A CRITICAL ANALYSIS OF LOAN FINANCING FOR SMALL AND MEDIUM SCALE ENTERPRISES IN CAMEROON

CHAPTER ONE

INTRODUCTION

Background of the study

In comparison to the rest of the globe, the African continent has experienced substantial expansion in recent decades. In the preceding decade, for instance, while the majority of the world's economies struggled with economic expansion, Africa's average growth rate exceeded 5%, which was significantly higher than that of the United States, Europe, and South Africa combined. Despite the continent as a whole experiencing consistent growth, certain nations such as Angola, Rwanda, and Malawi are thriving while others, including Zimbabwe, continue to struggle. Nevertheless, Africa's overall robust economic expansion has garnered the attention of several investors, particularly from the United States, China, and India. This trend is anticipated to contribute to the continent's sustained economic development in the long run (Douglass, 2020).

Small and medium-sized enterprises (SMEs), make a substantial impact on the economic vitality and expansion of the majority of nations worldwide, especially those classified as emerging economies (Quartey, Turkson, & Iddrisu, 2019). Small and medium-sized enterprises (SMEs) play a crucial role in driving entrepreneurial innovation, stimulating economic growth, and generating employment opportunities in Nigeria (World Bank, 2018). The contribution of small and medium-sized enterprises (SMEs) to employment opportunities, economic expansion, poverty alleviation, and revenue generation is substantial (Obi et al., 2018). Small and medium-sized enterprises (SMEs) significantly contribute to the economic expansion and progress of any country. Small and medium-sized enterprises (SMEs) not only alleviate destitution and generate employment opportunities but also significantly contribute to the progress of industry (Menike, 2018).

The World Bank (2018) asserts that small and medium-sized enterprises (SMEs) are the principal generators of employment in economies. One of the most well-known challenges confronting small and medium-sized enterprises (SMEs) worldwide is the limited availability of business financing (Aysan, Disli, & Ozturk, 2019).

Significant social, economic, and political advancements result from the expansion of the private sector, particularly in the realm of small, medium, and micro enterprises, in developing nations. Although its impact on nominal GDP may be minimal, it provides employment for approximately 80% of the labour force. Medium and long-term strategic master plans (Rwandavision 2020, Botswanavision 2016, Cameroonvision 2035, Nigeria-vision) are all predicated on private sector development (Beck & Kunt, 2018). There is an increasing acknowledgment in Ghana, for example, of the significant contribution that SMEs make to economic development. SME ownership accounts for approximately 90% of the overall business entities in Ghana and 60% of the employed workforce. They are frequently characterised as productive and efficient innovators who establish large enterprises and drive the economy at the national level. Despite the presence of multinational corporations, the SME sector remains the largest employer of labour in developed industrialised economies.

Cameroon is home to numerous businesses that operate in a wide variety of industries. As of the period covered by the General Census of Enterprises (GCE) in 2009, a total of 93969 businesses and establishments were identified and situated in Cameroon (NIS, 2018). The entrepreneurial structure in 2009, as reported by the GCE, comprised 75% Very Small Enterprises, 19% Small Enterprises, 5% Small and Medium Sized Enterprises, and less than 1% Large Enterprises. The economic impact of an enterprise is contingent upon the political, institutional, and legal climate in which it conducts its operations (WB, 2018). An favourable investment climate enables businesses to make profitable investments, which in turn generates employment opportunities and boosts production, thereby stimulating private investment and fostering economic expansion (Nkoulou, 2019).

However, as a result of their position, they also encounter an excessive number of challenges. As per the findings of the National Institute of Statistics in 2016, financing emerges as a prominent challenge faced by small and medium-sized enterprises (SMEs) in Cameroon, receiving the lowest score of 30.7%. This ranking is second only to administrative formalities (34.2%) and taxation policies (53.5%). Research findings indicate that a number of small and medium-sized enterprises (SMEs) fail to observe their fifth birthday. The majority of them shut their doors as a result of financing issues and the extremely competitive environment. Their failure to achieve their fifth birthday can be attributed to their deficient grasp of financial matters.

Fear of business failure, insufficient loan size resulting from onerous loan application procedures, exorbitant interest rates, inadequate bookkeeping systems, insufficient financial information, short loan terms, delayed loan disbursements, inconvenient loans, minimal or no government guarantee, and the tendency towards group collateral requirements have all contributed to the hindrance of small and medium-sized enterprises' (SMEs) access to financing hence the need for this study.

1.2 Statement of the problem

SME classification varies by country and is determined by their function in the economy, as well as by policies and programmes. Specific agencies and institutions that develop, regulate, and empower the various SMEs are responsible for the creation of these programmes. From these vantage points, a SME in the United States of America is defined as a company whose total assets are below $9,000. Conversely, in the European Union, small and medium-sized enterprises (SMEs) are frequently defined as enterprises with fewer than 50 employees and annual revenues below 10 million Euros. In contrast, as per Law Number 2010/001 enacted on April 13, 2010, a SME in Cameroon is defined as a category of Very Small Enterprises that have an annual revenue of approximately 15 million FCFA or 25,000 Euros and employ fewer than five individuals. Furthermore, minor firms are classified as Very minor Enterprises if they have an annual financial turnover ranging from 25,000 to 175,000 Euros and employ between 6 and 20 individuals (Nkoulou, 2019).

SMEs are incorporated into the growth and employment strategy document (GESP) of Cameroon. SME participation in the nation's economy encompasses more than 90% of the sector and is estimated to contribute 36% of the national GDP. Degryse (2020) discovered in a comparable investigation that small and medium-sized enterprises (SMEs) in Cameroon make a tax contribution exceeding 30% to the local government. Despite playing a significant role in fostering economic expansion, advancing infrastructure, and creating jobs, the viability and expansion of small and medium-sized enterprises (SMEs) in Cameroon and other African countries face formidable obstacles.

In recent times, substantial strides have been taken by the government to enhance the financial accessibility of expanding small enterprises. Still requiring correction are market failures and anomalies within the system. In mitigating market failures, government-supported initiatives that facilitate business access to capital play a crucial role. Access to capital supports the formation and expansion of businesses, as well as generates the employment and prosperity that the nation requires. It is worth noting that upon reviewing the findings of Blades (2019), Beck (2018), and Walters (2018) collectively, it becomes apparent that only a minority of organisations in Cameroon, approximately 20% on average, acquire bank credit. Therefore, this study seeks to critically analyse of loan financing for small and medium scale enterprises in Cameroon.

1.3 Objectives of the study  

The general objective of this study is to critically analyse of loan financing for small and medium scale enterprises in Cameroon. The specific objectives include the following:

To determine the extent small and medium scale enterprises access business loans in Cameroon.

To examine the avenues small and medium scale enterprises can access business loans in Cameroon.

To examine the factors that affects small and medium scale enterprises access to business loans in Cameroon.

To find out the challenges of small and medium scale enterprises encounter in assessing business loans in Cameroon.

1.4 Research Questions 

The following research questions will be answered in this study:

To what extent do small and medium scale enterprises assess business loans in Cameroon?

What are the avenues small and medium scale enterprises can access business loans in Cameroon?

What are the factors that affects small and medium scale enterprises access to business loans in Cameroon?

What are the challenges of small and medium scale enterprises encounter in assessing business loans in Cameroon?

1.5 Research Hypothesis

The following research null hypothesis will validate this study:

Ho: Loan financing has no sifghnificant effect on small and medium scale enterprises in Cameroon.

Ha: Loan financing has no sifghnificant effect on small and medium scale enterprises in Cameroon.

1.6 Significance of the Study

The effective tactics found in this study might have a substantial impact on the ability of present and future SMEs in Cameroon to get business loans, continue their operations, and contribute to economic growth. Helping small and medium-sized enterprises develop methods for obtaining capital loans can result in good social change by boosting economies and generating employment. In addition, the development of successful techniques may improve connections between financial institutions and SME owners. The Government of Cameroon might utilise the findings of this study to encourage and assist the development of current small and medium-sized firms (SMEs) and to stimulate the formation of new enterprises.

This study has the potential to contribute to societal change by providing SME owners with information on SME financing sources. While obtaining business loans, executives of small and medium-sized enterprises (SMEs) might discover techniques that may need them to adjust their current tactics or apply novel ways. Financial institutions may potentially find benefit in this investigation.

By charging interest rates on SME loans, banking institutions create revenue and profits. In addition, the expansion of small and medium-sized enterprises (SMEs) owing to their successful access to business loans might assist regulatory agencies in Cameroon collect extra revenue through taxes and business licence fees, which could be utilised to benefit the whole population.

1.7 Scope of the study

Generally, this study focuses on critically analyzing of loan financing for small and medium scale enterprises in Cameroon. Empirically, this study focuses on determining the extent small and medium scale enterprises access business loans, examining the avenues small and medium scale enterprises can access business loans, examining the factors that affects small and medium scale enterprises access to business loans and finding out the challenges of small and medium scale enterprises encounter in assessing business loans.

1.8 Limitation of the study

The researchers encountered slight constraints while carrying out the study. The significant constraint was the scanty literature on the subject owing that loan financing for small and medium scale enterprises discourse is vast thus the researcher incurred more financial expenses and much time was required in sourcing for the relevant materials, literature, or information and in the process of data collection, which is why the researcher resorted to a limited choice of sample size covering only residents of Cameroon. Thus findings of this study cannot be used for generalization for other regions within Cameroon. Additionally, the researcher will simultaneously engage in this study with other academic work will impede maximum devotion to the research. Howbeit, despite the constraint encountered during the research, all factors were downplayed in other to give the best and make the research successful.

1.9 Definition of terms

Small and Medium Scale Enterprises: A small and mid-size enterprise (SME) is a business that maintains revenues, assets or a number of employees below a certain threshold. Small and medium-sized enterprises or small and medium-sized businesses are businesses whose personnel numbers fall below certain limits. The abbreviation "SME" is used by international organizations such as the World Bank, the European Union, the United Nations, and the World Trade Organization.

Business Loan: A business loan is a loan specifically intended for business purposes. As with all loans, it involves the creation of a debt, which will be repaid with added interest.