THE ROLE OF COMMERCIAL BANKS IN THE GROWTH OF SMALL AND MEDIUM SCALE ENTERPRISES IN CAMEROON

CHAPTER ONE

INTRODUCTION

Background of the study

Small and medium-sized enterprises (SMEs) play a crucial role in facilitating wealth distribution and fostering economic expansion. They are considered to be agents of employment movement in the majority of global economies. By means of their financial investments, they generate value and generate an abundance of products and services, thus exerting a substantial influence on the financing of public services and the establishment of a vibrant local economy (Usman, 2018). Therefore, they are classified as catalysts for economic expansion and establishments of wealth redistribution in the majority of developed nations. Given that small and medium-sized enterprises (SMEs) are primary drivers of economic growth in these nations, the World Bank advises the majority of developing countries to prioritise the development of their SME sector as a means to propel their growth prospects.

Following its independence in 1961, the Cameroonian government shifted its attention towards major foreign corporations, upon which it heavily depended for development and growth. As time progressed, this failed to produce the anticipated outcomes, as the primary economic sectors of the nation remained unaffected. The neglect of the small and medium-sized enterprise (SME) sector resulted in a high rate of unemployment and destitution, which negatively impacted the daily lives of the average Cameroonian (Aliyu, 2019). 

Cameroon is often compared to a miniature Africa due to its significant development potential.  The government therefore made the strategic decision to depend on the SME sector in order to achieve economic prosperity and realise their long-term development objective of emergence. Despite the concerted efforts of the government, the contribution of small and medium-sized enterprises (SMEs) to the country's gross domestic product (GDP) has fallen short of expectations. In 2004, SMEs contributed 22% to the GDP, which was significantly lower than the projections made by the government. This is because the expansion of small and medium-sized enterprises (SMEs) in the nation was beset by a multitude of obstacles.  The results of a 2018 survey conducted in Cameroon by the National Institute of Statistics revealed that small and medium-sized enterprises (SMEs) encounter several notable obstacles, including inadequate financing, inaccessible resources, inadequate organisational structures, and restricted availability of necessary resources. These challenges necessitated attention and resolution (NIS, 2018). Therefore, it was necessary to place significant importance on banking institutions, which are to function as true catalysts for facilitating the expansion of small and medium-sized enterprises (SMEs). The provision of banking institutional services to these small and medium-sized enterprises (SMEs), including loans, payments, and savings services, as well as financing contracts tailored to SME needs, professional advisory services, and crisis bailouts, would significantly improve the state of SMEs in the nation.

The bank collects and allocates deposits as financial intermediaries in order to facilitate the development of higher-yielding investments. They furnish monetary aid to address the diverse requirements of businesses. The purpose of the bank is to amass public funds at no cost in the form of deposits, with the intention of utilising those funds to make loan applications. However, by means of diverse activities such as account maintenance, loan and advance approval, and transfer processing, among others, banks are able to discern the performance of numerous companies and organisations and exert influence and control over them. Banks contribute to the growth of businesses by facilitating the resolution of information issues that may arise between borrowers and investors and by ensuring that depositors' funds are utilised more efficiently (Preyo, 2020).

As stated by a number of researchers, commercial banks fail to adequately provide financial liquidity and banking services to small and medium-sized enterprises (SMEs) on account of insufficient bookkeeping systems, absence of collateral, and financial institutions frequently questioning their viability. Information and routine control issues emerge, which are critical for the financing of SMEs. This creates a financial burden for them due to the information asymmetry that can lead to moral hazard and adverse selection. As a result, only a limited number of banks offer loan products tailored for small and medium-sized enterprises (SMEs), with the majority receiving funding from donors. Therefore, SME departments are scarce in financial institutions (Mensah, 2018). The domain of electronic banking services in Cameroon remains relatively underexplored in the literature.  This indicates that there has been a dearth of research conducted within the nation regarding the determinants that impact the extent to which consumers embrace electronic financial services. With the aim of fostering economic growth in low-income nations, the majority of governments and development partners have advocated for the incorporation and advancement of ICT among small and medium-sized enterprises.

1.2 Statement of the problem

The contribution of small and medium-sized enterprises (SMEs) to the overall economic progress of any nation is crucial.  Indeed, small and medium-sized enterprises (SMEs) possess the potential to initiate substantial employment opportunities while simultaneously driving economic expansion.  The financial sector of developing nations such as Cameroon is underdeveloped. Thus, debt financing continues to be the predominant funding source for small and medium-sized enterprises (SMEs), with its scope restricted to commercial bank credits. Diamond (2019) finds that small and medium-sized enterprises (SMEs) account for an average of sixty percent of the overall formal employment in the manufacturing sector, encompassing both developed and developing economies. This represents approximately 75% of the total employment in the manufacturing sector in Africa. Considering the preponderance of commercial banks in Africa's financial sector, access to financing, and bank financing in particular, is a critical obstacle to the growth of the SME domain.

According to some authors, including Mairura (2019), commercial banks are the primary source of debt financing for new SMEs. Indeed, they provide an extensive array of services to newly established SMEs, either directly or by means of wholly or partially owned subsidiaries. In addition to export and import finance, factoring, leasing, overdraft facilities, term loans, trade bill financing, factoring, and factoring, these services also encompass government loan guarantee programmes.  Additional scholars, including Beitone (2018), contend that commercial banks possess a more advantageous stance to acquire knowledge regarding small and medium-sized enterprises (SMEs) by fostering connections between their personnel and SMEs proprietors. Commercial banks, in fact, possess vast branch networks that enable new small and medium-sized enterprises (SMEs) to access their services even from distant locations. The financial conditions of small firms in developing economies are often opaque to investors, which renders the costs associated with directly issuing securities to the public unaffordable for the majority of SMEs.  

Therefore, in the absence of financial intermediaries such as banks, acquiring the necessary information for the majority of investors to extend credit would be prohibitively expensive, and it would also be prohibitively expensive for the small firm to issue the credit. Financial institutions assuming the traditional roles of intermediaries address the challenges posed by adverse selection and asymmetric information through the following means: (i) generating and monitoring borrower information; (ii) establishing loan contract terms to enhance borrower incentives; and (iii) renegotiating the terms if the borrower encounters financial hardships (Mayor, 2020).  

A considerable number of enterprises in Cameroon identify the lack of access to sufficient loans for long-term investments and working capital as a significant obstacle to their operations. This is not exactly novel, as limited access to external financing is cited in a 2018 World Bank report as one of the leading causes of SME failure in developing economies. In addition, the report notes that the proportion of total bank loans allocated to small and medium-sized enterprises (SMEs) is typically lower in comparison to that of large corporations. Ten percent (10%) of all formal SMEs indicate that they are granted access to a bank credit line. Given that financing is critical to the survival of any business enterprise and that Cameroon has mandated the vitality of small and medium-sized enterprises (SMEs) as a prerequisite for its development by 2035. It is on this premise that this study will investigate the role of commercial banks in the growth of small and medium scale enterprises in Cameroon.

1.3 Objectives of the study  

The general objective of this study is to investigate the role of commercial banks in the growth of small and medium scale enterprises in Cameroon. The specific objectives include the following:

To find out the extent of commercial banks involvement in the growth of small and medium scale enterprises in Cameroon.

To assess ways commercial banks can influence the growth of small and medium scale enterprises in Cameroon.

To analyze the effects of commercial banks involvement in the growth of small and medium scale enterprises in Cameroon.

To examine the challenges faced by commercial banks involvement in the growth of small and medium scale enterprises in Cameroon.

1.4 Research Questions 

The following research questions will be answered in this study:

What is the extent of commercial banks involvement in the growth of small and medium scale enterprises in Cameroon?

What are the ways commercial banks can influence the growth of small and medium scale enterprises in Cameroon?

What are the effects of commercial banks involvement in the growth of small and medium scale enterprises in Cameroon?

What are the challenges faced by commercial banks involvement in the growth of small and medium scale enterprises in Cameroon?

1.5 Research Hypothesis

The following research null hypothesis will validate this study:

Ho1: The extent of commercial banks involvement in the growth of small and medium scale enterprises in Cameroon is low.

1.6 Significance of the Study

This work is significant to three groups of people which are; Government, commercial banks and to researchers. 

This work is important to the government in that it will help the government to develop good developmental strategies concerning SMEs and commercial banks. Moreover, this work will equally be important to commercial banks due to the fact that it will help commercial banks to improve  on  their  services  offered  to  the  nation and to implement advanced measures so as to enhance the growth of the SMEs.

Finally,  this  work  will  remain  to  be  the  background  work  to  which  forth  coming students and researchers will be able to review some ideal if necessary.

1.7 Scope of the study

Generally, this study focuses on the role of commercial banks in the growth of small and medium scale enterprises in Cameroon. Empirically, this study focuses on finding out the extent of commercial banks involvement in the growth of small and medium scale enterprises, assessing ways commercial banks can influence the growth of small and medium scale enterprises, analyzing the effects of commercial banks involvement in the growth of small and medium scale enterprises and examine the challenges faced by commercial banks involvement in the growth of small and medium scale enterprises.

This study will be carried out in Cameroon.

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 commercial banks in the growth of small and medium scale enterprises in Cameroon 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

Commercial banks: A commercial bank is a financial institution which accepts deposits from the public and gives loans for the purposes of consumption and investment to make profit.

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.