CHAPTER ONE

MAKERERE UNIVERSITY

CONTRIBUTION OF MICROFINANCE ON THE SUCCESS OF SMALL BUSINESSES

A CASE STUDY: SMALL BUSINESSES IN OWINO-MENGO KISENYI

BY

MANDE FRED

07/U/4991/EXT

SUPERVISOR

Ms. MBATUDDE SHEILA

A RESEARCH REPORT SUBMITTED TO MAKERERE UNIVERSITY IN PARTIAL

FULFILMENT FOR THE AWARD OF THE DEGREE IN BACHELOR OF

COMMERCE.

AUGUST 2011

DECLARATION

I Mande Fred declare that this research report is my original work and has never been at any one time submitted for award of a degree in any university

Signature...

MANDE FRED

Date

APPROVAL

This report has been submitted with my approval as the supervisor and is worth for the award of Bachelor of commerce Degree of Makerere University

Signature

Ms. MBATUDDE SHEILA

SUPERVISOR

Date.

DEDICATION

I dedicate this work to all those who have sacrificed resources and time towards my education.

To my Uncle Joe Mpuuga who saw potential in me at a tender age, my wife Irene and daughter Erica whose time I sacrificed, I can only say God bless you.

ACKNOWLEDGEMENT

I thank God for the wisdom, endurance and knowledge that have seen me through to the end to complete this research.

I thank everyone who contributed in one way or another to the success of my education.

I am grateful to my supervisor Ms. Mbatudde Sheila for her professional advice, guidance, patience and dedication to make sure I came up with good work.

Special thanks goes to my Father and Mother for the guidance and support, my uncle who saw me through school, my cousin Denis whose encouragement and support saw me through,I also extend appreciation to my friends Odoi,Frank,Bosco ,Robert,Gladys,Charles and many others you made studying meaningful.

TABLE OF CONTENTS

iDECLARATION

iiAPPROVAL

iiiDEDICATION

ivACKNOWLEDGEMENT

vTABLE OF CONTENTS

viiiLISTS OF TABLES

viiiLIST OF FIGURES

ixABSTRACT

1CHAPTER ONE

11.0INTRODUCTION

11.1BACK GROUND

21.2STATEMENT OF THE PROBLEM

31.3 PURPOSE OF STUDY

31.4OBJECTIVES OF THE STUDY

31.5RESEARCH QUESTION

31.6SIGNIFICANCE OF THE STUDY

31.7SCOPE OF THE STUDY

5CHAPTER TWO

52.0 Introduction

72.1 Procedures employed by micro finance institutions to provide credit services to small

7scale businesses.

122.2 Benefits derived by small scale businesses from micro finance institutions.

12Lease Financing

162.3 challenges faced by small businesses in accessing and maintaining the loans

202.4 Conclusion

21CHAPTER THREE:

21METHODOLOGY

213.1 Introduction

213.2 Research Design

213.3 Area of the study

213.3.1 Study population

223.4 Sampling procedure

223.5 Data sources

223.5.1 Primary data

223.5.2 Secondary data

223.6 Research instruments

223.7 Validity and Reliability of instruments

223.8 Data analysis and processing

24CHAPTER FOUR

24PRESENTATION, INTERPRETATION, ANALYSIS, AND DISCUSSION OF FINDINGS

244.0 INTRODUCTION

244.1 Discussions of Findings

274.2 Contribution of Micro Finance Institutions to Small Scale Businesses

324.3 Benefits of Financial institutions to businesses

364.4The relationship between the Contribution of Micro Finance Institutions and the Success of Small scale Businesses

37CHAPTER FIVE

37SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATION.

375.1 Introduction

375.2 Summary of the findings of the study with respect to study objectives

375.2.1 Contributions of MFIs to Small scale business

385.2.2 Lease Financing

395.2.3 The relationship between the Contribution of Micro Finance Institutions and the Success of Small scale Businesses.

405.2 Conclusions of the study.

405.3 Recommendation

405.4 Areas of further research

42REFERENCES

48APPENDIX I: QUESTIONNAIRE

57APPENDIX II: INTRODUCTORY LETTER

LISTS OF TABLES

6Table 1: Bank of Uganda Tiered framework for Regulation

21Table 2: Sample size and sample selection

24Table 3: Category / Type of the respondent

25Table 4: Respondents Bio-Data by Gender

26Table 5: Marital status of the Respondents

27Table 6: Working experience of the respondents

27Table 4.2.1: Descriptive Statistics showing the bank interview process

28Table 4.2.2: Descriptive Statistics showing the Loan application process

29Table 4.2.3 : Descriptive Statistics showing the Appraisal process and Field visits

30Table 4.2.4: Descriptive Statistics showing Loan processing and approval

31Table 4.2.5: Descriptive statistics showing Monitoring and Deliquency Management

32Table 4.3.1: Descriptive statistics showing Leasing financing

33Table 4.3.2: Descriptive statistics showing venture capital

34Table 4.3.3: Descriptive statistics showing Working capital

35Table 4.3.4: Descriptive statistics showing saving facility

35Table 4.3.5: Descriptive statistics showing money transfer services

36Table 4.4.1: Correlation between the Contribution of Micro Finance Institutions and the Success of Small scale Businesses.

LIST OF FIGURES

25Figure 1: Academic level of the respondent

26Figure 2: Age Bracket of the Respondent

ABSTRACT

The purpose of this study was to establish the relationship between Microfinance and the performance of small Businesses. The objectives of this study were to find out procedures micro finance institutions use to provide Credit services , benefits and challenges faced by small businesses in accessing loans.

The research was descriptive in nature involving quantitative methods which was administered through questionnaires. The total sample comprised of 100 respondents in Owino-Mengo Kisenyi Kampala. Simple random sampling was used in the study. Primary data was used and the researcher went to Owino-Mengo Kisenyi and administered questionnaires to the selected sample and secondary data was got from FINCA Uganda, library materials, textbooks, journals and the internet. Data analysis was carried out using SPSS and frequency distribution tables.

According to the research findings Small businesses have got several benefits from banks that have lead to there growth .However majority of small businesses have low turnovers, not organised enough to benefit from government programmes. Never the less there is a strong positive relationship between the contribution of Microfinance to the success of small Businesses with a correlation coefficient r=0.876.

It was concluded that the contribution of Microfinance services affect the ratio of the Success of Small Scale Businesses in form of profits earned from the sale of stock hence a consistent re- stocking of goods, Small businesses need financing to restock.

It was recommended that more products tailored to the customers needs should be set up. From the study, it was realized that the financial sector in Uganda is narrow with only a few standard products which limit the options available to Small Scale Businesses.

CHAPTER ONE

1.0INTRODUCTION

This chapter presents the back ground to the study, statement of the problem, objectives of the study.

The study is aimed at finding the contribution of micro-finance institutions to the success of small-scale Businesses, research questions, significance, scope, and limitations of the study. It reflects a brief historical dimension of the problem under investigation; Businesses in Kampala district. The study will put emphasis on individuals, groups, or associations participation in micro-finance institution within Kampala with special reference to FINCA Uganda.

1.1 BACK GROUND

Microfinance refers to financial services provided to low-income earners usually people who cannot get access to formal commercial banks (Bategeka, 2001).

Generally micro finance refers to the provision of financial services to those excluded from the formal financial system, (UNCDF 2002). It therefore targets the informal sector that comprise of small and micro enterprises, which are located in, urban and semi urban areas. They are loosely structured and therefore keep on changing from time to time depending on market trends and other factors that affect their business since most of them are privately owned (Wasswa Baluynwa2006).

Micro finance programs have been adopted in many countries of the world such as India, Bangladesh and of recent have been introduced in Uganda. The government of Uganda considers micro finance services to be one of the most effective ways of reducing poverty, addressing and increasing the earning potential of the poor. Special emphasis has therefore, been put on support for micro finance services to rural beneficiaries by setting up rural microfinance support project (RMSP) as an attempt to build sound and sustainable microfinance institutions to play a crucial role in poverty reduction by supporting of small scale business in Uganda (Lukaya, 2005).

However, despite of that the government intension to reduce poverty and the supporting institutions face a number of challenges. Among use of unconventional collection methods, character based lending, short maturity loans and limited contact enforcement powers and provisions of financial services to low income clients (Kikonyogo, 2005).

For example in Owino-Mengo Kisenyi area which is in central division of Kampala a few proprietors of small businesses fail to access debt financing that can lead to increased investment in their small businesses. Available debt finance options for small enterprises in this area include term loans, overdraft facilities, trade financing and leasing. However, the growth of businesses in the area which is measured by their expansion and profitability remains low. Debt financing accessed by business proprietors has not made a positive impact (Kakooza, 2006).

Complaints from business community include lack of acceptable collateral, in addition, the very short-term nature of banks loans, coupled with the high interest rates, makes banks unsuitable as a funding mechanism for financing in this sector and opting for rather readily available short-term financing instruments for medium- to long-term investments.

Therefore, it is against this background that the researcher finds it necessary to carry out a study on the contribution of microfinance on the success of small businesses

1.2STATEMENT OF THE PROBLEM

Despite the fact that there is wide spread of MFI in and around Kampala whose main aim is to stimulate sustainable economic growth of micro entrepreneurs through provision of financial loans and non financial services (MOF report, July 2008).

Many borrowers complain about inadequate loan amounts and terms, mandatory weekly meetings, and having to pay for group members who default. It does not help the poor to meet their saving needs (Morduch, 2005).

It therefore calls for research to find the constraints to the sustainability and success of small-scale businesses in Kampala. According to the Bank of Uganda (report July2008) some constraints are; cost of finance, inadequate knowledge of how to run businesses, micro-Economic instability

1.3 PURPOSE OF STUDY

The purpose of the study is to establish the contribution of microfinance on the success of small businesses.

1.4OBJECTIVES OF THE STUDY

1) To find out procedures micro finance institutions use to provide Credit services to small-scale businesses.

2) To ascertain the extent to which small scale businesses have benefited from the services.

3) To find out the challenges and boundaries faced by small businesses in accessing and maintaining the loans.

1.5RESEARCH QUESTION

1) What are procedures micro finance institutions use to provide Credit services to small-scale businesses.

2) To what extent have small scale businesses benefited from the services?

3) What are the challenges and hindrances small businesses face in accessing and maintaining of the loans?

1.6SIGNIFICANCE OF THE STUDY

The study was aimed at helping the institutions especially commercial institutions to adopt ways of creating good relationship between the staff and the clients.

It will also act as a guideline to MFIs on how best they can make loans work effectively towards the success of small-scale businesses.

The study will help the government to realize the need of strengthening the interest rate so that they can offer better services.

The research will also be useful for future researchers, stakeholders, and students who are interested in the success of small businesses.

1.7SCOPE OF THE STUDY

The study was concerned with the contribution of micro-finance to small businesses. It was conducted in Owino Mengo Kisenyi area and it focused on the period between 2000-todate using survey, which contained both qualitative and quantitative methods of collecting and analyzing of data using the questionnaire. In the sample 40 people will be given individual questionnaires of which 30 were small scale business holders, and 10 were service providers of FINCA Uganda Kampala. Data was collected through questionnaires, interviews, group discussions and document analysis techniques. The studies specifically seek to find out the effect of micro finance to small businesses in Kampala.

Time scope

The study covered a period of four months from February to June 2011 and will concentrate on the literature ranging from 2000 to 2010.

Geographical scope

The study covered small businesses in the areas of Owino market and Mengo Kisenyi. FINCA microfinance Uganda, Ben Kiwanuka Street will be centre of focus.

CHAPTER TWO

2.0 Introduction

In this chapter the research looked at critical analysis of work done by other researchers on the contribution of microfinance on the success of small Businesses. We shall look at the definitions of microfinance and small Businesses, examine the existing knowledge about micro finance in relation to the set objectives of the study which are to find out the services that micro finance intuitions do provide for small-scale businesses, to examine the procedures employed by microfinance institutions to provide credit services, to ascertain the extent to which small scale businesses have benefited from the services and to find out the challenges and boundaries faced by small businesses in accessing and maintaining the loans.

Definition of Microfinance

Microfinance is generally defined as the provision of financial services such as savings, credit facilities, insurance and payment products to low-income clients (Kiiza 2004).

Over the years microfinance has not only acquired an additional dimension as a tool for financial systems development, it has reported an impressive growth. Microfinance is the fastest growing segment of rural financial intermediation. A range of services are provided to clients which include credit, savings and payment products.

Microfinance institutions are those institutions providing Microfinance Services. Microfinance institutions fall into a variety of categories cutting across Commercial Banks and Nongovernmental organizations. They are those which are regulated by Bank of Uganda and those simply operating as NGOs. Financial institutions in Uganda are regulated depending on the tier they belong.

Table 1: Bank of Uganda Tiered framework for Regulation

Criteria level

Depositing taking

Legal and regulatory frame work

Regulating and supervising authority

Tier 1:commercial Banks

yes

FIA 2004;MDI act 2003

Bank of Uganda

Tier 2: Credit institutions

Yes

FIA 2004;MDI act 2003

Bank of Uganda

Tier 3:MDIs

Yes

MDI act 2003

Bank of Uganda

Tier 4:Non-Bank of Uganda regulated institutions

No

Various laws

Various bodies

Source: Katimbo-Mugwanya (2000)

Definition of small Businesses

According to Wasswa Balunywa a Small scale business is defined as one which is independently owned and operated, and not dominant in its field of operation. It can also be defined in terms of sales volume and by the number of employees in the business.

In Uganda, these businesses are very small employing up to a maximum of 50 people, who in most cases are members of the same family. They have working capital of less than USD 26,882 and revenue value of USD 5,376 - 26,882 throughout each year of operation. In addition, they have an asset base of up to USD $25,000 (Kazooba 2006). The major activities of small scale businesses in Uganda are farming, buying produce, market vending, catering and confectionery, shop keeping, second hand clothing, health/herbal services, secretarial services, telephone services, handicraft, transport, and many others. The majorities of these operate in shared premises and are set up before they get licenses (Keough, 2006). Ownership and management is on family basis and as such has a small scale operation. It is labour intensive and skills are acquired on the job, often using adapted technology.

2.1 Procedures employed by micro finance institutions to provide credit services to small

scale businesses.

Credit policies are comprehensive set procedures and guidelines that must be followed by banks in lending practices to achieve their goals (Okumu, 2007).

The term credit policy is used to refer to the combination of three decision variables i.e. credit standards, credit terms and collection efforts on which the financial manager has influence. Credit standards are criteria to decide the types of customers to whom credit facilities can be extended. If a Bank has more slow- paying customers, its investment in accounts receivable will increase. The firm will also be exposed to higher risk of default.

According to Pandey (2001), in order to analyze customers and set standards, two aspects are considered; the average collection paid and the default rate. To him, average collection paid refers to the period in which debts remain outstanding, and default rate is the ratio of uncollected receivables to the total receivables.

Steps involved in credit Services;

Step 1: The interview

The first procedure is to establish a relationship with the customer through a face to face interview. Microfinance institutions normally start the credit procedure by getting to know the customer. In this way vital information is gathered about the customers capacity to repay the loan (Feschijan, 2008)

The Process involves finding Information about the customers background, industry and Business and above all the purpose of borrowing which is key in determining whether the facility extended to the individual will be of benefit or not ( Brand. M. 2007).

However according to Ralph Chaffee (2007) interviews will give you the basic information required about a customer but not adequate data that is required in loan assessment. Physical visits and Audited books of account will give you more clear information about the client and his Business.

Given the illiteracy levels of most Microfinance customers its not easy to get clear information through an interview since most of them dont have records to back up the information provided.

An interview may be done face to face especially with the less educated or the customer will be given a form to put down the data required. The interview gives the Background information about the customer and to determine there after their ability to service loans whether they qualify for the loan or not (BOU report, 2006).

Under the interview such information as Bio data, credit history, Nature of Business are established, type and ownership of the Business, number of employees, the age of the Business, the type of industry whether trade and commerce or the other, the collateral security available and many other. This also helps to check fraud and falsification of information. (Barnes, 2002).

It is at this stage that the screening of clients is done. Those found not meeting the standards required of them to qualify for the loan is determined at this stage. Advice is extended to the customer whether to grow the businesses stronger first or to save with the institution first (Boulder, 2002).

Step 2: loan application

At this step the client has gone through the screening process and found to have capacity to qualify for the loan. However the information provided has to be backed up with what is on ground. The client is given a loan application to be filled usually with the help of a credit officer (Jennifer ONeil, 2002).

The loan application should state all the necessary information about the applicant. The most important part of the application is the purpose of Borrowing. According to Centenary Bank Credit policy and procedure Manual 2011 the loan application requirements include;

1. Account with the Bank

2. Permanent Resident

3. Loan security.

4. Good source of income to repay the loan

5. Application fees.

6. Mortgage registration on security held

7. Loan guarantees where applicable

However it has been argued that at times a loan application is usually a compressive document with structured questions about the customer and the Banks lending Terms. It has also been argued that at times a loan that at times a loan application can be misleading and often times vital information is omitted (Nyamugasira, 2002).

Loan applications are structured based on the product offered but most Banks have a format that has general questions and requirements. It should spell out the information concerning the applicant, the purpose of borrowing and the source of repayment. This will give an overview of the applicant. Most banks are able to access capacity based on the information a customer puts down on a loan application (Kulabako, 2010).

The loan application process helps to establish what project the customer intends to fund and whether the amount requested for the project is sufficient and also to avoid overfunding. The application process is supposed to be backed up by documentary evidence. Documents such as identification of the applicant, Business documents, bank statements and other such documents showing evidence of Business and personal information. It is this stage that the information needed to determine eligibility for the loan will be gathered (AMFIU report 2005).

Step 3: Appraisal process and Field Visits

This is the most important stage in the credit procedure. Under this stage the Banking officer will make physical visits to the customers Business and sometimes to his home to ascertain permanency of residence, existence of Business, nature of Business and other factors that require physical verification (UBI report, 2002).

Stock is taken of the Business and this is done through physical examination of the Business Books of account and records and comparisition is made. Physical check of sales records like sales day book, purchases, bank statements and Debtor and Creditor Records are carried out (Bagyenda, 2008).

The findings are compared to the estimates provided by the customer. Professional evaluation and weights are attacked to the information provided and the capacity of the customer is accessed based on these weights. In some cases where collateral security is required its weight is also valued to see whether it covers the amount borrowed and in case of failure to pay can be disposed off and used to cover the loan amount. Valuation of such assets sometimes requires the use of professionals like land valuers, surveyors, auditors and lawyers (AMFIU report 2005).

Step 4: loan processing and approval

Loan processing and approval involves customer appraisal and field visits to the clients Business. The credit report is made by a Banking Officer and this goes with the supporting documents. This is the most important stage in the loan procedure process. It is important that the loan processing time, the interest rate offered and collateral to the facility are considered (Sempijja, 2011).

The loan application package is then reviewed by a credit committee and all the information is verified and the presence of all essential documents is confirmed. The weights assigned to file are analyzed and a general decision is reached at by the Bank credit committee headed by a credit manager, to either extend a loan facility to the customer or decline it (Edoku, 2002).

The loan application package is supported by such important documents like land valuation reports were collateral of land is used, audited books of account for limited companies. At this stage in case of collateral security underwriting is done and where a group is considered to secure or guarantee the facility proper legal documentation must be taken which binds them to the facility. It is that stage that the loan committee finally approves the facility. The client is informed of the approval (Wakoko, 2007).

It is upon the customer to accept the facility or decline it. The customer is provided with a loan agreement which states the terms of the loan, like the loan repayment period, interest rate, penalties involved and many other legal implications. When the customer signs it then means that the customer accepts the offer and all the terms in it and this seals the deal. The loan is then disbursed on the clients account and a payment schedule is printed out for the customer (AMFIU report, 2005).

A lot of MFIs process and approve loans to Groups. Group lending procedure is a common method that is adopted by most MFIs. Groups of 5-20 people are formed to borrow and each and everyone acts as the watchdog of the other. In this kind of lending each member is guarantee of the other and this case no asset collateral is required (Helms, 2000).

Group lending makes a lot of sense for MFIs because the group methodology is cost effective and the groups provide some level of security to the loans. Chances to an individuals defaulting are minimal because penalties for nonpayment affect all the group members (Muhammad, 2008).

However Rippey (2003) is of the view that group loans create unnecessary charges on borrowers like compulsory savings, contributions towards insurance fund, solidarity funds etc. He instead recommends a three-tier guarantee system. He said if a customer had difficulties in the repayment, other borrowers would help him/her but on the other hand he/she will have to help others who are in the same trouble and this could be quite expensive. He also states that weekly/monthly meetings make borrowers spend more time away from their businesses hence increased time and cost on the borrowers.

Barnes and Kibombo (2002) support the group solidarity policy in that they help to empower clients to acquire skills and knowledge and increase in the number ways they save. They recommend the policy more so in the empowerment of women in acquisition of skills.

Step 5: Monitoring and Delinquency Management.

Kakuru (2001) noted that collection procedures are efforts applied in order to accelerate collections from slow paying customers and to reduce bad debt losses. Collection procedures could be defined for each credit customer. This should be done in an organized manner that will accelerate cash receipts without endangering the relationship with the debtor. And gives a step by step procedure that is essential in collecting arrears from slow paying customers and these include; reminders, final write-off, insuring debtors, and factoring of debtors.

The loan process under microfinance institution doesnt stop with disbursement but goes on until it is fully paid off by the customer. The Banking officer is supposed to keep monitoring the client to see whether loan extended to the customer does indeed make an improvement on the customers Business and welfare (Cohen, 2001).

The banking officer is supposed to carry out continued evaluation of the customers Business and make reports back to bank on the progress of the Business. It is at this stage that banking officer also carries out collections and constant reminders to those customers who are failing to pay their loan installments. Reminders are made to customer at every stage of default until when the client reaches a stage and fails completely to pay off the loan. At this stage the Bank officer must advice the Bank manager whether to dispose of collateral security or advice the guarantors in case of group security to pay for the client (Bategeka, 2001).

Collection procedures of most Banks have been criticized on how defaulting customers have been handled. Many clients have complained about the rigorous repayment policies many MFIs employee. Many clients have lost rather than benefited from borrowing. Land and property have been disposed off due lack of payment without proper analysis of why clients default. Some clients have been made to pay for group members who default (Banya, 2003).

2.2 Benefits derived by small scale businesses from micro finance institutions.Lease Financing

Leasing has been an alternative means of financing capital investment of Small businesses with minimum initial outlay. In Uganda, the industry is still too small and young comprising of a few leasing companies. However most microfinance institutions have taken up this product in form of Micro-leasing. Machinery in form of agro-processing, ploughs, milk coolers, tracks, solar equipment and motor cycles are being provided under to small business owners (Kikonyogo, 2005).

It has become increasingly more common in recent years for companies to lease equipment. Each leasing agreement needs to be read through carefully to understand the terms and conditions within said lease. Typically a lease can run anywhere from one to five years. Most equipment necessary in commercial businesses today, including technical equipment, can be leased. Some leases provide an option to then purchase the equipment at substantially less money when at the end of the term of the lease. By leasing equipment, if structured properly, you can maintain your credit availability, as the lease debt does not have to be considered a direct liability on your financial statements. This is advantageous, as it does not limit your ability to borrow from lending sources (Kisaame, 2003).

Leasing is playing a major role in the modernization of the economy via technology transfer,

efficient marketing and production methods especially in the areas of transportation, primary

Processing and cottage industries. Increased production, improved efficiency and value added

processing of agricultural commodities lead to improved incomes. Support to small enterprises

will result in increased production, the creation of value added products, especially those related

to agriculture, and reduce wastage and loss through increased efficiency. The resulting

improvement of primary product producer, most often women in rural areas, incomes will

stimulate economic growth and better living standards (Opondo, 2003).

However not so many small businesses have benefited from lease financing in Uganda. It is a costly product requiring a lot of capital, most banks have often provided machinery which hasnt been appropriate for most small Businesses around. The payment process a lot has been difficult to comprehend moreover leases come with high Value Additional Tax. The breakage rate of most machinery imported is also too high moreover spare parts and technical knowhow of operating these equipments is also had to come by (Nair, 2006).

Venture Capital Financing

According to Margret Kigozi (UIA 2010) Venture capital has become an established investment vehicle in developed economies and is becoming increasingly popular in Uganda today. Venture capital involves the provision of investment finance to Small businesses in the form of equity or quasi-equity instruments not traded on a recognized stock exchange. It is long- term risk finance whose primary return to the investor is capital gains rather than income. Venture capital investors actively get involved in the management of the companies that they invest in to ensure the success of the venture.

Guarantee Schemes offered by insurance, as well as banks to ease access to credit facilities. Government programs, Regional trade finance being provided by the regional banks offering mainly medium to long term financing and African Development Bank (ADB). International trade finance being offered as refunds to programs that involved cross border trade between designated nations, notably, pro-invest under the European Union (ABID equity service guide, 2008).

Venture capital is an important source of funding for start-up and other companies that have a limited operating history and dont have access to capital markets. A venture Capital firm (VC) typically looks for new and small businesses with a perceived long-term Growth potential that will result in a large payout for investors. Venture capital can be out sourced from individuals and companies but the biggest source of Venture capital is usually the bank (Obwona, 2009).

However in Uganda its hardly likely for an enterprise to source startup capital from a commercial Bank. Most financial institutions are willing only to risk their money with well established companies that have long existence where it will have a minimum risk. Individuals or companies that are just starting will not be easily funded for fear of collapsing because they havent been tried. Many individuals however smart their ideas may be will not get funds from a Bank unless they have operated for more than six months have sound financial statements and good security (Hisali, 2006).

Working Capital

Clients are able to get working capital to run their day today activities. Loans extended to customers as term loans or overdraft facilities help customers to have funds to purchase stock for their businesses, pay workers and other running costs involved in the running of Businesses. Small Businesses are faced with the problem of little working capital that most of them close before celebrating their first birthday. With microfinance institutions small Businesses have taken up this advantage and are borrowing to finance their day today activities (Okumu, 2001).

Working capital includes cash and all those current assets that can easily be converted to cash used for the day today running of business. Working capital is the life blood of all businesses. All businesses depend on it to purchase stock, pay workers, pay taxes and many other expenses (Balunywa, 2003).

Savings facility

Microfinance institutions have opened up and encouraged the savings culture in Uganda. The culture of saving was uncommon most people preferring to spend what they earn and others saving it in form of assets like land and domestic animals (Arbuckle, 2002).

The banking sector catered for a specific middle class and had no room for the rural poor and small income groups who operate small Businesses. Today many farmers and small petty traders can be able to save their earning with microfinance institutions which encourage their participation (Nsubuga, 2010).

They have less transactions costs and are within easy reach of the customer. Small amounts can be accepted unlike commercial banks that set a minimum balance. A variety of Flexible savings products are also available on the market for the customer. Products thats are tailored for all customers like women groups, old and retired, children and institutions are all provided on the market (Jaramogi, 2002).

A variety of products are offered under the savings scheme Drive. Today many microfinance institutions offer savings products tailored to the common man. Small enterprises can save as little as 500/= on their accounts. Several accounts like savings, current, fixed deposits and many other are operated to encourage savings. Several individuals are catered for to include children, the elderly on pension schemes and even farmers have accounts to suite them (Twimukye, 2009).

However not all has been well for savings customers. Many customers have complained of high Bank charges, unexplained interest rates which dont favor the customer, limited accessibility to the customers funds and too much documentation that doesnt favor the illiterate customer. This has forced many small income earners to save the money in form of Assets like land and cattle (Ssewanyana, 2005).

Money Transfer

Small businesses are able to receive and send Money as a service provided by Microfinance institutions. MFIs are registered members of money Transfer institutions like SWIFT, Western union and money gram. MFIs also Transfer money for their customers from one branch to another. Small Businesses have benefited from this product in that clients dont have to move with large sums of cash to carry out Business. Customers are able to get money from relatives and customers living abroad through methods such as western union and Money gram (Sennoga, 2011).

Money Transfer remittances are increasingly becoming a significant source of Development finance in Uganda which had a recorded amount of remittances equivalent to 5 percent of Gross domestic product in 2009 (World Bank report, 2011).

Users of money transfer services in Uganda include individuals, traders, firms, nongovernment organizations (NGOs) and others. However, research shows that the market for money transfer services in Uganda is underserviced (Millinga,2001).

Uganda receives about 4 percent of remittances to Sub-Saharan Africa. In the period 200010, Uganda experienced a significant growth in remittances from US$299 in 2003 to US$773 (World Bank 2011).This increase is mainly attributed to the growing number of Ugandans working abroad, loosening of the foreign exchange regulatory regime, and the adoption of new remittance technologies that helped to reduce transfer costs and increase competition in the market. Outward remittances from Uganda also increased during the same period fromUS$182 million in 2003 to US$463 million in 2009 .Inward remittance volumes depicted a marked decline in 2009, possibly because of the fragile labor markets, global financial crisis, and the increased scrutiny of migrants without proper documentation in destination Countries.

The Uganda National Household Survey 2005/2006 (Uganda Bureau of Statistics 2006) shows that only 2 percent of Ugandans receive remittances from abroad, with the highest proportion of remittances going to Kampala. Bank of Uganda study indicates that the Ugandan population receives money from abroad. And the survey data indicates that 42 percent of all inward international remittances to Uganda originated from North America. Overall, the United Kingdom tops the list of remittance senders to Uganda, followed by the United States of America.

2.3 challenges faced by small businesses in accessing and maintaining the loans.

Access to financial services is generally cited as the main constraint for small scale businesses in Uganda. In addition, compared with other types of companies, small scale businesses in Uganda have difficulty in accessing finance. Large, well-capitalized companies rarely have any problem,

Small scale businesses have limited access to capital and financial services needed to meet their working and fixed capital needs (Schmukler 2008).

According to the Private Sector Foundation of Uganda the difficulties in accessing financing from formal sources are due to the high cost of finance, poor information sharing between banks and small scale businesses, lack of acceptable collateral, limited sources of long-term finance, and insufficient depth of the financial sector.

High cost of financing;

The high cost of finance and limited access to credit remain key impediments to private sector growth in Uganda. Commercial banks' average lending rates have been over 23% for the past three years. These rates compare unfavorably with those of Ugandas neighboring countries. Very few private businesses in Uganda can achieve an internal rate of return as high as 25% to justify borrowing from the Uganda's commercial banking sector (Ssendaula, 2002).

Banks have all sorts of charges when a customer borrows money. A customer has to bare all the costs of processing a loan. Costs such as Loan processing fees, Valuations and other costs involved. This together with high cost of doing business has rendered small businesses inefficient (Mugume, 2001).

The studies carried out have indicated that actually not so many small business operators have benefited from microloans acquired through MFIs. Many have had to repay loans that have left businesses collapsed. Borrowings at high interest rates have not matched with the rate of return. Clients have had to lose their property due to failure to loans and others have simply closed (Kasekende, 2003).

The methodology of group lending in order to get capital to small income group has not helped much. Many customers complain of having to pay for the group members who default on payment, members are forced to save which affects business also. Others complain of mandatory group meetings that affect business because they are time consuming. Moreover the methods of collection employed by most MFIs are often brutal and dehumanizing (Kikonyogo, 2000).

However despite the high costs of borrowing, it seems the only sure way for most businesses to acquire working capital for their ventures is through banking. The government however needs to set up regulations that will favor the borrower. There is need to set up community based savings Corporative schemes to help bring down the cost of lending (BOU report,2008).

Lack of adequate information;

Inadequate information escalates the cost of borrowing and constrains access to the required credit. Banks often do not supply all the required information to the small borrowers, except the lending rates that is; other fees are not mentioned. When these are added up, the cost of borrowing escalates. On the other hand, small borrowers do not supply all the information required by banks, thereby constraining their own access to credit (Micco, 2005).

Information is key in all forms of businesses, however most small business lack proper record keeping. Informal exist of business without training in management skills renders most small business inefficient. No proper books of accounts are maintained and banking records are usually scanty. MFIs too are not the best institutions in providing information to their customers. Basic information like interest rates is what is usually provided (Arden, 2003).

Information is usually passed on to customers through group meetings. These meetings are usually held periodically to pass down vital information. Some MFIs are known to teach new customers. This involves lecturers in which information is passed down. This is encouraged since most customers especially peasants and small business owners tend to be illiterate and have little or no knowledge about banking (Bagazonzya, 2003).

Lack of formal Collateral

Many banks, particularly the transnational ones, do not accept collateral outside a 25 kilometer radius of the city centre. Even for urban-based small scale businesses, this condition is a severe constraint. It has been suggested that banks could salvage the small borrowers, but the financing requirements of small scale businesses are beyond the limits of many banking institutions (Aung, 2008).

In addition, the very short-term nature of loans, coupled with the high interest rates, makes banks unsuitable as a funding mechanism for financing in this sector. Moreover not so many small Business owners have any form of collateral. Most are urban and pre-urban poor strangling to survive and havent acquired property to use in Banks as collateral (Kakuru, 2002).

Collateral security can be in form of land, insurance guarantees, share certificates or term deposit certificate. However given the condition of small business owners it is not likely that they will have the collateral required. And those who seem to have land it is usually family owned or even not titled making it unsuitable to use as collateral (Keough, 2002).

The proposed form of collateral for some MFIs has been Group lending methodology were each member guarantees the other and therefore acts as security for the other. This has worked for the poor as a solidarity group. However the set back of group lending methodology has been with the members themselves. Members have had to pay for those who fail to pay and others have lost their savings to the banks as a recovery procedure (Mwanje, 2003).

Few available financial institutions;

Uganda's financial sector is dominated by commercial banks, with a limited number of development banks. As a result, small scale businesses frequently use the more readily available short-term financing instruments for medium- to long-term investments. In addition to reducing their profitability and constraining their ability to pay, this situation diverts investment decisions away from capital-intensive ventures (Uganda Bureau of Statistics, 2003).

Although Uganda today the banking sector has grown from a handful banks in the 1980s to so many banks. Still banking is not accessible to the majority. Most banks are based in urban and pre-urban areas were the common man in rural areas has not fully benefited from it (United Nations Statistics Division, 2004).

Moreover the few available rural MFIs are inefficiently managed with high closure rate in that very few people have confidence in them. The bigger banks are not tailored on the other hand to meet the needs of small businesses and farmers (Mbaguta, 2002).

Studies have shown that skill MFIs have not catered for the poor man with smaller incomes. The credit facilities are extended to only those that have businesses in a particular range of turnover and their doors are open to those with ability to save. Those with very little income are less encouraged to benefit from the products provided by the banks (Ssendaula, 2002).

Limited Financial Products provided by Banks;

The business needs of enterprises are generally varied. For these needs to be adequately addressed by the financial sector, the latter must be equally diverse. This calls for a wide variety of long-, medium- and short-term products, and a healthy composition of debt and equity instruments, as well as those instruments specifically tailored to the unique needs of certain sectors. The financial sector in Uganda is narrow with only a few standard products, and this limits the options available to small scale businesses (Micco, 2005).

The products provided by most banks centre around loans and savings. Products provided are limited and not suited to most business owners. Most banks are inflexible and still run on the old principles of banking. Banking today like any other business needs to tailor its products to suite the customers needs (Snyder, 2000).

However today competition has enabled banks to diversify their products. There many products that one can walk in a bank and demand. Products like Mortgage and land acquisition financing, leasing, money transfer, school fees loans and many more other products have been made available to the customer.

Informal Operations;

Relative to large firms, small scale businesses are more likely to be informal, particularly in developing countries. This not only worsened the situation, but it also poses additional obstacles and risks to small scale businesses lending. For example, banks cannot lend to small scale businesses as much as would be warranted if firms do not report reliably their full financial activity on their financial statements. Furthermore, informality implies that the firm has unrecorded, contingent liabilities to the government and to its own employees (Kasekende, 2000).

Small businesses world over are the greatest employers and the engine for development. However in Uganda small businesses are usually inefficiently managed, families owned and operate informally. Few of them have registered and have tax returns. The majority however are too small with very low turnover which limit bank support in terms of financing (Ishengoma, 2008).

This also limits there bargaining power. They are hardly reorganized and most not likely to benefit from government programs. There death rate is also usually very high. (Murinde, 2006).

2.4 Conclusion

Finance plays a central role in enterprise development but this is only possible if it is accessible and reasonably priced. While small businesses are increasingly seen as playing a strategic role in economic growth and development, they suffer from liquidity problems arising from their small nature of operations. Furthermore, they usually experience difficulties in accessing loans from the banking sector and other financial intermediaries to finance working capital and to provide credit for smooth day to day operations.

CHAPTER THREE:

METHODOLOGY

3.1 Introduction

This chapter presents the methodology that was used to collect data in this study. It describes the research design, area where the study was carried out, population, subject sample, instruments and procedure for data collection, sampling procedure, and methods of data processing and analysis.

3.2 Research Design

The researcher used quantitative method. This design is appropriate in investigating relationship between the variables.

3.3 Area of the study

The study was carried out in Owino market and Mengo-Kisenyi area, Kampala district Uganda. The main economic activity in the area is small scale businesses and petty trading.

The Area has many microfinance institutions like FINCA, Trust, Opportunity Uganda, Centenary Bank and Pride among others which provide financial services to the community.

3.3.1 Study population

Data was collected from different groups of respondents. The target population comprised of proprietors of small businesses in Owino, Mengo Kisenyi and staff of FINCA Uganda Kampala.

Table 2: Sample size and sample selection

Category of Population

Sample size

Proprietors of small businesses

80

Staff of FINCA Uganda

20

Total

100

3.4 Sampling procedure

Purposive sampling was used to select respondents who are knowledgeable about the services of MFIs and management of Small businesses. The researcher also employed random sampling to the respondents to remove bias.

3.5 Data sources

The study used both primary and secondary sources, with much emphasis on primary data.

3.5.1 Primary data

This was obtained through use of questionnaires and discussions with relevant stakeholders to the study.

3.5.2 Secondary data

Data was obtained from records of FINCA Uganda, journals, textbooks as well as Internet.

3.6 Research instruments

Data was collected with the use of questionnaires formulated and directed to the sample subjects. Relevant data collected was quantitative in nature.

It will utilize a Five (5) point Likert scale ranging from (SA)Strongly agree,(A)Agree,(NS)Not sure,(D)Disagree and (SD)Strongly disagree.

3.7 Validity and Reliability of instruments

To ascertain the validity and liability of the instruments used to collect data, a test was carried out. The questions were tested using a sample to eliminate questions that are vague and uncoordinated. The research instruments were tested using the content validity index (CVI) and a cronbach Alpha co-efficient.

A CVI of greater or equal to 0.50 confirms to the questions that were taken and relevant to the study. To be liable cronbach Alpha co-efficient with values equal or greater than 0.50 were also considered relevant. This was done to build confidence that the instrument will yield good results.

3.8 Data analysis and processing

After data collection it was edited, coded, classified, tabulated and analyzed and there after simple descriptive statistics frequencies and percentages were computed to help in the discussion of findings.

Data was analyzed using frequency tables and graphs and relationship were obtained using SPSS package.

CHAPTER FOUR

PRESENTATION, INTERPRETATION, ANALYSIS, AND DISCUSSION OF FINDINGS

4.0 INTRODUCTION

This chapter presented the findings of the study that involved a sample of One hundred respondents. The study was aimed at establishing the contributions of Micro Finance Institutions towards the success of Small scale businesses. The research was carried out at Owino Mengo Kisenyi, the leading section of Small scale business persons in the city centre of Kampala.

The findings presented here are derived from systematic analysis and interpretation of the data and information obtained from the field.

4.1 Discussions of Findings

Demographic Characteristics of the Respondents.

Table 3: Category / Type of the respondent

Type

Frequency

Percentage

Business owner

66

66.0

Banking officer

34

34.0

Total

100

100.0

Source: Primary

Most of the respondents were business owners as the table above shows at 66% and the minorities were banking officers at 34%. This is an implication that there are more small business entrepreneurs than banking officers in circular.

Table 4: Respondents Bio-Data by Gender

Gender

Frequency

Percentage

Male

35

35.0

Female

65

65.0

Total

100

100.0

Source: Primary

Table 2 above revealed that more female respondents (65%) were interviewed than male (35%). This signifies a high number of female participants who turn up for the engagement in small businesses around the area of the case study Owino .

Figure 1: Academic level of the respondent

The above figure shows the academic level of the respondents where most of them at 75% are certificate holders of which these are the business owners and 25% have a University degree and these are the banking officers.

Table 5: Marital status of the Respondents

Status

Frequency

Percentage

Married

58

58.0

Single

40

40.0

Widowed

2

2.0

Total

100

100.0

Source: Primary

Findings showed that most of the respondents are married (58%), some are still single (40%) and only 2% of the respondents are widowed. That is to say, theres a lot of responsibility amongst the majority of the respondents and they have to sustain their families hence the establishment of small businesses and other activities to earn a living.

Figure 2: Age Bracket of the Respondent

Most of Respondents at 70% were between the age of 28-35 years, 14% were of 36-43 years and 12% were between the age bracket of 20-27 years. All respondents were proven to be youth and energetic with determination to work and meet their essential welfare.

Table 6: Working experience of the respondents

Period

Frequency

Percentage

Less than a year

10

10.0

1-3 yrs

40

40.0

4-6 yrs

50

50.0

Total

100

100.0

Source: Primary

Table 4 has it that 50% of the Respondents have worked for between 4-6 years, 40% have been in the field for a period of between 1-3 years and only 10% have worked for less than a year. This reveals that both business owners and banking officers hold experience in the field of working and have knowledge about the business curriculum.

4.2 Credit procedures used by Micro Finance Institutions

Table 4.2.1: Descriptive Statistics showing the interview process

ITEM

N

MIN

MAX

MEAN

S.D

Obtaining a loan for a business is important for business growth.

100

1

5

4.25

1.140

Books of accounts are required before extending credit.

100

1

5

4.34

.945

Willingness to pay and settle obligations is important in credit.

100

3

5

4.85

.479

It is important to access Character in credit in order to avoid fraud.

100

1

5

4.29

1.104

Ones financial position is a determinant to repay a loan.

100

1

5

4.05

.757

Valid N (likewise)

100

Source: Primary source

Using the Likert scale of 1-5, it was found out that on the interview process, respondents agreed to some items. Respondents revealed that willingness to pay and settle obligations is important in credit with (mean= 4.85) and the books of accounts are required before extending credit (mean=4.34) as its very important to access character in credit in order to avoid fraud with (mean=4.29). In addition, obtaining a loan for a business is important for business growth (mean=4.25). However, ones financial position is a determinant to repay a loan with (mean=4.05).

Table 4.2.2: Descriptive Statistics showing Loan application process

ITEM

N

MIN

MAX

MEAN

S.D

All borrowing customers need to fill loan forms

100

1

5

4.25

1.140

Before extending a loan the purpose is key

100

1

5

4.34

.945

Ones Credit history is an indicator of repayment capacity

100

3

5

4.85

.479

It is important to carry out identification checks on all borrowing customers

100

1

5

4.29

1.104

The type of business needs to be known to establish the credit need

100

1

5

4.05

.757

Valid N (likewise)

100

Source: Primary source

Analyzing from findings on loan application process, it was found that ones credit history is an indicator of repayment capacity (mean=4.85) and the purpose of the loan is the key before its extended to the borrower (mean=4.34). And its very important to carry out identification checks on all borrowing customers (mean=4.29). In addition, all borrowing customers need to fill loan forms (mean=4.25) where as the type of business needs to be known to establish the credit need.

Table 4.2.3 : Descriptive Statistics showing the appraisal process

ITEM

N

MIN

MAX

MEAN

S.D

Banking officials Made visits to both your home and business

100

1

5

4.05

.757

It is important to keep business records

100

3

5

3.75

.472

All Banks carry out checks of business Records in order to extend a loan

100

1

5

4.69

.873

Appraising a customer tests a customers Capacity

100

1

5

4.86

1.417

All microfinance institutions train borrowing customers in business management

100

1

5

4.54

.881

Source: Primary

According to the findings, it showed that appraising a customer tests a customers capacity with (mean=4.86)

because all banks carry out checks of business records in order to extend a loan (mean=4.69). It was found out that all microfinance institutions train borrowing customers in business management (mean=4.54) then after wards the banking officials make visits to both the customers home and business (mean=4.05). Besides, its important to keep business records (mean=3.75)

Table 4.2.4: Descriptive Statistics showing Loan processing and approval

ITEM

N

MIN

MAX

MEAN

S.D

Banks process customer loans in time as a marketing tool

100

4

5

4.88

.288

Saving by borrowing customers usually helps customers to pay off their loans in time.

100

3

5

4.15

1.774

Borrowing in a group helps poor people with no security to obtain credit

100

1

5

4.49

.628

Banks tend to give the same amount as requested by the customer to boost their businesses

100

3

5

4.58

.655

Loans usually meet the financial needs of the customers in the running of business

100

4

5

3.73

.327

Source: Primary

Results showed that banks process customer loans in time as a marketing tool with (mean=4.88) and they tend to give the same amount as requested by the customer to boost their businesses (mean=4.58). However, borrowing in a group helps poor people with no security to obtain credit with (mean=4.49) while saving by the borrowing customers usually helps customers to pay off their loans in time (mean=4.15). More so, loans usually meet the financial needs of the customers in the running of business (mean=3.73).

Table 4.2.5: Descriptive statistics showing Monitoring and Deliquency Management

ITEM

N

MIN

MAX

MEAN

S.D

Visits by bank officials after loan is given to you are mainly to boost confidence

100

3

5

4.15

.520

Banks tend to train and advice customers on the best investment options

100

1

5

4.49

.859

Notification to a defaulting customer is important

100

3

5

4.58

.516

Customers are sometimes unfairly treated in cases of default

100

1

5

3.73

.694

Several customers have lost their property to banks due to default

100

1

5

4.06

1.205

Valid N (likewise)

100

Source: Primary

From the table above, it showed that respondent agreed that notifying a defaulting customer is an important aspect with (mean=4.58) because banks tend to train and advice customers on the best investment options (mean=4.49). In addition, bank officials visit their customers after a loan is given in order to boost confidence (mean=4.15) though several customers lose their property to the bank due to default with (mean=4.06). However, customers are some times unfairly treated in cases of default.

4.3 Benefits of Financial institutions to businesses

Finding on the benefits of Financial institutions to businesses were evaluated in terms of lease financing, venture capital, working capital, saving facilities and money transfers.

Table 4.3.1: Descriptive statistics showing Lease financing

ITEM

N

MIN

MAX

MEAN

S.D

At times you obtain leasing as an alternative means of financing capital investment of Small businesses.

100

4

5

4.91

.288

Lease finance helps most businesses acquire the right machinery for their businesses

100

1

5

4.41

1.774

Most banks ask customers to contribute a portion of the cost of machinery

100

3

5

4.64

.628

At times a lease is given to group

100

1

5

4.43

.655

Business improved after a lease loan

100

2

5

4.72

.587

Valid N (likewise)

100

Source: Primary

Findings in the above table indicated that obtaining a lease can be an alternative means of financing capital investment of small scale businesses (mean=4.91) although most banks ask customers to contribute a portion of the cost of machinery with (mean=4.64). However, businesses improve after a lease loan (mean=4.72) though at times a lease is given to a group with (mean=4.43), it helps most businesses acquire the right machinery for their operations (mean=4.41).

Table 4.3.2: Descriptive statistics showing venture capital

ITEM

N

MIN

MAX

MEAN

S.D

At times Banks extend long term financing to their customers

100

1

5

4.25

1.140

Few Banks extend startup capital to borrowing customers

100

1

5

4.34

.945

All banks require security from customers as collateral to the facilities extended to them

100

3

5

4.85

.479

Loan repayment period given was appropriate

100

1

5

4.29

1.104

Venture capital is a product for bigger incorporated companies

100

1

5

4.05

.757

Valid N (likewise)

100

Source: Primary

In general, all respondents strongly agreed that all banks require security from customers as a collateral to the facilities extended to them with (mean=4.85), where as a few banks extend start up capital to borrowing customers (mean=4.34). Loan repayment period given is relatively appropriate with (mean=4.29) and at times banks extend long term financing to their customers (mean=4.25) because venture capital is a product for bigger incorporated companies (mean=4.05).

Table 4.3.3: Descriptive statistics showing Working capital

ITEM

N

MIN

MAX

MEAN

S.D

Microfinance institutions have helped a lot of business to grow

100

3

5

4.86

.472

Microfinance institutions offer short term financing like overdraft facilities to their customers

100

1

5

4.69

.873

Microfinance institutions encourage small businesses to borrow in groups

100

1

5

3.75

1.417

The cost of borrowing is sometimes very expensive to small businesses

100

1

5

4.54

.881

It is much easier to obtain working capital loans from microfinance institutions

100

4

5

4.88

.327

Valid N (likewise)

100

Source: Primary

Respondents agreed that its much easier to obtain working capital loans from microfinance institutions with (mean=4.88) because their main objective is to help the small scale business sector expand or grow (mean=4.86). More so, microfinance institutions offer short term financing like overdraft facilities to their customers (mean=4.69). However, the cost of borrowing is some times very expensive to small businesses (mean=4.54) hence encouraging small businesses to borrow in groups (mean=3.75).

Table 4.3.4: Descriptive statistics showing savings facility

ITEM

N

MIN

MAX

MEAN

S.D

Microfinance institutions have a variety of savings products

100

3

5

4.15

.520

Customers always have access to their savings

100

1

5

4.49

.859

Microfinance institutions offer ATM services

100

3

5

4.58

.516

Savings accounts have a lot of bank charges

100

1

5

3.73

.694

Customers are allowed to save as little as possible of their money

100

1

5

4.06

1.205

Valid N (likewise)

100

Source: Primary

Findings showed that respondents agreed with the fact that microfinance institutions offer ATM services with (mean=4.58) in that customers always have access to their savings (mean=4.49). In addition, microfinance institutions have a variety of savings products (mean=4.15) but customers are always allowed to save atleast a little possible of their money with (mean=4.06), However, banking officers disagreed that savings accounts have a lot of bank charges (mean=3.73).

Table 4.3.5: Descriptive statistics showing money transfer services

ITEM

N

MIN

MAX

MEAN

S.D

Banks allow customers to receive money from relatives abroad through their branches

100

4

5

4.91

.288

Payments to suppliers can be made through the bank

100

1

5

4.94

1.774

Money transfer at your branch is fast and reliable

100

3

5

4.64

.628

Money transfers are costly ventures

100

1

5

4.43

.655

Language and terms used in money transfer is often too sophisticated

100

2

5

4.72

.587

Valid N (likewise)

100

Source: Primary

Analyzing from table 4.3.5, respondents agreed that payments to suppliers can be made through the bank (mean=4.94) which facilitates convinience and reliability. As well, banks allow customers to receive money from relatives abroad through their branches with (mean=4.91) though the language and terms used in money transfer is often sophiscated to some customers (mean=4.72), money transfer at any branch is fast and reliable (mean=4.64). However, statistics showed that money transfers are costly ventures (mean=4.43),

4.4The relationship between the Contribution of Micro Finance Institutions and the Success of Small scale Businesses.

Table 4.4.1: Correlation between the Contribution of Micro Finance Institutions and the Success of Small scale Businesses.

SHAPE \* MERGEFORMAT

From table 17, Having used the Statistical Package for Social Scientists (SPSS), Spearmans correlations revealed that the relationship between Contribution of Micro Finance Institutions and the Success of Small scale Businesses was found to be significant where r=0.876**, p=0.000. This implies that the Contribution of Micro Finance Institutions influence the Success of Small scale Businesses in a positive response.

CHAPTER FIVE

SUMMARY DISCUSSION OF FINDINGS, CONCLUSIONS AND RECOMMENDATION.

5.1 Introduction

The chapter deals with summary conclusions, recommendations and issues for further research basing on the objectives of the study.

5.2 Summary of the findings of the study with respect to study objectives5.2.1 Procedures Micro Finance Institutions use to provide credit

Findings revealed that through the interview process, the willingness to pay and settle obligations is important in credit, This is in line with the way how vital information is gathered about the customers capacity to repay the loan (Feschijan, 2008). According to Ralph Chaffee (2007) the interview process gives basic information about the customer though not adequate data that is required in loan assessment.

Findings showed that the client is given a loan application to be filled usually with the help of a credit officer (Jennifer ONeil, 2002). However, this will give an overview of the applicant. Most banks are able to access capacity based on the information a customer puts down on a loan application (Kulabako, 2010). And it is this stage that the information needed to determine eligibility for the loan will be gathered (AMFIU report 2005). The most important part of the application is the purpose of Borrowing.

Findings revealed that banking officers make loan appraisals and field visits to both home and business to ascertain permanency of residence, existence of Business, nature of Business and other factors that require physical verification (UBI report, 2002). This relates to Physical check of sales records like sales day book, purchases, bank statements and Debtor and Creditor Records are carried out according to the findings of (Bagyenda, 2008).

Findings showed that loan processing and approval is the most important stage in loan procedure process, this is because at this stage the loan processing time, interest rate and nature of security are considered (sempijja,2011). It was also found out that most microfinance institutions process and approve loans in form of group solidarity since most microfinance customers are poor people with no formal security. In this kind of lending each member is a guarantee of the other and this case no asset collateral is required according to (Helms, 2000). In addition, chances to an individuals defaulting are minimal because penalties for nonpayment affect all the group members (Muhammad, 2008). However, Rippey (2003) is of the view that group loans create unnecessary charges on borrowers like compulsory savings, contributions towards insurance fund, solidarity fund.

Findings showed that notification to a defaulting customer is important. This relates with Kakuru (2001) who noted that monitoring and deliquency management are efforts applied in order to accelerate collections from slow paying customers and to reduce bad debt losses. Findings also revealed that the Banking officer is supposed to keep monitoring the client to see whether loan extended to the customer indeed makes an improvement on the customers business and welfare (Cohen, 2001). Therefore, at this stage the Bank officer must advice the Bank manager whether to dispose of collateral security or advice the guarantors in case of group security to pay for the client (Bategeka, 2001). Findings continued to show that Some clients have been made to pay for group members who default (Banya, 2003).

5.2.2 Benefits derived from Micro finance Institutions

Findings showed that leasing has been an alternative means of financing capital investment of Small businesses with minimum initial outlay (Kikonyogo, 2005). In addition, findings revealed that this is advantageous as it does not limit ones ability to borrow from lending sources (Kisaame, 2003). Lease finance helps most businesses acquire the right machinery for their businesses, resulting to improvement of primary product producer, most often women in rural areas, incomes will stimulate economic growth and better living standards according to (Opondo, 2003).

Findings showed that all banks require security from customers as collateral to the facilities extended to them. In addition according to Margaret Kigozi (2010) venture capital is a vehicle for economic development through which businesses acquire equity. It can as well be out sourced from individuals, investment companies and banks. Besides, firms typically look for new businesses with perceived long-term growth potential (obwana,2009).

Findings revealed that it is much easier to obtain working capital loans from microfinance institutions. Loans extended to customers as term loans or overdraft facilities help customers to have funds to purchase stock for their businesses, pay workers and other running costs involved in the running of Businesses. Findings of (Okumu, 2001), also showed that microfinance institutions have helped a lot of business to grow where by Working capital is the life blood of all businesses. All businesses depend on it to purchase stock, pay workers, pay taxes and many other expenses (Balunywa, 2003).

Findings proved that Microfinance institutions offer savings facilities because the culture of saving was uncommon most people preferring to spend what they earn and others saving it in form of assets like land and domestic animals (Arbuckle, 2002). Moreover, the banking sector catered for a specific middle class and had no room for the rural poor and small income groups who operate small Businesses. Today many farmers and small petty traders can be able to save their earning with microfinance institutions which encourage their participation (Nsubuga, 2010).

Findings showed that customers are able to get money from relatives and customers living abroad through methods such as western union and Money gram (Sennoga, 2011). This relates with Money Transfer remittances that are increasingly becoming a significant source of Development finance in Uganda which had a recorded amount of remittances equivalent to 5 percent of Gross domestic product in 2009 (World Bank report, 2011).

5.2.3 The relationship between the Contribution of Micro Finance Institutions and the Success of Small scale Businesses.

Findings showed that there is a strong positive relationship between the contribution of Microfinance institution and the Success of small scale businesses at Spearmans correlation coefficient r=0.876**, p=0.000. This implies that the Contribution of Micro Finance Institutions influence the Success of Small scale Businesses in a positive response 87.6% and 12.4% by other factors. For example, The majority however are too small with very low turnover which limit bank support in terms of financing (Ishengoma, 2008). and they are hardly reorganized and most not likely to benefit from government programs.

5.3 Conclusions of the study.

It was concluded that procedures used by Micro Finance Institutions to provide credit, depend on ones willingness to pay and settle obligations, credit history as an indicator of repayment capacity and the key purpose of the loan. Besides it is important to carryout identification checks on all borrowing customers while the books of account are required before extending credit.

It was also concluded that Micro Finance Institutions have benefited the small scale business through a variety of products where by customers always have access to their savings, payments to suppliers can be made through banks and customers can receive money from abroad through their branches. In addition, its much easier to obtain a working capital loan from Micro finance Institutions. However, not so many products are offered to customers in a way that banks require a security to extend credit facilities to their customers.

It was concluded that small businesses face a challenge in accessing and maintaining loans as a result of high cost of financing, lack of adequate information, lack of collateral security, few financial institutions and limited products along side informal operations which limit them from accessing credit.

Nevertheless there is a positive relationship between the Contribution of Micro Finance Institutions and the Success of Small scale Businesses with a correlation coefficient r=0.876.5.4 Recommendation

From the study, it was realized that the Financial sector in Uganda is narrow with only a few standard products which limit the options available to Small Scale Businesses. The products provided by most Micro Finance Institutions are basically loans and savings. The business operators should acquire loans with flexible and reliable terms and conditions which do not affect the established business operations or their objectives.

The government should encourage investors to set up more Micro Finance Institutions in rural areas so as to bring financial services nearer to Small businesses.5.5 Areas of further research

i. Financial policies and performance of business organizations

ii. Tax subsidies and growth trend in Courier business services

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APPENDIX I: QUESTIONNAIRE

RESEARCH QUESTIONNAIRE

OWNERS OF SMALL BUSINESSES AND EMPLOYEES OF MICRO FINANCE

INSTITUTIONS QUESTIONNAIRE

MAKERERE UNIVERSITY

INSTITUTE OF ADULT AND CONTITUING EDUCATION

P.O BOX 7062 KAMPALA, UGANDA

Dear Respondent,

You are kindly requested to answer the following questions providing information to the best of your knowledge and in its best true sense. The information is purely for academic purposes as a partial requirement for the award of a Bachelor of commerce degree.

The information provided in this questionnaire will be treated with utmost confidentiality.

The research topic is CONTRIBUTION OF MICROFINANCE ON THE SUCCESS OF SMALL BUSINESSES.

SECTION A: BACKGROUND INFORMATION

1. Type of respondent;

Business owner Banking officer

2. Gender:

Male Female

3. Education level

University Degree. Certificate

Diploma

post graduate

4. Marital status.

MarriedSingle Widowed

5. Age bracket

20-27

28-35

36-43

44- Above

6. How long have you been in business?

Less than a year 1-3Years

4- 6Years

7 Years and above

7. Type of business

Retail Wholesale Production vende