difficult to get information from the entire population. The target population was the population to which the researcher generalized the results of the study. The sample was drawn from the target population. Therefore, the sampled results were generalized to the sampled population (Amin, 2005).

3.4. Sampling Techniques

Simple random; in this sampling technique all members of the population have an equal chance of being selected to participate in the study. The technique was selected because it avoids bias and is easy to use (Neumann, 2006). It was therefore used to select respondents in microfinance institutions, agro business, retail businesses and welding and metal fabrication.

Purposive sampling technique was also be used in the study. Purposive sampling according to Neumann (2006) is a non random sample in which the researcher uses a wide range of methods to locate all possible cases of a highly specific and difficult to-reach population. The researcher used purposive technique on the respondents that provided key information that couldn’t be attained by any other method. These respondents included the district officials for key information.

3.5. Data Collection Methods

3.5.1. Documentary Review

Documentary review involved the search and collection of information from the already existing documents and information like books, internet, magazines, newspapers, district literature on business growth and development in Bushenyi and other resource centers.

3.5.1. Questionnaire Survey

This method was used to collect data from respondents especially staff from microfinance institutions, agro business owners, retail shop owners, welding and metal fabrication businesses. Respondents we given a questionnaire containing a number of interrelated questions and items about the factors affecting the performance of small enterprises with questions from which they selected their opinions. This method was preferred because it reduces the cost of data collection; was used on the selected enterprises and individuals as selected in the sample to collect data (Mugenda, 2003).

3.5.3. Interviews

The researcher used face to face interviews with key informants and these were the district officials.  In this method the researcher asked a number of questions to a key informant who responded freely by giving their opinion, perceptions and views on the problem under investigation. This method was used because it provides in-depth data, is more flexible than questionnaires, and yields a higher response rate than questionnaires (Amin; 2005, Mugenda: 2003, Sekaran: 2004).

3.6 Data Collection Instruments

The researcher used both primary and secondary sources. Primary data was collected from the business community and key informants through questionnaires and interviews while secondary sources included records, government publications, websites, the internet and journals. Data instruments which were used included the questionnaires and interview guide.

3.6.1  Documentary Review Checklist

The researcher reviewed documents in form of books, internet, magazines, newspapers, district and government literature that were relevant to the study so as to get a more informed view of the problem.

3.6.2 The Questionnaire

The researcher used a close-ended questionnaire to collect data in the study. This consisted of questions which the respondents answered in writing. The instrument was used because it was cheap compared to other methods. The researcher used self administered questionnaires to collect data. The self administered questionnaires were filled by respondents who were selected to participate in the study. The self administered questionnaires were delivered physically by the researcher and the research assistant to ensure that they are not delayed.

A five Likert scale questionnaire was used. This contained the dimensions of Strongly Agree (SA), Agree (A), Undecided (UD), Disagree (D), and Strongly Disagree (SD). The same instrument was administered to the respondents who would fill their answerers therein. It was divided into five sections and these included A-back ground information, B-microfinance institutions’ practices and the growth of small enterprises, C-government policies and the growth of small enterprises, D-organizational management and the growth of small enterprises and finally, performance of small enterprises.

Questionnaires were used in order to cover a large number of respondents in a relatively short time and there was generation of data because answers were given in their own mood. This however stimulates the respondents because it gave an insight into their feelings and options (Mugenda and Mugenda, 1999).

3.6.3 Interview Guide

An interview guide was designed and used by the researcher to collect qualitative data from key informants in the district. It had key questions on the performance of small enterprises to be asked to key respondents and then it was filled by the researcher while conducting a face to face interview.  This instrument according to Sekaran (2004) enables the researcher to collect rich and detailed data, clarify doubts, and it enables him to establish rapport and motivate respondents to answer questions.  (Yuko & Onen: 2009), argue that this instrument enables the researcher to collect data that can’t be written, and to capture meaning beyond words, and it yields a high response rate.

3.7. Quality control of the instruments (Validity and Reliability)

To ensure the quality control of the instrument, the researcher ensured that the instrument is reliable and valid. Pre-testing of the above instruments was undertaken to measure that the questions were understood by the respondents and that there were no problems with the wording or measurement. This helped to rectify the inadequacies in the instrument before administering them (Sekaran, 2003).

Pretesting was done on 10 persons of a similar sample in the neighboring district of Sheema in Kabwoohe Town Council who never participated in the actual study. The pretest sample was chosen based on Sekaran, (2003) who says that a sample between 1% and 10% is appropriate depending on the sample size. The pre-test subjects were encouraged to make comments and suggestions concerning the instruments, clarity of questions and relevance.

3.7.1 Validity

According to Amin (2005), he defines validity as the ability to produce findings that are in agreement with theoretical or conceptual values; a research instrument is said to be valid if it actually measures what it is supposed to measure with accuracy. The researcher used experts to rate items in the tools. This is supported by Waner (2005), as cited in Barifaijo, Basheka and Oonyu (2010) who assert that Content validity in the study is ensured by using two or more independent experts to judge/rate each item’s relevancy within the research instrument.

Validity was established through a validity test using the Content Validity Index (CVI). This is a tool that is used to gauge the content of items on an empirical measure. It was applied to the formula bellow;

(CVI) =       number of items rated relevant by all judges  

Total number of items in an instrument

That is; CVI =n/N

The instruments for this study were valid to be used since they had a C.V.I of 0.81.

Using the formula;

Judge1. = 29/36= 0.805

Judge2. = 31/36= 0.86

Judge3. = 32/36= 0.88

Therefore the total= 0.805+0.86+0.88 = 2.55/3 = 0.85

In this approach, Subject Matters Experts (SMEs) were asked to indicate whether or not the instrument was valid, and when the CVI is 0.7 and above, the instrument can be considered valid (Amin, 2004). After the comments by SMEs, the result was 0.85. The researcher considered this because Amin proposes that a minimum CVI of 0.7 and above is valid.

3.7.2  Reliability

Reliability addresses whether repeated measurements or assessments provide a consistent result given the same initial circumstances (Last, 2001). Last’s argument  is strengthened by Amin (2005) and Mugenda(2003) who assert that reliability is the degree to which an instrument consistently measures whatever it is measuring and produces similar results if repeatedly used on same respondents under similar procedure .This is achieved by estimating internal consistence and therefore questions measuring the same concept are grouped together and pretested. The following formula below will be used to determine Cronbach’s Alpha Coefficient.

α= k     [1─ ∑ σ²k]

k­1              σ²

Whereby;

∑ σ²k – is the sum of variable of k parts (items) of the test,

σ – Standard deviation of the test,

α- is the Alpha correlation Coefficient

Table 2; Summary of Reliability Statistics

Source: Primary data

If the Alpha is close to one that is above 0.72 then the instrument will be having a high reliability and if the alpha is bellow it will not  be reliable according to Mugenda and Mugenda, (1999). Since Cronbach’s Alpha Coefficient was found to be 0.856 the results were considered valid for the study.

3.8. Procedure of Data Collection

The researcher wrote the proposal and submitted it to the higher degrees department for defense. Upon successful defense before a master’s defense committee, he was given an authority letter which was then presented the relevant people, the small enterprises and government authorities to get permission to collect data from them.

The researcher recruited a research assistant and then trained him for a day on issues about the research that included questionnaires, ethics (confidentiality), creating rapport and editing questionnaires among others. After permission had been granted by the necessary people, the researcher went ahead to create rapport and make appointments and thereafter, proceeded to collect data from the respondents sampled.

Data was then collected, analysed, interpreted and a dissertation report was produced, forwarded to supervisors who made comments. After the comments from supervisors, the researcher submitted a dissertation book to the higher Degrees Department for Viva.

3.9. Measurement of Variables

The term variable refers to an element that take more than one form, and which a researcher measures, controls and manipulates (Neumann, 2006). Nominal scale which indicates the differences among categories like religion; catholic, Jews, Muslim; racial heritage: African Asian, Caucasian, Hispanic etc. The ordinal scale which indicates the difference plus the categories that can be ordered and ranked  like letter grades ;A,B,C,D,E,F opinion measures ; strongly agree, Agree, Disagree, Strongly disagree as given by Neumann (2006)  that form the Likert scale was used. Therefore a five Likert scale  was used to measure responses of respondents in the questionnaire based on continuum of; Strongly Agree(5), Agree(4), Undecided(3), Disagree(2), and Strongly Disagree(1).  This scale enabled respondents to give their views, opinion and attitudes and perceptions about the problem being investigated

3.10. Data Analysis

Sekaran (2003) suggests that analysis is the evaluation of data. It is the process of systematically applying statistical and logical techniques to describe, summarize and compare data

3.10.1 Quantitative Data Analysis;

Quantitative data was collected mainly from close ended type of questions. The researcher ensured that data is coded and categories into useful and relevant data. The data collected from questionnaires was entered in a computer and analysed using the Statistical Package for Social Scientists (SPSS) to find out how microfinance institutions’ practices, government support and organisational management affect the performance of small enterprises. SPSS is the most recommended package for analyzing social science research data (Sekaran, 2003).

Descriptive data was presented in form of summary tables, frequency distribution and percentages and was analysed using Pearson Correlation.

3.10.2 Qualitative data analysis;

The analysis of interview responses from key informants was edited according to the themes developed in the objectives of the study. The information from open ended questions and interview responses was analysed by listing down all respondents’ views under each question or category. The data was harmonized basing on a common view from respondents on the themes and was then interpreted to give meaning.

Therefore, data was first written, coded and analysed using content analysis and thematic analysis. Content analysis is the reading and re-reading of transcripts/data with the aim of establishing similarities, differences so as to develop themes, while in thematic analysis, Barifaijo et’ al (2010:136) argues that data is analysed by theme and this goes on until the researcher is satisfied that no new issues are arising.