NKHOMA UNIVERSITY

FACULTY OF COMMERCE

INVESTIGATING HOW LACK OF CREDIT FINANCE AFFECTS SMALL AND

MEDIUM ENTERPRISES’ PERFORMANCE: A CASE STUDY OF WAKAWAKA
MARKET, LILONGWE.

Project Dissertation

By

ENOCK KAPOTE

Submitted in partial fulfillment as a requirements for the award of the Degree

Of

BACHELOR OF COMMERCE IN ACCOUNTANCY

AUGUST (2021)

i
 INVESTIGATING HOW LACK OF CREDIT FINANCE AFFECTS SMALL AND
MEDIUM BUSINESS ENTERPRISES`S PERFORMANCE IN WAKAWAKA MARKET
IN THE CENTRE OF LILONGWE URBAN DISTRICT

Project Dissertation

By

Enock Kapote
BAC/GEN/0104

Research Supervisor

Mr. Joy Khangamwa

Submitted in partial fulfillment as a requirements for the award of the Degree

Of
BACHELOR OF COMMERCE IN ACCOUNTANCY

AUGUST (2021)

ii
DECLARATION
Declaration by Supervisor
This is to certify that the project work entitled “INVESTIGATING HOW LACK OF CREDIT
FINANCE AFFECTS SMALL AND MEDIUM ENTERPRISES` PERFORMANCE” is a
bona fide work of Mr. Enock Kapote, Registration No. NU/BCOM/0104/2017 submitted in
partial fulfilment for the award of Degree of Bachelor of Commerce in Accountancy of Nkhoma
University under my supervision and guidance. This Project Dissertation is an original one and
has never been submitted earlier elsewhere for the award of any degree.

Name of Research Supervisor: Mr. Joy Khangamwa.

Signature of Research Supervisor.................................................................................................

Date..................................................................................................................................................

iii
Declaration by Candidate
I Enock Kapote hereby declare that this project report “INVESTIGATING HOW LACK OF
CREDIT FINANCE AFFECTS SMALL AND MEDIUM ENTERPRISES`
PERFORMANCE” submitted to Nkhoma University in partial fulfilment of the requirements
for the award of the Degree of Bachelor of commerce in Accountancy is an original academic
writing of my work guided under the supervision of Mr. Joy Khangamwa.
Student Registration No:
Date :
Signature :

iv
ACKNOWLEDGEMENTS
I desire to express my gratitude to various individuals who took part in supporting throughout
my research period. To begin with, Mr. J. Khangamwa deserves to be mentioned for being a
dedicated and supportive supervisor despite his tight schedules. Direction from the supervisor
played a vital role to ensure completion of this work is successful. Secondly, I also wish to
express my heartfelt thanks to my fellow students who actively supported me regardless their
busyness especially the likes of Richard White and Maxwell Zikabuma and of course the entire
fourth year class.
Thirdly, I wish to also express my thanks to business owners at Wakawaka market for
contributing much to the study through responding to the questionnaires I gave despite their
engagements.
Finally, I ought to acknowledge my parents (Mr. And Mrs Kapote), Mr. Raymond Misomali and
Dr. Alan who is now in USA for the financial support, tolerance and encouragement rendered to
me throughout my studies. I cannot forget Mr C. Chisunkha (the dedicated accounting lecture)
my brothers and sisters for their untiring support: Andrew, Alice. Joseph and Dolice. To God be
glory for being in my life at all times.

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DEDICATION
It is my wish to dedicate this work wholly to God for His unending mercy and love to me
knowing to reach this far, it has been God by protecting me from any harm that would lead me
not to get involved in this writing. It is also the same God who stirred the hearts of my parents
and relatives to continually support me financially and encouragement they rendered to me
throughout my study despite their daily needs.

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ABSTRACT
Introduction: Small and medium business enterprises are the driving engine to the success of a
national economy. In Malawi, the importance of the small and medium enterprises cannot be
underestimated. The small scale businesses contribute to social-economic development of
nations in many forms including boosting public revenue collections through various forms of
taxation, provision of goods and services to the general public and more importantly, poverty
alleviation through creation of employment and improving the living standards of the people.
Additionally, small and medium enterprises are the major sources of entrepreneurial skills and
innovations. However, in many developing nations like Malawi, small scale businesses are not
substantially financed which in turn affect their performance. For example, the small scale
enterprises in Malawi are largely owned by women who face financial constraints through credit
accessibility from financial institutions and other lending institutions which has a significant
impact in turn.

Methods: The research employed the use of qualitative and quantitative methods in carrying out
the study. Microsoft Excel and SPSS statistics were used in compiling the quantitative data. 60
questionnaires were distributed in total to SMEs owners under consideration. Stratified sampling
method was used where respondents were grouped according to their business category.

Results: The research findings revealed that majority of SMEs owners intensively rely on
savings as a means of financing their businesses thereby indicating that optimal financing is still
a problem especially when it comes to accessing credit or loan from financial institutions. This is
resulted from lack of collateral security that SMEs owners could use to secure loans.

Conclusion: Small and medium business enterprises are very essential for they stimulate the
improvement of the living standard of individuals and bring about a health economy of a nation.
It is therefore, important for financial institutions and other lending institutions to formulate
lending terms and conditions that will ease credit accessibility to the disadvantaged businesses.

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This includes the reduction of other lending conditions such as collateral so as to ensure many
business owners are interested in applying the loan.

Table of Contents
DECLARATION............................................................................................................................iii

ACKNOWLEDGEMENTS.............................................................................................................v

DEDICATION................................................................................................................................vi

ABSTRACT..................................................................................................................................vii

CHAPTER ONE..............................................................................................................................1

1.0 Introduction............................................................................................................................1

1.1 The background of the study..................................................................................................2

1.2 The statement of problem......................................................................................................3

1.3 The purpose of the study........................................................................................................4

1.4 Research questions.................................................................................................................4

1.5 The scope of the study...........................................................................................................4

1.6 The significance of the study.................................................................................................5

1.7 Limitations of the study.........................................................................................................5

1.8 The operational definitions of the study................................................................................5

1.9The organization of the study..................................................................................................6

CHAPTER TWO.............................................................................................................................7

LITERATURE REVIEW................................................................................................................7

2.0 Introduction............................................................................................................................7

2.1 The imperfect information theory..........................................................................................7

2.2 Empirical literature review.....................................................................................................8

2.2.1 Global perspective...........................................................................................................8

2.2.2 African perspective..........................................................................................................9

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 2.3 Local perspective.................................................................................................................10

2.4 Measuring growth of SMEs.................................................................................................11

2.5 SME challenges to growth...................................................................................................12

2.6 Key determinants of credit accessibility..............................................................................12

2.6.1 Literacy level.................................................................................................................12

2.6.2 Level of income generation by these SMEs..................................................................13

2.6.3 Collateral.......................................................................................................................13

2.6.4 Legal status of the business...........................................................................................14

2.7 Conceptual framework.........................................................................................................14

2.8 Summary of the review........................................................................................................15

CHAPTER THREE.......................................................................................................................16

METHODOLOGY........................................................................................................................16

3.0 Introduction..........................................................................................................................16

3.1 Research design....................................................................................................................16

3.2 Sampling design...................................................................................................................16

3.2.1 Study area......................................................................................................................16

3.2.2 Population......................................................................................................................17

3.2.3 Sample size....................................................................................................................17

3.2.4 Sources of data..............................................................................................................17

3.2.5. Data collection methods...............................................................................................18

3.2.6 Data analysis and the interpretation..............................................................................18

3.3 Reliability and validity tests.................................................................................................18

3.4 Ethical considerations..........................................................................................................19

3.5 Expected outcomes..............................................................................................................19

3.6 The organization of study....................................................................................................19

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CHAPTER FOUR.........................................................................................................................20

PRESENTATION OF THE FINDINGS.......................................................................................20

4.1 Introduction..........................................................................................................................20

4.2 Response rate.......................................................................................................................20

4.3 Background information......................................................................................................20

4.3.1 Gender of respondents...................................................................................................20

4.3.2 Education level..............................................................................................................22

4.3.3 Duration by which the business has been in operation.................................................23

4.4 Credit accessibility...............................................................................................................24

4.4.1 Sources of business financing.......................................................................................24

4.5.1 Adequacy of start-up capital..........................................................................................25

4.5.2 Loan or credit application..............................................................................................26

4.5.3 Whether credit offered improved business performance..............................................26

4.5.4 Rating credit services offered by financial institutions.................................................27

4.6 Collateral..............................................................................................................................28

4.6.1 Collateral and credit accessibility..................................................................................29

Literacy level of entrepreneurs and credit accessibility.............................................................30

Growth of SMEs........................................................................................................................31

4.8.1 Growth of SMEs............................................................................................................32

Total annual sales...................................................................................................................32

CHAPTER FIVE...........................................................................................................................34

DISCUSSION OF THE RESEARCH FINDINGS.......................................................................34

5.1 Key determinants of credit accessibility..............................................................................34

5.1.1 Collateral.......................................................................................................................34

5.1.2 Literacy level of entrepreneurs......................................................................................35

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 5.1.3 Legal status of the business...........................................................................................35

5.1.4 Income level generated by the SMEs............................................................................36

5.2 Growth of SMEs..................................................................................................................37

5.3 Linking the theory with the results drawn from the findings...............................................37

5.4 The extent to which lack of credit affects the business performance..................................38

CHAPTER SIX..............................................................................................................................39

SUMMARY, CONCLUSION AND RECOMMENDATIONS....................................................39

6.1 Introduction..........................................................................................................................39

6.2 Summary of the findings......................................................................................................39

6.3 Conclusion of the study........................................................................................................40

6.4 Recommendation of the study..............................................................................................40

6.5 Suggestion for further study.................................................................................................41

References......................................................................................................................................42

Appendices....................................................................................................................................45

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xii
List of Tables
Table1. 1..........................................................................................................................................2
Table1. 2........................................................................................................................................14
Table1. 3........................................................................................................................................17
Table1. 4........................................................................................................................................21
Table1. 5........................................................................................................................................22
Table1. 6........................................................................................................................................23
Table1. 7........................................................................................................................................24
Table1. 8........................................................................................................................................25
Table1. 9........................................................................................................................................26
Table1. 10......................................................................................................................................27
Table1. 11......................................................................................................................................27
Table1. 12......................................................................................................................................28
Table1. 13......................................................................................................................................29

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List of Figures
Figure 1..........................................................................................................................................22
Figure 2..........................................................................................................................................24
Figure 3..........................................................................................................................................29
Figure 4..........................................................................................................................................30
Figure 5..........................................................................................................................................33
Figure 6..........................................................................................................................................34

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CHAPTER ONE
1.0 Introduction
Small and medium enterprises (SMEs) are often defined by number of employees, total capital,
total sales turnover, or total asset. According to World Bank (2013), small and medium
enterprises (SMEs) are defined as the enterprise that has relatively small share (in terms of,
number of employees, sales turnover ownership and assets) of their market place. Businesses that
are managed by owners or part owners in a personalized way and not through the medium of
formalized management structure and are independent in the sense of forming a large business. It
is the dream of every small scale business owners to sustain growth objective of his or her
business through the injection of capital that helps to buy new technologies in order to ensure the
business continue to survive and grow (Mwongera, 2014). These small scale businesses play a
vital role in economy of a country, both developed and developing nations as well as to the
individuals for they provide employment and of course improve the living standards of
individuals to both employers and employees.
Survival and growth of these SMEs are among struggles that they face mostly. A working paper
by Wairimu (2015) stated that less than 5% SMEs go beyond their first year of existence. This
shows that many businesses do not manage to attain their goals and objectives for they lack
financing that can help them develop the business hence deterring them to grow. Among other
challenges that hinder SMEs from achieving growth objective in Malawi is limited access that
can help the business access new means of doing the business with the alarming changes in
technology. Additionally, regulatory burdens that SMEs in Malawi face especially when
registering their businesses act as a challenging factor to not having a chance of accessing credit
mainly because lenders are only open to working hand in hand with businesses that are legally
recognized (Muriithi 2014). Lending terms and conditions that banks and other lending
institutions follow when lending to these SMEs do not favour business owners to have access to
credit that consequently affect the business functionality and productivity.
The study is to be based on the theory of imperfect information that was founded by George
Akerlof in 1970. This theory states that imperfect information occurs when one part to a
transaction has more and timely information than another party. It this theory that reveals the

1
causative agent to why in the business environment there is an adverse selection of financial
markets. This imbalance can cause one party to enter into a transaction or make costly decisions.

1.1 The background of the study

The provision of credit has increasingly been regarded as an important tool for raising the
incomes of rural populations. According to Muriithi (2017) small and medium enterprises are the
engine that drives world economies and the stepping stone to industrialisation, both for
developing and developed economies. The evidence about the critical role played by the small
and medium enterprises and the contribution they make to the social-economic development of
economies has been well documented (Ndala, 2019). World Bank Group (2018) reported that
small and medium enterprises account for over 90% of firms worldwide. This signifies that these
SMEs play a significant role in the economy of a country both developing and developed nations
as well as to individuals (Hussen, 2015).
In Malawi, the findings by the comprehensive 2012 Fin Scope MSME survey that 1,050,320
people were employed by just around 41% of the country’s MSMEs also attest to the pivotal role
of SMEs in our domestic economy. The small and medium scale businesses contribute to social-
economic development of nations in many forms including boosting public revenue collections
through various forms of taxation, provision of goods and service to the general public and more
importantly, poverty alleviation through creation of employment and improving the living
standards of the people. Additionally, small and medium enterprises are the major sources of
entrepreneurial skills and innovations (Wairimu, 2015). A working paper by Willemse (2010)
commented that many with large businesses today, started at a small scale level of business and
it is because of the skills and knowledge they acquired at their youthful stage of the business that
enable them have the ability to manage large businesses. The draft policy for Malawi categorises
MSMEs as follows:
Table 1: Proposed Official Working Definition of MSMES in Malawi
Enterprise size Number of employees
Micro 1 to 4
Small 4 to 20
Medium 21 to 100
Large 100+

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Source: MSME Policy Strategy for Malawi, Ministry of Industry and Trade
Access to credit gives small and medium business enterprises the chance to develop their
businesses and to acquire better technologies for production, therefore ensuring their
competitiveness. Kung’u (2011) adds that improving access to credit by SMEs is crucial in
fostering competition, growth, innovation and entrepreneurship. In accordance with Ndala
(2019), as the business grow; there is a need for capital injection to satisfy strategic growth
objectives. It is at this stage that the owner seeks other ways of obtaining capital for the business
operations. As a result of this growth, there could be a probable necessity for any business to
borrow at some stage of their lifespan and banks comes in handy as financing institutions
enabling these SMEs expand their business. According to Reserve Bank of Malawi, Financial
Supervision Annual Report (2015) banks are the most important source of external finance for
the SME sector especially business loans and overdrafts. In correlation with the reports, the IoB
President, Kwanele Ngwenya, who is also NBS Bank Chief Executive officer, concurred with
Kabambe in agreement with the above report by saying that banking industry is the nerve centre
of economic growth and does so by providing loans. This supports the Ndala’s point on the need
for banks to come in the need for SMEs to help them expand their businesses. Among other
problems, there is a struggle in accessing credit by small and medium business enterprises that
discourage businesses from applying new technologies which consequently lead them to finding
difficulties to perform effectively. Anvieni (2014) found out that despite the long-existence of
commercial banks in local, international and multinational, most of them have shied away from
lending to small and medium businesses resulting into being unable to grow while others have
collapsed few years after their establishment. Zidana (2015) commented that financing SMEs has
been identified as one single factor that challenges the survival and growth of SMEs, not only in
Malawi but also the rest of other parts of both developed and developing world, albeit with
varying magnitudes. As such many of these small and medium business enterprises find it
difficult to grow and of course others fail at the same time (Zidana, 2015).

1.2 The statement of problem

Despite the significant role that the small and medium business enterprises play in an economy,
growth and survival of these small scale enterprises has been problematic. This was stimulated
by the financial constraints they face in their businesses which has a corresponding impact on
their development and economy in general. Accessibility of credit to SMEs has been the major

3
problem, mainly due to the lending terms and conditions of banks and other lending institutions
that affects their performance (Peterfolt et al. 2014). Banks and other lending institutions prefer
to lend to the government rather than private sector borrowers because the risk involved is lesser
and higher returns are offered (Abdesamed, 2014). This acts as a drawback to SMEs for their
survival and growth hence affecting the economic performance of the country in one way or the
other.

1.3 The purpose of the study

The main purpose of the study was to investigate how lack of credit finance affects SMEs’
performance at Wakawaka, Lilongwe. The specific objectives of the paper are;
1. To assess how lack of credit finance affects SMEs performance at Wakawaka market,
Lilongwe.
2. To identify obstacles that SMEs face in accessing credit from banks and other lending
institutions at Wakawaka market, Lilongwe City.
3. To determine how effective banks and other lending institutions communicate their
lending requirements to SMEs and alternative sources to finance SMEs at Wakawaka
market, Lilongwe City.

1.4 Research questions

This study will be guided by the following research questions:
1. How lack of credit finance affects SMEs performance at Wakawaka market, Lilongwe?
2. What obstacles do SMEs face when accessing credit from banks and other lending
institutions at Wakawaka market, Lilongwe City?
3. What possible ways do banks and other lending institutions communicate their lending
requirements to SMEs and alternative sources to finance SMEs at Wakawaka market,
Lilongwe City?

1.5 The scope of the study

The study placed much emphasis on investigating how lack of credit finance affects small and
medium enterprises’ performance. This prompted the researcher to choose the stated topic
having observed that a good number of small and medium scale businesses rarely grow and

4
survive while others flop after their establishment. The study was conducted at Wakawaka
market, Lilongwe and it involved people owning small and medium business enterprises. Such
examples of these small and medium business enterprises are as those selling farm produces,
hardware and grocery shops, clothes and many other businesses which are in this category. The
study did not involve those who own the large businesses because the concern of the researcher
was on those who own small and medium enterprises.

1.6 The significance of the study

The study played a significant role in the sense that it has illustrated how lack of credit finance
affects small and medium enterprises’ performance. The researcher observed that despite their
major contributions they make to the national economy, the financial constraints they face
negatively affects their business operations. It is therefore, required for the financial institutions
to put flexible lending terms and conditions that will ease access to credit by for instance
removing collateral as a primary lending condition. The findings were of great use to the
researcher for he has identified what hindered many of SMEs to grow and survive. In that way,
the suggested remedies have been outlined based on the findings. Resultantly, all the concerned
parties such as business owners in this study, academia and financial institutions will particularly
find it needful.

1.7 Limitations of the study

 Inability of the respondents to provide responses on time which put the researcher under
pressure to work tireless to ensure enough data was collected.
 The issue of Covid-19 pandemic

1.8 The operational definitions of the study

Terms Definition
Interest rates: According to Azende (2011), interest rate is the annualized cost credit or debt-
capital computed as the percentage ratio of interest to the credit. In this study, this is the
annualized cost of credit or debt-capital computed as percentage ratio of interest to the credit
advanced to small and medium business enterprises.

5
Small and Medium Enterprises (SMEs): World Bank (2013) defined small and medium
enterprises (SMEs) as enterprise that has relatively small share (in terms of number of
employees, sales turnover, ownership and assets) of their market place. The study identifies those
owning small and medium enterprises as those with low income generation; they own a small
market share and a small number of employees.
Credit: According to Mwongera (2014), credit is the purchasing power created by banks and
other lending institutions through lending based on fractional reserve system. In this study, this is
the purchasing power created by banks or other lending institutions through advancing of money
to small and medium business enterprises so as to advance their businesses.
Growth: According to Nikolic (2015), growth is defined as the process of improving some
measure of a business’s success. In this study, growth is the overall increase in the number of
employees, assets and sales per given period.
Income: According to Wlodarczyk et al. (2018), income is the revenue a business earns from
selling its goods and services or the money an individual receives in compensation for his or her
labour, services or investments. In this study, the definition has been used likewise.

1.9The organization of the study

This chapter of the study has focused much on the background, statement of the problem, the
aims and objectives, scope of the study, significance of the study, limitations, the operational
definitions and the organization of the study. The chapter to come will dwell much on the
literature view.

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CHAPTER TWO

LITERATURE REVIEW
2.0 Introduction
This section critically identifies and analyses information related to the study topic. It also looks
at various theories relating to credit accessibility by small and medium business enterprises of
which in this case the imperfect information theory is to be used. It further summarises the
literature review.

2.1 The imperfect information theory

Imperfect information occurs when one party to a transaction has more and timely information
than another party. Among the pioneers of the stated theory was George Akerlof (Lofgren et al.
2002) who demonstrated how imperfect information can produce adverse selection in the
markets. He argued that when a lender or a buyer has imperfect information, a borrower with
weak repayment prospects or a seller of low quality cars may crowd out everyone else from their
side of the market thereby hindering mutually advantageous transactions. This imbalance can
cause one party to enter into a transaction or make costly decisions. According to Lofgren et al.
(2002) information asymmetry is a common feature of any market interactions for example, the
seller of a good knows more about its quality than the prospective buyer while a borrower knows
more than the lender about the creditworthiness. This normally leads to one side of the
transaction party suffer the cost or leave them to disadvantage for they possess different
knowledge with the other party which influences one side of the transaction party make decisions
that are not favourable to the other party (Abdesamed et al. 2014).
Observation made by Robinson (2011), found out that this theory assumes that the financial
institutions cannot effectively differentiate between high risk and low risk loan applicants. This
takes high percentage in countries that are developing simply because the stakeholders involved
in credit accessibility desire to cut cost which can be incurred through conducting a research on
which financial institution is favourable to their credit needs. Robinson further argues that
mainstream financial institutions are not able to compete successfully with informal lenders
because such lenders have better access to information about credit applicants than formal
lenders have. According to (Wairimu, 2015) commented that the theory suggests that it would be

7
difficult for banks to profitability operate in developing countries credit markets and to attain
extensive outreach. Based on this theory it would therefore be hard for policy makers,
economists, bankers, donors, financial analysts and government decision makers to advocate for
commercial banks to enter into micro credit markets.
This theory is matching with the stated topic in the way that it is depicting the clear picture why
and how information asymmetry at Wakawaka leads to small and medium business enterprises
finding difficulties in accessing credit from banks and other financing institutions. The theory is
of great use in the sense that it will help to figure out the causative agent to why SMEs struggle
in accessing loans and of course getting to understand why lenders are reluctant to lending these
SMEs. The knowledge to be gained using the theory will further help the stakeholders who in
this case are the business owners and financers devise new ways that are to be favourable to both
the lenders and borrowers. This will therefore, improve credit accessibility to the underprivileged
businesses, hence achieving self-independence through the alleviation of poverty while at the
same time improving the national economy.

2.2 Empirical literature review

2.2.1 Global perspective

It is worldly noted by different researchers about the challenges and the impact that small scale
enterprises face when accessing credit from financial institutions in pertaining to improve their
functionality and of course productivity (World Bank, 2013). According to Schmidt and Kropp
(2003) argues that among the constraints limiting credit access by small and medium business
enterprises is limited access to financial services which denies access to this credit facilities.
Accessibility to credit however originates from the financial institutions through their lending
terms and conditions especially those in the formal setup. Such lending terms and conditions
include; the legal status of the business, literacy level, level of income generation by these SMEs
and of course credit security. Schmidt and Kropp further state that the nature of the financial
institutions and its lending terms and conditions are the key determinants of the credit
accessibility problem. The denial of these small scale enterprises face from having access to
credit subject them to disadvantage whereby it acts as a drawback from boosting their businesses
(Nguyen et al. 2015). Considering where the lending terms, credit security and additional

8
services provided do not favour the needs of the customers; many of these SMEs are reluctant to
go for credit even if the funds are available.
As in accordance with Bihoctavia (2013), Grameen Bank argues from its point of experience that
majority of conditions such as collateral requirements needed by formal financial institutions do
not favour the poor and small scale borrowers trying to access loan. To ensure those with small
scale businesses are encouraged, banks and other lending institutions need to set effective credit
obtaining procedures and that proper supervision ad repayment schemes are put in place
(Hussain, 2012). Mostly, banks agree with the idea of setting high interest rates on credit so as to
limit credit access only to the targeted groups and discourage the influential non-target group
from going for a loan programme that targets a specific group (Hussein, 2015). It is therefore,
prior for the financial institutions to put flexible lending terms that can influence the interest of
small scale businesses to have access to credit.

2.2.2 African perspective

Improving credit accessibility to small and medium businesses in Africa has been a major
challenge despite the acknowledgement of the great role they play in an economy. Much has
been written and researched on SMEs success World-wide (Muriithi, 2014). However, despite
many studies done on SMEs, few studies have given much attention to challenges encountered
by these businesses so as to provide business owners and entrepreneurs with right information
and guidance to improve their businesses. Nikolic et al. (2015) states that small scale businesses
operating in Africa face many challenges that deter their growth and survival. This is supported
by Kamunget al. (2014) and Beck et al. (2006) who observed that beside their positive role to
development, SMEs face many obstacles when accessing credit that restrict their long term
survival. The rate of business failure is alarming with only a few businesses surviving a few
months to one year (Kenyan National Bureau of Statistics, 2007). As in accordance with Adcorp
(2014), the mortality rate of small scale businesses among African countries remains very high
with five out of seven new businesses failing in their first year. For example, in Uganda, one-
third on new business start-ups not going beyond one year of operation whereas in South Africa
the failure is between 50% and 95% depending on the industry (Willemse, 2010).A working
paper by Yeboah (2015) also revealed that 75% of SMEs in South Africa do not become
established businesses making the country to have the highest failure rate in the world (World
Bank, 2010). Although the African continent has shown improvement in business environment in

9
the last ten years thereby attracting numerous businesses from different parts of world, it is still
ranked by World Bank as the most difficult region to do businesses for SMEs (World Bank,
2012). This is mainly due to many obstacles that hinder them from having access to finance that
can be used to improve their functionality and productivity through the application of new
technologies.
Muriithi (2014) shows that chief among the external constraints to SME growth and survival
widely cited in literature is limited access to business financing. In response to such challenges,
many governments have tirelessly worked on establishing other means of financing small scale
businesses away from commercial banks, whose loan terms and conditions are usually
unattractive (Hussain, 2012). Azende (2011) commented that Nigeria remains one of such
countries that have pursued other schemes to widen SME access to finances. In Africa, it is
agreed among researchers that inability to access finances remains a major hindrance to SMEs
growth and survival (Ariyo, 2008: Cook, 2001; Horn, 2003; Mambula, 2002).A survey by The
Enterprise Survey of the World Bank in a period of ten years and covering over 100 countries
found that access to credit as the most needful constraint hindering operations and growth of
SMEs compared to other parts of the world where the problem was moderate (Beck & Cull,
2014). The study found that Africa’s financial systems are not only small, shallow and costly, but
also they have very limited outreach thereby only reaching a small percentage of the total
population. This normally forces many SMEs to do their own self-financing or depend on
colleagues and friends to provide capital for their businesses which consequently affect business’
functionality and productivity.

2.3 Local perspective

In Malawi, financial markets have not been able to reach the underprivileged sections of
societies into basic financial services (Mandiwa, 2014). Since majority of small scale enterprise
owners here in Malawi live below poverty line, they are vulnerable to having access to financial
services. This is so mainly because many of them are illiterate which threaten financers to
experiencing a loss considering they cannot be able to repay the loan due to poor management of
funds (Zidana, 2015). Though the government’s key development objective is to encourage her
citizens achieve self independence through self employment, it is reluctant to intervene in
regards to credit facility programs in order to increase incomes of poor households. This is

10
therefore accelerating the level of poverty in the country hence affecting the performance of the
economy negatively.
For the government of Malawi to achieve positive economy, requires strategising ways that are
favourable to underprivileged small scale businesses to ensure they buy new technologies in
pertaining to improve their functionality and productivity. Zidana (2015) commented that for
Malawi to develop and attain stabilized economy, needs to devise new means of financing small
and medium business enterprises. Zidana further stated that, many of these SMEs lag behind as a
result of government’s reluctance to intervene in their credit needs that consequently lead them
to finding difficulties to achieve growth objective. It has by Richard (2014) been noted that a
good percentage of small scale businesses here in Malawi, find it hard to survive and grow
mainly due to limited access to finance that can enhance their business development. It is
therefore, needful for the government to come in as a hand to uplift these SMEs to a large
business.

2.4 Measuring growth of SMEs

Every business owner wishes to expand and achieve strategic growth objective of his business
from the earliest years of existence. Majanga (2015) stated that it is the normal anticipation that
after the early years of its existence, a business wishes to expand or grow. Due to dimensions in
which SMEs are defined, the measurement of their growth is not universal as it also depends on
which dimension it is defined, (Scote & Bruce, 2010).For this growth to be observed and
experienced in any kind of business, the owner seeks additional capital to ensure employment of
new technologies that creates conducive environment for the business to attain growth objective
is applied. According to the International Finance Corporation (2012), growth of the small scale
businesses is measured through the increment that occurs in number of employees, total assets
and total annual sales. Lawder (2003 asserts that business expansion can be achieved by
increasing either the range of products or number of locations, which eventually lead to
maximising sales and profits. This view point according to Lawder (2003) has been considered
as a good measure of growth for most small and medium business owner though from the
economic view point it is not without limitations. For the growth objective to be easily attained,
the business owners require financing to enable them cater costs that help to improve the
business. As in accordance with Kemp et al. (2006), when the business productivity and
efficiency keeps on increasing over time, it is said to be growing in as far as its contribution to

11
the economy is concerned. In their research report, Danes, Bonner, Hart and Mason (2009),
using turnover as a basis for measuring business growth, assess the impact of high-growth firms
on the UK economy on the employment side.

2.5 SME challenges to growth

A good number of researches have been done on investigating challenges that SMEs face in their
quest to expansion, both in Africa and the world as a whole (Kung’u, 2015). In his study Ndala
(2019) made a direct link to the lack of credit facility and the failure of businesses and concluded
that there is a positive correlation between the success of a business and the need for credit
finance in South African SME’s. In agreement with Essien and Arene (2010) argued that small
scale enterprises find it hard to perform e as anticipated more especially in developing countries
due to lack of financing that assist in developing the business. Finance is considered as most
important component that helps to improve business operations. Improving credit accessibility in
African countries has been a challenge for little attention is paid to these small scale businesses
which have a corresponding impact to the economy as a whole (World Bank, 2010). Considering
majority of small scale business owners live below poverty line and that most of them do lack
collateral or credit facility that can help them secure the loan, lenders are reluctant to lending
them for fear of experiencing a loss which in turn affect their functionality and productivity. This
is so more reason why most SMEs experience a stagnant growth while others flop few years after
their establishment.

2.6 Key determinants of credit accessibility

2.6.1 Literacy level

According to Wlodarczyk et al. (2018), financial literacy refers to the ability of an individual to
understand how money works-how it’s earned, managed and invested. It is very needful for any
business entrepreneurs to have knowledge on how to manage the business so that they can
oversee its growth (Andoh and Nunoo (2011). A literate entrepreneur understands on the best
time to make certain investment decisions such as when to borrow and from whom to borrow
and at what cost. Additionally, knowledge that the entrepreneur can possess, may assist him or
her know how to handle the business especially when it is experiencing growth hence meeting
the business goals and objectives.

12
2.6.2 Level of income generation by these SMEs
According to Wlodarczyk et al. (2018), defined income as the revenue a business earns from
selling its goods and services or the money an individual receives in compensation for his or her
labour services or investments. Considering that majority of these small scale businesses
generate low level of income, many financial institutions shine away from lending them for they
feel insecure and fear of making loses afterwards. Chipeta and Kanyumbu (2018) commented
that financing SMEs has for centuries been considered as a risk idea, mainly because, many of
these small scale enterprises have low generation capacity of income. Additionally, many of
these SMEs lag behind from being granted the chances to access credit because many of them do
not keep financial records which can act as a reference to evaluating the financial performance of
the business. According to Essien and Arene (2010), state that for banks to be assured of the
repay status, they assess the business performance which the owner requires financing by
checking his or her financial records. Banks and other lending institutions do this to ensure they
are safe from experiencing a loss when they grant loans to these SMEs.

2.6.3 Collateral
Collateral is one of the key determinants of credit accessibility where lenders bank on to ensure
they are safe from experiencing a loss especially if the borrower fails to repay. According to
Hussein (2015), collateral refers to an asset that a borrower uses to secure a loan from the lender.
Here, a lender gets a fall back in case of default where they can dispose the asset to recover their
money. Kung’u (2011) noted that secured loans are seen to have a low risk of default hence they
are charged a lower interest. Mac AnBhaird & Lucey (2010) commented that collateral serves as
a means to reduce asymmetric information and moral hazard in asset-based lending. An
argument made by Bester (2004) stated that collateral signals firm’s level of risk because only
low risk borrowers are willing to pledge high amount of collateral. Most of small and medium
enterprises do not have tangible assets that they can use to secure their loans which consequently
limit their borrowing. As Shinozaki (2012) puts it, he says the lack of collateral is among the
major barrier to access bank finance which resultantly affects business performance. It is for this
reason that lags most of these SMEs behind from having access to credit which normally affect
their functionality and productivity.

13
2.6.4 Legal status of the business
One of the fundamental factors that financial institutions consider most when they want to grant
loans is the legal status of the business. According to Ghanavati et al. (2009), legal entity refers
to any individual, company, business or organization that can legally enter into a binding
contract with another legal entity. This implies that businesses which desire to work hand in hand
with the lenders need to get registered. Since, majority of small scale businesses world-wide are
not legally recognized, they are denied the chance to access credit thereby putting them to
disadvantage from employing new technologies that can aid their businesses get boosted
(Hussain, 2012). Most researches have shown that lenders work better with businesses that are
legally recognized for they are easily followed than informal businesses (Ndala, 2019). It is
therefore needful for business owners to ensure their businesses get registered to create
conducive environment for loans as they anticipate.

2.7 Conceptual framework

This showed how independent variable access to credit which was measured in terms of literacy
level, level of income, collateral and legal status of the business influences the growth of small
scale businesses.
Figure 2.1

Independent variable Dependent variable

Credit accessibility
. Literacy level Growth and survival of SMEs
. Income level . Growth in sales turnover
. Collateral
. Legal status of the business

Personal and firm characteristics

.Education level
.Year
.Age
Source: Author (2021)

14
2.8 Summary of the review
Finance was a major component in the survival, growth and development of a business entity. At
micro economic level, slow rate of growth by firms was mostly articulated to limited access to
financial services. Most of the reviewed literature in this study was based on countries from west
while few were from countries like Malawi, Uganda, South Africa, Nigeria and Kenya which
had few scholarly articles about the SMEs and the ways in which they access business financial
support. The chances for profitable expansion in employment in small scale enterprises are
limited when the micro-economic conditions are less favourable. This mainly implied to those
small scale businesses with linkages with bigger enterprises and the economy. As in accordance
with the above review, a proper scrutiny of SMEs dynamics was found needful both for SMEs’
support programs and economic growth. Given the role that small scale businesses play in the
Malawian economy and how exposed they face financial constraints due to their nature. An
empirical study was carried out to investigate how lack of credit finance affects small and
medium business enterprises’ performance. It was for this reason that prompted the researcher to
choose the above stated topic of study.

15
CHAPTER THREE

METHODOLOGY
3.0 Introduction
This chapter describes the methods and procedures to be used when carrying out the study. It
will present the study design, target population, data collection instruments and procedures and
data analysis techniques.

3.1 Research design

In this study, the descriptive design was used and this was preferred because it is the design that
answers the questions who, what, which, when or how much (Cooper & Scheduler, 2006).
Mostly, a descriptive study is appropriate especially if the description is informative. Therefore,
this study is also necessary since it acts as the starting point for identification of variables and
coming up with hypothetical constructions which could be put to test using other formulas and
finally acts as a way of studying a situation or behaviour since it is either ethically or physically
impossible to generate it in an experiment (Helman, 2005).
A research design helped in the attempt to generalise the findings that were provided and due
care was taken while designing the population from selecting the same size and used appropriate
statistical method in analysing data. In accordance with Mugenda & Mugenda (2003) population
refers to an entire group of individuals, objects or events having common observable
characteristics. The population that was targeted in this research included all registered and non-
registered small and medium enterprises at Wakawaka market, Lilongwe City.

3.2 Sampling design

The researcher employed the use of stratified sampling in the selection of respondents. The
population was split into mutually exclusive sub-populations referred to as business categories.
Since the population was heterogeneous, the research used the appropriate stratification that was
based on the share of the stratum of the total population came up with each stratum’s sample.

3.2.1 Study area

The study was conducted at Wakawaka market, in Lilongwe district which is allocated along M1
Road near St John Secondary School. This is a private market whose owner is Mr. Solomon and

16
it is known by the name of Wakawaka because of the hotel, therefore, people are used to call it
Wakawaka market.

3.2.2 Population
The target population of the study were based the business owners falling under SMEs. The
researcher allocated 60 questionnaires from the total population. According to the record that the
research findings determined by Lilongwe City specifically at Wakawaka market, there were 6
registered and 40 non-registered small and medium enterprises for as at July, 2021. One of the
challenges at Wakawaka market is limited access to funds in the form of a loan which has a
negative impact to their business performance. The population of the study was based on the
business categories as shown in Table 3.1.
Table 3.1
Business category Population
Clothes and shoe sellers 7
Hardware shops 5
Grocery shops 11
Restaurant operators 6
Farm produce sellers 13
Pharmacy shops 4
Total 46

Source: Research findings

3.2.3 Sample size

The researcher had a target of 60 respondents from the total number of small scale businesses
which were visited to enable the researcher build a reasonable sample size. A total of 60
participants were selected purposive from the total population of small and medium business
owners. This was to ensure the data presented achieves its intended purpose.

3.2.4 Sources of data

The research employed the use of primary and secondary data as sources of data. Primary data
was collected by the researcher through the administration of questionnaires to the concerned
group of small and medium business enterprises. In order to collect secondary data, the

17
researcher made a review on the recommended literature in terms of books, journals,
Government of Malawi publications, reports, conference proceedings and other miscellaneous
sources which were relevant to the topic of study

3.2.5. Data collection methods

To ensure a balanced data was collected, the study employed the use of self-developed
questionnaires which were both structured and unstructured. In this case, the structured
questionnaires were close ended questions comprising of alternatives for respondents to choose.
Whereas the unstructured questionnaires were open ended questions to allow respondents
express their views in reference to the topic of study. For a qualitative and quantitative analysis
to be made effectively, both of the questionnaires were used.

3.2.6 Data analysis and the interpretation

For the research to be of great value and that the intended purpose was given, data collected was
analysed and interpreted accordingly. Denscombe (2010) reported that analysis involves
separation of things into their component parts. Denscombe further states that the application of
both qualitative and quantitative methods improves accuracy of findings through the study of
complex things in pertaining to identify the basic elements. The researcher analysed data
collected by employing the use of Microsoft Excel and SPSS statistics which were suitable for
application in order to allow arithmetic manipulation of data.

3.3 Reliability and validity tests

According to Hussein (2015), reliability and validity are the key indicators of the quality of the
data collection instruments. A measure is reliable when different attempts at measuring
something converge on the same result (Mwongera, 2014). Impliedly, reliability is therefore, an
indicator of an instrument’s internal consistency. The content becomes valid when all relevant
areas of the study are covered. According to Saunders et al. (2014), content validity is facilitated
by the help of an expert. In this case, the supervisor played a vital role. For the validity and
reliability to be attained, uniform test procedures was employed. For instance, the study used the
sampling procedures and questionnaires.

18
3.4 Ethical considerations
To ensure privacy of respondents was maintained, names were not used when handling
questionnaires. Respondents were assured that the data collected was for academic purpose only
and that the results of the respondents would be safeguarded by the researcher and of course no
publicising of the information collected were to be made.

3.5 Expected outcomes

It is expected that upon completion, the study is to reveal the following:
 Limited access to financial services affects SMEs performance.
 Failure of the businesses to meeting their goals and objectives.

3.6 The organization of study

Credit availability is considered to be most needful for it helps develop the underprivileged
businesses and of course at the same time improving the national economy. Credit accessibility
has for centuries been identified as one single factor that challenges small scale businesses in
pertaining to buy new technologies in order to improve the business operations. Therefore, this
study aimed at investigating the financial constraints that SMEs face as evidenced by the
stagnant growth and flopping of many small scale enterprises few years after their establishment.
The research study also aimed at identifying new means of financing these small and medium
enterprise businesses to help them improve their workability. The information was collected
from the small scale business owners in order to understand fully what hinders them from a
continual survival and growth and finding necessary means of presenting those challenges to the
concerned group to ensure solutions are made available as anticipated by the business owners.

19
CHAPTER FOUR

PRESENTATION OF THE FINDINGS

4.1 Introduction
The main purpose of this study was to investigate how lack of credit finance affects small and
medium enterprises performance. The chapter presents the research findings based on the
methodology stated in chapter three. It is comprised of the following sub-sections: response rate,
background information, credit accessibility, collateral and entrepreneurial literacy.

4.2 Response rate

The researcher had a target of 60 respondents anticipated by the study to respond to the survey
questionnaire. However, out of the estimated figure, about forty six responded by filling in and
returning the questionnaires. Thus, the projected response rate was 76.7 percent. An implication
that, the remaining fourteen (14) questionnaires were either not answered properly or were not
returned as indicated in table 4.1. However, the response rate recorded by the study was found to
be fit for analysis as advocated by Mugenda & Mugenda (2010) that any response rate of 70%
and above is considered excellent for analysis and making recommendations.
Table 4.1 Distribution of response rate
Responses Frequency (n) Percentage (%)
Responded 46 76.7
Not responded 14 23.3

Total 60 100
Source: author (2021)

4.3 Background information

This part consists of distributions on the gender of respondents, age of respondents, and their
highest level of education as well as length of time SMEs have been in operation.

4.3.1 Gender of respondents

Table 4.2 Gender of respondents
Gender of respondents

20
 Frequency Percent Valid Cumulative
Percent Percent
Male 20 43.5 43.5 43.5
Valid Female 26 56.5 56.5 100.0
Total 46 100.0 100.0
Source: Research findings
In reference to the above Table 4.2, indicates that about 56.5 percent of gender respondents were
female which is representing a higher value than that of male is for they take 43.5 percent. This
is an indication that there was a fair distribution of genders respondents who participated in this
study and that female commands a large number of SMEs ownership at Wakawaka market,
Lilongwe. The genders respondents can also be presented in a bar graph as below.
Figure 4.1

gender of respondets
30
26
25
number of respondents

20
20

15

10

0
male female

The research sought to establish the respondents age in years that were sub-divided into
reasonable categories ranging from less than 20 years, 21-25 years, 26-30 years, 31-35 years, 36-
40 years and above 40 years. From the table 4.3, it can be deduced that majority of the
respondents (37%) were in the age bracket of between 31 and 35 years. About 22% were in the
age group of between 26 and 30 years. Those who were in the age bracket ranging from 21-25
years had 17.4%. An estimate of 13 percent of the respondents was in the age bracket of between
36-40 years. Those ranging above 40 years had 7% while those falling under less than 20 years
had 4.3%. This shows that there was indeed a fair distribution of the respondents expected in the

21
study where the youth commands a large number of SMEs owners at Wakawaka market,
Lilongwe. Below is the table 4.4 showing age distribution.
Table 4.3 Age of respondents in percentage
Age in years Frequency Percent
Less than 20 2 4.3
21-25 years 8 17.4
26-30 years 10 22.0
31-35 years 17 37.0
36-40 years 6 13.0
Above 40 years 3 7.0
Total 46 100
Source: Research findings

4.3.2 Education level

Education is key tool that supports the success of a business for it enables business owners
have the ability to plan on when to spend and of course at what effective rate of expenditures
should be made to ensure the business generates profit out of its operations. It is for reason
that the researcher sought to understand the educational levels of those owning small scale
businesses. Table 4.5 shows the outcomes on highest educational level. The results indicate
that majority (39.1%) of the respondents from which data was gathered had attained
certificate as their highest level of education. About 28.3 percent were reported to lack any
education achievement. Furthermore, 26.1 percent were holders of diploma as their highest
level of education whereas 4.3 percent represents those with bachelor’s degree as their highest
level of education. Lastly, 2.2 percent was a holder of masters as his highest level of
education. It can be generalized from the gathered data that majority of the respondents whose
researched was conducted on had prerequisite educational level and that this would have
facilitated the understanding of their business undertakings.

Table 4.4 level of education

Level of education

22
 Frequency Percent Valid Cumulative
Percent Percent
Masters 1 2.2 2.2 2.2
Degree 2 4.3 4.3 6.5
Diploma 12 26.1 26.1 32.6
Valid
Certificate 18 39.1 39.1 71.7
Not educated 13 28.3 28.3 100.0
Total 46 100.0 100.0
Source: Research findings

4.3.3 Duration by which the business has been in operation

The research study ascertained the duration of which the respective businesses of various
respondents have been in operation and that the Table 4.6 of responses reveal that an
overwhelming majority (52.2%) of the business has been in operation for a period ranging from
1-5 years. About 37.0 percent of the SMEs have been in operation for time lengths of 6-10 years
while a few (10.9%) of the SMEs at Wakawaka market operated for a period ranging from 11-15
years. This could mean that most of the SMEs are still budding. These results are in support to
that of the age of respondents where it was discovered that most of the SMEs were being owned
by young adults.
Figure 4.5 Years of business operation
The figure 4.5 which is below is showing the duration by which businesses in the vicinity of
Wakawaka have been in operation.

23
 Years of business operation (%)
60

50

40

30
52.2
20 37

10
10.9 Years of
business
0 operation
1-5years 6-10years 11-15years (%)

Source: Research findings

4.4 Credit accessibility

4.4.1 Sources of business financing

The study ascertained to establish the major source(s) of financing of small and medium
enterprises at Wakawaka market, Lilongwe and the results are as indicated in Table 4.7. From
the outcomes given, it can be construed that most of the respondents (41.3) depend on savings as
a major form of financing their businesses. About 26.1 percent of the respondents rely on other
means of financing their business financially. Another group of respondents 19.6 percent were
recorded to have been getting financed through borrowing from friends and relatives while 13.0
percent represent those respondents who got financed through bank loans or loans from other
lending institutions. Below is the Table 4.7 showing various forms of business financing at
Wakawaka market, Lilongwe.
Table 4.6 Sources of business financing
Sources of business financing
Frequency Percent Valid Cumulative
Percent Percent

24
 Savings 19 41.3 41.3 41.3
Bank loans or loans from
6 13.0 13.0 54.3
other lending institutions
Valid Borrowing from friends
9 19.6 19.6 73.9
or relatives
Others 12 26.1 26.1 100.0
Total 46 100.0 100.0
Source: Research findings

4.5.1 Adequacy of start-up capital

The study further sought to determine whether the start-up capital of SMEs at Wakawaka
market, was adequate or not. From the findings provided in Table 4.8, it is clear that
overwhelming majority (60.9) of the respondents affirmed that their start-up capital was not
adequate. On the other hand (39.1) of the respondents reported that they did have adequate start-
up capital at the time they were starting their businesses. This implies that respondents lack
financial support through borrowing from banks or other lending institutions that is why they
mostly depend on savings before starting their businesses and therefore, the findings can be
linked to that of sources of financing where the research revealed that majority of SMEs owners
rely on their savings.
Table 4.7 Adequacy of start-up capital
Responses Frequency Percent
Adequacy 18 39.1
Not adequate 28 60.9
Total 46 100

25
 Source: Research findings

4.5.2 Loan or credit application

The research required also to establish whether the respondents had ever applied for a loan
from any financial institution or not. The findings are indicated as in Table 4.8 where most of
the respondents (52.2%) confessed to have applied loan(s) from financial institutions whereas
47.8 percent seem not to have ever applied a loan from financial institutions. These results are
contrary to that given in Table 4.6 on the sources of business financing and therefore an
indication that business owners at Wakawaka request for loans but they are denied or do not
meet credit needs.
Table 4.8 Loan application
Responses Frequency Percent
Yes 24 52.2
No 22 47.8
Total 46 100
Source: research findings

4.5.3 Whether credit offered improved business performance

For those who applied for loan and were granted, were therefore required to indicate whether the
loan given to them enhanced their business performance or not. The results displayed in Table
4.9 indicate that majority (66.7%) of the respondents revealed that the credit offered by the banks
and other lending institutions promoted their business performance. While the remaining 33.3
percent indicated that the credit they got did not change their business for better. From the
generated and gathered data, it can be said that credit offered by the financial institutions has a
high chance of benefiting SMEs at Wakawaka market, Lilongwe.
Table 4.9 Credit offered improved business performance
Responses Frequency Percent
Yes 4 66.7
No 2 33.3
Total 6 100

26
4.5.4 Rating credit services offered by financial institutions
Furthermore, respondents were required to rate the credit service offered in their vicinity and the
responses are shown in the Table 4.10. From the results shown, it can deduced that majority of
the respondents (41.3%) who took part in this survey had not been able to access credit from
financial institutions and confirmed that the services offered were poor. About 26.1 percent of
the respondents rated the credit services offered as average. Approximately 19.6% of them
confessed that they were neutral. 10.9 percent of the respondents reported to have had an
effective rate of credit services offered in the area while 2.2 percent confirmed to have had a very
effective. This indicates that at Wakawaka market, Lilongwe, business owners find it hard to
have easy access to credit mainly due to the imposed lending terms and conditions which act as a
drawback to influencing the interest of the business owners apply for the loan.
Table 4.10 Rating credit accessibility
Rating the credit service offered by the banks and other lending
institutions in your area
Frequenc Percent Valid Cumulative
y Percent Percent
Poor 19 41.3 41.3 41.3
Average 12 26.1 26.1 67.4
Neutral 9 19.6 19.6 87.0
Valid Effective 5 10.9 10.9 97.8
Very
1 2.2 2.2 100.0
effective
Total 46 100.0 100.0
Source: Research findings
The generated results can also be presented in a form of a pie chart as that of below which is
clearly portraying the same results achieved by the study.
Figure 4.3 Rating credit accessibility

27
4.6 Collateral
Based on the Table 4.11, it can clearly show that 43.5% of the respondents represented land as a
credit security that banks and other lenders use when granting credit to business owners. About
34.8 percent of the respondents, who participated in this study, were that of house as collateral
used most when the financial institutions wish to guarantee loan to businesses while 21.7 percent
were those respondents representing others. This indicates that land as credit security
commanded a large number that financial institutions base on most when granting loans to
businesses. It is for this reason that many business owners who are willing to apply for a loan are
discouraged from applying due to lack of collateral in form of land as a credit security.
Table 4.11 Credit security
Credit security mostly demanded by financial institutions
Frequency Percent Valid Cumulative
Percent Percent
House 16 34.8 34.8 34.8
Land 20 43.5 43.5 78.3
Valid
Others 10 21.7 21.7 100.0
Total 46 100.0 100.0
Source: Research findings

28
The above results shown in Table 4.12 can also be presented in a bar graph as that of below
which is giving the same sense as the table.
Figure 4.4 Credit security

4.6.1 Collateral and credit accessibility

Based on the likert scale of 1-5 where (1) meant strongly disagree, (2) represented disagree, (3)
stood for not certain, (4) was agree and (5) signified strongly agree. Therefore, the respondents
were asked to indicate their level of agreement on the aspect of collateral and credit accessibility.
From the results presented in Table 4.13, it can be construed that (41.3%) of respondents agreed
that on several occasions they had applied for a loan but they were declined due to lack of
collateral security. Those who agreed strongly represented 28.3 percent of the respondents.
About 24.0 percent of the respondents were those who were not certain. About 4.3 percent
represent those who strongly disagreed that on several occasions they had applied for a loan to
improve their businesses but they were declined while 2.2% represent those who disagreed.
On the statement on whether the financial institutions were more focusing on potential to repay
rather than on collateral security, 34.8 percent of the respondents disagreed with it, 26.3%
strongly disagreed to it. About 17.4% of them agreed to the statement, 15.2 percent of the
respondents were reported by not certain while 6.5% of the respondents made a strong agreement
to the statement. Furthermore, majority (39.1%) of the respondents agreed on the statement that

29
the requirements that they provide pushed them to seek other means of financing their businesses
which include borrowing from friends and relatives. For those respondents who reported to have
a strong agree and not certain on the statement had the same share of percentage (19.6%). About
13 percent of the respondents were reported to have disagreed while 8.7% were those who
strongly disagreed on the statement.
Moreover, the research sought the respondent’s opinion on the statement of whether at times
they apply for loans a group because they can easily co-guarantee each other. In reference to the
results, 34.8% disagreed to it, 23.9% of the respondents strongly disagreed on the statement, but
those respondents with about (21.7%) agreed to it. About 19.6% of respondents were not certain
to the statement while on strongly agree none reported to it. In addition, 30.4% of the
respondents agreed on the statement that financial institutions insist on using collateral a primary
lending condition, 24% of them disagreed to it. About 17.4 percent of respondents strongly
disagreed on the statement, 15.2% were those who strongly agreed to the point while those
respondents (13%) who were not certain.
The last statement was on the aspect of the reluctance of the lending institutions to avail credit to
businesses for operating informally while it is difficult for them to provide the acceptable results.
Based on the results, (34.8%) of the respondents disagreed to the statement, 23.9% agreed on the
statement. About19.6 of the respondents’ percent strongly disagreed and the other were not
certain while 2.2% of them strongly agreed on the statement.

Literacy level of entrepreneurs and credit accessibility

In determination of credit accessibility in relation to literacy level of business owners, the
respondents were required to state the level of agreement on each statement given. 42.3% percent
of the respondents disagreed on the statement that they were not aware of the legal issues that
were needed to address credit for their businesses because they could not understand the lending
terms and conditions, 37% of them made a strong disagree on the statement. About 13% of the
respondents were not certain on the statement presented in the above while 8.7 percent represent
those who agreed on the statement.
On the expression of whether the education level of the respondents had a corresponding impact
on business management through the application of skills and knowledge they had or not, 34.7%
agreed on the statement, 24 percent of them disagreed, 19.6% of the respondents strongly

30
disagreed on the statement. Those who were not certain and those who strongly agreed shared
the similar value of percentage (10.9%).
About 45.7% of the respondents strongly disagreed on the statement that the lending institutions
were more interested in lending those who were literate than those with no learning background.
28.3% of them were those who strongly disagreed on the statement, 17.4 percent of the
respondents were not certain to the statement while 8.7% of them were in agreement to the
statement.
Furthermore, the respondents were asked to indicate whether the level of education had a
positive impact on when or how to get loan in order to improve their businesses. From the
findings, about 34.8% of the respondents agreed on the statement, 28.3 percent of them disagreed
to it. Those respondents who strongly agreed to the statement were about 15.2%, 13% were those
of respondents who strongly disagreed to the statement while 8.7 percent represent those who
were not certain to the statement.
Lastly, about 39.1% strongly disagreed on the statement that they were discouraged from
borrowing because the available credit information and charges were not communicated in the
language they could manage to understand. 24% of the respondents disagreed to the statement,
21.7% agreed to the statement while 15.2 percent of them represent those who were not certain.

Growth of SMEs
On the question of average start-up capital, the respondents were required to indicate what they
invested in their businesses and the results are as indicated in figure 4.3.

31
 Source: Research findings

4.8.1 Growth of SMEs

The study sought to establish the average level of start-up where an estimate of 36.96% of the
respondents had a start-up capital ranging from K51,000-100,000. About 28.26 percent indicated
to have been falling below K50, 000. Furthermore, 19.57 percent of the respondents confessed to
have had a start-up capital between K101, 000 and 150,000 while those having a start-up capital
above K150, 000 reported about 15.22 percent. This indicates that majority of small scale
holders do really not have enough capital that can help to stimulate business development
through acquiring new technologies that can help their businesses experience growth and of
course continue to survive. It is for reason that there is a need for ensuring easy access to credit
that may improve the business performance.

Total annual sales

As indicated in Figure 4.4, about 39.13% registered to have had average total sales of between
K25, 000 and 50,000. Sales turnover of below K25, 000 per annum was reported by 34.78% of
respondents. About 17.39 percent registered a year sales turnover ranging from K55, 000 to
100,000 while 8.70% of them reported to fall on more than K100, 000.

32
Source: research findings

33
CHAPTER FIVE

DISCUSSION OF THE RESEARCH FINDINGS

This section of the study, presents a further analysis on the findings which are in correlation with
the research objectives.

5.1 Key determinants of credit accessibility

This area of the study emphasizes a critical understanding of what really determines credit
accessibility at Wakawaka market, Lilongwe. According to the researcher, he sought to establish
the understanding on what factors influence the availability of credit finance to support the
business operations by the following key determinants of credit accessibility: collateral or credit
security, literacy level of entrepreneurs, legal status of the business and income level generated
by the business.

5.1.1 Collateral
The findings demonstrate that majority of financial institutions and other lending institutions use
collateral mostly in form of a land or house when granting credit or loan to small and medium
businesses. The small business holders emphasized that banks prefer to lend to those with
collateral to secure their loan than those without for they do that to ensure they reduce a risk of
loss which can be experienced when borrowers fail to repay the loan. This lending condition that
lenders base as a guarantee to granting credit puts many businesses to disadvantage especially
those with no collateral to secure the loan. It is for reason that most of the businesses at
Wakawaka market are still budding.
Availability of credit or loan according to the findings, help to improve business performance for
it enables the business acquire new means of doing business and that it enables business owners
meet their demand. Due to advancement in technology where people are nowadays transacting
their businesses technologically, the business owners made a big worry that the lending terms
and conditions that financers base when providing loans has a negative impact to their businesses
for they experience a stagnant growth while others flop few years after their establishment. To
ensure the business continue to operate and that it experiences a change through growth, the
owners sought to access credit from banks and other lending institutions but they could not meet
business needs mainly because they lacked collateral to secure the loan.

34
Furthermore, the business owners confessed to have based much on savings as a means of
financing their businesses due to lack collateral to access credit. This negatively affects their
business performance for they do not manage to meet the business needs in pertaining to effect
positive results. Therefore, the owners of the businesses firmly stated that though they base on
savings as a means of financing their enterprises, but they fail to achieve their desired growth
objective due to lack of ready financial markets that can support their need. It is therefore
needful for lenders to put flexible terms and conditions that can call the attention of these small
scale holders have the ability to access credit so that they advance their business operations.

5.1.2 Literacy level of entrepreneurs

In order for the researcher to come up with the reasonable results on what actually determines
small scale businesses have access to credit, he sought to determine their level of education.
From the findings drawn from the study, indicate that majority of business owners had at least a
certificate of the Malawi School Certificate of Education. This implies that they were able to
interpret the lending terms and conditions which the banks and other financial institutions were
providing in a foreign language (English). The owners of the businesses further said, they were
capable of making business decisions with the knowledge they acquired from their studies. The
business holders confessed to have also been able to use their level of knowledge and skills they
had acquired from their schools in planning how to operate their businesses which includes
keeping business records to easily trace how their businesses were performing.
Though business owners were found to be knowledgeable on how to do their businesses, they
were declined to have access to credit mainly due to lack of collateral which from the results was
indicated as a primary lending condition used by financial institutions. However, some of the
respondents confirmed that management of the business to some is an inborn skill which does
not need an external knowledge that can be acquired through learning. The study can conclude
that, the respondents whose researched was conducted on had a prerequisite educational level
and this would have facilitated the understanding of their business undertakings.

5.1.3 Legal status of the business

In determination whether legality of the business has a significant influence to enabling small
and medium business enterprises have access to credit finance or not, the researcher enquired the
respondents to state whether their businesses were legal or not. A good number of the

35
respondents indicated that their businesses were not legal. To facilitate a reasonable result in
relation to legal status of the business, the researcher asked the respondents to provide the reason
on why they illegally operate. The results drawn from the findings, show that many of these
businesses operate informally because they do want to get traced by the government which can
force them to pay taxes and that it is their desire to cut costs which can be incurred yearly when
renewing the business name.
The respondents were also required to indicate if legality of the business has some benefits
where majority of them confessed that it was beneficial. Some of the benefits that respondents
provided include, it enables businesses to operate their businesses safely, and it builds trust to
financers who mostly wish to work hand in hand with businesses which are legal. The business
owners said that many of the financial institutions are not willing to work with unregistered
enterprises because it is difficult for them to trace their businesses financially and how they
perform unlike those which are under registration. Though legality of an entity acts as an added
value to induce the willingness of these banks and other lending institutions to lend these SMEs
funds, the respondents made a strong emphasis that many financial markets in the area base on
the credit security as a primary condition which put the businesses to underprivileged for they
lack an asset to secure the loans.

5.1.4 Income level generated by the SMEs

To ensure a reasonable conclusion on what really determines the credit accessibility at
Wakawaka market, Lilongwe, the researcher sought to determine whether the level of income
generated by these small scale enterprises influences the interest of the financial institutions to
lend them funds to support their business operations or not. From the findings, the business
operators confessed that majority of lending institutions base on collateral as a security to the
loan that SMEs owners desire to have. Therefore, it can be concluded that small scale holders
have not been able to access credit finance mainly due to lack of credit which banks or other
lending institutions use mostly as a basis to grant them. The results indicate that majority of these
financers use collateral security as a guarantee to lending these underprivileged businesses in
order to reduce the risk of loss which can be experienced when they fail to repay.

36
5.2 Growth of SMEs
The findings from the study, show that majority of the businesses had a start-up capital ranging
from K51, 000 to 100,000 which according to the owners of the businesses is not enough to meet
their business undertakings. Many complained that, for their businesses to meet demand has been
problematic due to unstable prices charged when ordering the goods or services. It is for this
reason that they sought to have easy access to credit to ensure they meet their demands; however,
they were declined from getting the loan because they could not be able to provide credit
security. It has also been noted from the findings that lack of capital injection from banks which
can be in a form of a loan has had a significant impact to the business development, growth and
survival.
Furthermore, the research findings reveal that a good number of businesses were capable of
making a total annual sales ranging from K25, 000 to 50,000. The business owners stated that
this range of total annual sales cannot help to improve the business operations for it is the same
business that provides for rentals and food. Therefore, the holders of these small scale enterprises
confirmed that it is for reason that they experience a stagnant growth in their businesses while
others flop at the same time.

5.3 Linking the theory with the results drawn from the findings
The study based on the theory of imperfect information which occurs when one party to a
transaction has more and timely information than another party, and the researcher drew the
conclusion in relation to the theory. From what the researcher found, it can be confirmed that it
was indeed difficult for the financial institutions to lend the SMEs because the information they
had was only that of the benefits they get when they grant a loan to a business not having
knowledge on how worth the credit is to the business owners. Due to this fact, many businesses
have been forced to make costly decisions such as borrowing from friends who were charging
them a higher rate of interest than required. This has had a negative impact to small enterprises
for they could not be able to meet their business undertakings which consequently led the
businesses experience a stagnant growth while at the same time others flop.

37
5.4 The extent to which lack of credit affects the business performance
 Businesses fail to meet customer demand due to inability to inject additional capital in a
form of a loan. The respondents expressed their worry that due to lack of credit
accessibility they have not been able to order goods or services that would meet their
demand.
 Inability of the businesses to buy new technologies which can only be acquired when the
business is financially stable made through an easy access to credit enabling them have
computers and phones to advance business operations. Due to Covid-19 pandemic,
businesses are forced to do their transactions via internet as a way of reducing the spread
of the pandemic. This includes the use of Airtel money

38
CHAPTER SIX

SUMMARY, CONCLUSION AND RECOMMENDATIONS

6.1 Introduction
This section of the study provides the summary of the study, findings and conclusions made in
relation to the findings. The chapter also provides the recommendations in reference to the
findings of study.

6.2 Summary of the findings

The researcher found it pleasing to conduct the study in the vicinity of Wakawaka market for the
researcher managed to understand fully what really causes the stagnant growth while at the same
times others flop few years after their establishment. This section covers the summary of the
research findings which was done based on the study objective. The research study reported a
response rate of 76.7 percent and the results indicate that there was a fair distribution of the
respondents who participated in this study based on the gender; however, it was revealed that
female command a large number of those owning small scale enterprises at Wakawaka market,
Lilongwe. Additionally, the research findings revealed that the age of respondents that took a
large number of commands was that of youth adults. The respondents whose researched was
conducted on had a prerequisite level of education. The research study discovered that most of
the small and medium enterprises are still budding for they are not developed fully.
The study further revealed that a reasonable number of SMEs operators at Wakawaka market,
Lilongwe have the ability to support their business operations through savings. The respondents
were found to lack financial support from banks and other lending institutions that could help
them develop their businesses which force them to base on savings as a means of financing their
businesses. A good number of respondents who confessed to have applied loan(s) from financial
institutions revealed that the credit offered by the financial institutions enhanced the performance
of their businesses. Additionally, the respondents who had accessed credit from the financial
institutions confirmed that the services offered by credit finance in their area were effective.

39
6.3 Conclusion of the study
The main aim or intention of this research was to investigate how lack of credit finance affects
small and medium enterprises performance at Wakawaka market, Lilongwe. In relation to the
findings of the study, it can be concluded that small scale businesses in this area were not able to
have access to credit which in real sense affected their businesses to not being able to grow,
survive and develop. The inability of the business to develop, survive and grow was found to be
caused by limited access to credit finance that could help the business buy new technologies and
meet the business demand. The research findings revealed that majority of SMEs owners were
not able to have access to credit finance mainly because they lacked collateral to secure their
loans. This is the reason why many of these SMEs have not been able to perform as expected.
Therefore, the empirical study supports the idea that lack of credit finance has a significant
impact to the business performance.
Nevertheless, one of the key determinants of credit accessibility which was found to play a major
role in influencing the lenders have interest in giving SMEs loans at Wakawaka market, was
collateral. The findings reveal that many of the business owners were not able to have access to
credit due to lack collateral security that was used by the financial institutions as a primary
lending condition. Therefore, it can be concluded that the inability of businesses at Wakawaka
has been caused by lack of collateral which in turn affects their business performances for they
fail to meet their demands and of course unable to apply new technologies such as transacting
their businesses via computers or phones which require heavy capital.

6.4 Recommendation of the study

From the findings provided by this study, it can be recommended that:
 There should be flexible lending terms and conditions that can enable SMEs have easy
access to credit finance. This can be done by reduction of bureaucracy of some tough
conditions like that of providing collateral that the financial institutions and other lending
institutions base on most.
 The government should take part in influencing the financial institutions and other
lending institutions to encourage them have interest in providing loans to small scale
business owners. This can be done by encouraging the financers to have time to sensitize

40
 the business owners on the importance of accessing credit and train them on how
effective can they use the accessed loan to ensure they benefit from it.
 The business operators should be encouraged to formulate village banks that can enhance
the ability to have access to credit. The formulation of these groups can reduce the
problem of limited fund to support their business operations for they may be borrowing
each other amongst their groups.

6.5 Suggestion for further study

It is very needful for further studies whose data should be based on the use of more wide scope
consisting of a larger sample size. This is to enable the understandability on how lack of credit
finance affects business performance. In doing so, the generalization of the results will easily be
justified.

41
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Appendices
Questionnaire
The theme: investigating how lack of credit finance affects small and medium enterprises’
performance: a case study of Wakawaka market, Lilongwe.
I am Enock Kapote, an undergraduate student of Bachelors of Degree in Accountancy at
Nkhoma University. I have designed the following questionnaire based on the stated topic above.
I kindly request you to answer all the questions to the best of your knowledge and be aware that
all information collected via this questionnaire is confidential and will be used for academic
purpose only.
Instructions: Indicate with a tick ( ) or mark (X) in the space(s) given.
Section A: General information
1. What is your gender?
Male { } Female { }
2. What is your age group?
Less than 20 years { } 21-25 years { }
26-30 years { } 31-35 years { }
36-40 years { } 40 years above { }
3. Level of education
Masters { } Undergraduate { } Diploma { } Certificate { } Not
educated { }
4. Duration by which your business has been in operation
1-5 years { } 6-10 years { } 11-15 years { } 16-20 years { } More than 20
years { }
Section B: Loan/ credit accessibility
5. What is/ are your major source of financing?

45
 Savings { } Bank loans or loans from other lending institutions { } Borrowing from
friends or relatives { }
Other sources of finance (please specify)
------------------------------------------------------------------------------------------------------------
-------------------------------------------------------
6. Was the start-up capital adequate?
Adequate { } Not adequate { }
7. Have you applied for credit in the past from any financial institution?
Yes { } No { }
If yes as in (c) above, do the credit offered from the financial institution improve your
business performance?
Yes { } No { }
8. How many times have you been obtaining loans from the applied financial institutions?
Not at all { } 1-5 times { } 5-10 times { } Above 10 times
9. Rate the credit services offered by the banks and other lending institutions in your area
Poor { } Average { } Neutral { } Effective { } Very effective { }

Section C: Collateral and credit accessibility

10. What kind of credit security do banks or other lending institutions use most when
granting loans?
House { } Land { }
Any other (please specify) -----------------------------------------------------------------------
11. Indicate your level of agreement with the following aspects of collateral and credit
accessibility among SMEs by using a scale of 1-5, where (1) strongly disagree, (2)
Disagree, (3) Not certain, (4) Agree, (5) Strongly agree
Rankings 1 2 3 4 5
A On several occasions I
have applied for a loan
to improve my
business but declined
because I lacked

46
 collateral.
B Banks and other
lending institutions are
focusing more on
potential to repay
rather than on
collateral in our
business.
C The requirements that I
provide security for
my loan have pushed
me to seek other
means of financing to
fund my business such
as borrowing from
friends and buying on
credit.
D At times we apply for
loans as a group
because we can easily
co-guarantee each
other.
E Financial institutions
insist on the provision
of collateral security as
a primary lending
condition.
F Lending institutions
are reluctant to avail
credit to us because we
work informally while

47
 it is difficult for us to
provide acceptable
confirmation of our
earnings.
Section D: Legal status of the business
12. Is your business legal?
Yes { } No { }
If no as in (a) above, why have you not registered your business (please give a reason)
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
13. Does registration of the business have some benefits?
Yes { } No { }
If yes as in (b) above, give a reason please
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
----------------------------------------------------
14. Does the registration fee has an influence to a number of SMEs’ interest in getting
registered their businesses?
Yes { } No { }
If your answer is yes as in (c) above, does the current registration fee attract the SMEs’
attention to getting registered?
Yes { } No { }
Section E: Literacy level of entrepreneurs
15. What is your level of agreement with the following statements relating to entrepreneurs
literacy level and credit access. Use a scale of 1-5, where (1) strongly disagree, (2)
Disagree, (3) Not certain, (4) Agree, (5) Strongly agree
Rankings 1 2 3 4 5

A I do not know of the legal issues that are

needed to address access to credit for my
business because I do not know how to
understand lending terms and

48
 conditions.
B My education level has a corresponding
impact to managing my business
knowing skills and knowledge are
needed in a business

C Lending institutions are more interested

to lending those who are literate than
those with no learning background.
D Level of education has a positive
influence on when/ how to get loans to
improve the business.
E I am discouraged from borrowing a loan
because the available credit information
and charges are not communicated in a
language that I can manage to interpret.

Section F: Growth of SMEs

17. On average, how much start-up capital did you invest in Malawian kwacha?
Below 50,000 { } Between 51,000 and 100,000 { } Between 101,000 and 150,000 { }
Above 150,000
18. On average, what is the range of the enterprises total annual sales? (Tick appropriately)
Below 25,000 { } Between 25,000 and 50,000 { } Between 55,000 and 100,000 { }
More than 100,000
Thank you for your participation!!!!!

49