AKSUM UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF MANAGEMENT

THE ROLE OF MICRO FINANCE INSTITUTIONS ON PERFORMANCE OF MICRO

AND SMALL SCALE ENTERPRISES

RESEARCH PAPER SUBMITTED FOR PARTIAL FULFILLMENT OF BA DEGREE

IN MANAGEMENT

BY: SAMUEL GUESH

ID: 248/16

ADVISOR: Metkel G

sep, 2019

SHIRE, ETHIOPIA

1
 Acknowledgment
foremost gratitude deserves to the Almighty God, for giving us robust health wisdom that made it possible
for to we have another academic triumph. The next deepest gratitude is to our advisor metkel G for his
constructive comments and guidance during our trouble. We are giving grateful to MSEs that are client of
MFI in shire city engaged in merchandise, manufacturing, and service sectors for their integrity and
cooperation for giving to us relevant data. Finally, we would like to acknowledge our family and friends
for their support and encouragement.

i
 Abstract
This study was conducted on the role of MFIs On performance of MSEs in case of Shire,shire city. It was
tried to identify the role of MFIs on performance of MSEs to achieve its goals. The source of data
could be both primary and secondary sources of data were used and questionnaire used to obtain
primary data which secondary were obtained from different source like book and website that has
been written in similar areas. The data were analyzed by using descriptive type and they were
interpreted. The researchers used statements, table and percentage. Finally the collected data
was processed, analyzed and interpreted by using different table, percentage and sort of
conclusion was giving timely loan to MSEs,the MFI was giving type training to its client MSEs
concerning how to save in the institution, use loan taken from the institution, managing and
planning techniques to be highly performed business. Then sort of recommendation was MFIs
should have to avoid that factors hinders the MSEs from using service from the institution by
simplifying the legal process of agreement, reduce the amount of interest and increasing the size
of loan as well as should give relative longer repayment period.

ii
Acrimony
MFIs-Microfinance Institutions.

MSEs-Micro and small Enterprises.

DECSI-Dedebit Credit and Service Institution.

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Table of Contents
Acknowledgment..........................................................................................................................................i

Abstract.......................................................................................................................................................ii

Acrimony....................................................................................................................................................iii

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

1 Introduction..............................................................................................................................................1

1.1 Background of the study 1

1.2 Statement of the problem 3

1.3 Objectives of the study 4

1.3.1 General objective........................................................................................................................4

1.3.2 Specific objectives......................................................................................................................4

1.4 Research questions 4

1.5 Significance of the study 5

1.6 Scope of the study 5

1.7 Limitation of the study 5

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

Review of related literature.........................................................................................................................7

2.1 Definition of Microfinance 7

2.2 Characteristics of microfinance 7

2.2.1 Microfinance in the world...........................................................................................................8

2.2.2 Microfinance in developing countries.........................................................................................8

2.2.3 Micro finance in Ethiopia...........................................................................................................8

2.3 Necessity of Microfinance 9

2.3.1 Basic Principles of Microfinance................................................................................................9

2.4 Overview of Dedebit Credit and Saving Institution (DECSI) 10

2.5 Definition of Micro and Small Enterprises 11

2.5.1 Development of micro and small scale enterprises in Economic

development......................................................................................................................................12

iv
 2.5.2 In Ethiopia Micro and Small enterprise development...............................................................12

2.5.3 The Ethiopian micro and small enterprise Development strategy......13

CHAPTER THREE...................................................................................................................................14

3. Research Method and Methodology......................................................................................................14

3.1 Description of the area 14

3.2 Research Design 14

3.3 Target group/population 14

3.4 Method of sampling 14

3.5 Source of data and method of data collection 15

3.6 Data analysis method...................................................................................................................15

3.7 Organization of the study.............................................................................................................16

CHAPTER FOUR.....................................................................................................................................17

4. DATA PRESENTATION AND ANALYSIS.......................................................................................17

CHAPTER FIVE.......................................................................................................................................33

5. Conclusion and Recommendation.........................................................................................................33

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 List of Table
Page
Table 4.1: personal profile of respondents………………………………………20

Table 4.2: The role of MFIs on productivity of MSEs…………………………..23

Table 4.3: Factors challenges MSEs when they want to client of MFIs…………26

Table 4.3.1: Factors challenges MSEs when they want to client of MFIs……...30

Table 4.4: The capital of MSEs before and after client of MFIs………….…….33

Table 4.5: How access to credit enhance MSEs……………………..……….…34

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 CHAPTER ONE

1 Introduction
1.1 Background of the study
The history of micro-finance can be traced back as long to the middle of the 1800s when the
theorist Lysander Spooner was writing over the benefits from small credits to entrepreneurs and
farmers as a way to getting the people out of poverty. The today use of the expression micro-
financing has it roots in the 1970s when organization, such Grammen Bank of Bangladesh with
the micro-finance pioneer Mohamed Yunus, where starting and shaping the modern industry of
the micro-financing. Many pioneering enterprise began experimenting with loaning to the
underserved people. The main reason why micro-finance is dated to 1970s is that the programs
could show that people can be relied on the repay their loans and that it’s possible to provide
financial services to poor people through market based enterprise without subsidy. Shore bank
was the first microfinance and community development bank founded 1974 in Chicago. Today
the World Bank estimates that more than 16 million people are served by some 7000
microfinance institutions all over the world. CGAP experts mean that about 500 million families
benefits from these small loans making new business possible. (www.MFI.com)

When properly harnessed, microfinance offers a variety of benefits to the African people.
Foremost, microfinance initiatives can effectively address material poverty, the physical
deprivation of goods, services and income to attain them. Most population in sub-Saharan
African has very access to deposit and credit facilitates after financial services provided by
formal financial institution. To meet unsatisfied demand of financial service, variety of
microfinance institution (MFIs) has emerged over time in Africa (mmm.IMF/eternal pubs/ft/wp
2004/wp04/24).

Ethiopia is one of the low income countries in Africa. The majority of its people are poor and
they can’t save. As a result the county unemployment situation increases from time to time.
When takeover of the present government in 1991, considerable attempt has been made to
liberalize the financial sector. To this effect, proclamation Nº 84/94 was issued, which allows
private domestic investors to participate in banking and insurance activities, which are

1
monopolized by the government. However, the issuance of this proclamation alone did not
totally solve the financial problem of the economically active poor people in urban and rural
areas. Since middle 1980s many NGOs, in Ethiopia have stated providing microcredit to the poor
households for the purpose of income generating activities. (Itata, 2000 cited in Seifu, 2002)

After years of civil war, droughts and conflicts the Tigray regional stat suffered from severe
hardship during the mid 1990. According to a research made on its socio-economic status in
1993, a staggering 89% of the population depends on food aid. The study was conducted by
relief society of Tigray, this significance of establishing an institution to provide financial service
to poor households. In response, the rural scheme of Tigray, as one development wing of result,
was established in 1994 in order to provide micro finance to the impoverished. This was later
called as a share holding company, Dedebit Credit and Saving Institution (DECSI) is equally
named As Dedebit Microfinance, with a need of commitment to saving the need of poor people.
For a longer period of time even if the introduction of small scale enterprises is not recent
phenomenon, the policies directed towards the development of large scale enterprises.
Historically the attitudes of the government towards small enterprises have varied considerably.
In most European countries which received the bulk of public support with respect research and
development of resources by contrast during the same period the policy of United States
government have favored the protection and assistance to small scale enterprises. (Terefe, 1996)

To eradicate unemployment in Africa countries was establish many micro and small scale
enterprise and they have dominate place in Ethiopian economy. According to the sample survey
conducted in 48 major towns by the Central Statistical Authority (CSA) in May 1997, the sector
is the second largest source of employment next to agricultural, requiring a relative limited
amount of capital for start up, employing labor intensive technique, demanding low skills,
addressing narrow domestic markets, and distributing all over the economy without being highly
vulnerable to inadequacy of infrastructure facilities. (CSA, 1997)

The government of the Federal Democratic Republic of Ethiopia has recognized and paid due
attention to the promotion and development of micro and small scale enterprise (MSEs) for they
are important vehicles to address challenges of employment, economic growth and equity in the
country. To this effect the government has formulated a national MSEs Development and

2
promotion strategy, which enlightens a systematic approach to alleviate the problems and
promote the growth of MSEs. (Terefe, 1996)

The source start-up capital for MSEs in Shire were personal (own saving), borrowing from
friends and relatives, family and friends assistance, borrowing from banks and other financial
institutions, borrowing from local money leaders and inherits. (CSA survey, 1997).

Lack of access to finance has been identified as one of the major constraint to small business
growth. The reason is that provision of financial services is an important means for mobilizing
resources for more productive use. The extent to which small enterprises could access found is
the extents to which small firms can save and accumulate own capital for further investment.
However, small business enterprises find it difficult to access formal financial institution such as
commercial bank for funds. The inability of the MSEs to meet the standard of the formal
financial institutions for loan consideration provides a platform for informal institutions to
attempt to fill the gap usually based on informal social networks, and this is what gave birth to
micro-financing. The microfinance arrangement makes it possible for MSEs to secure credit
from microfinance on more easy terms. It is on this platform that we intend to examine the role
of microfinance on performance of micro and small enterprises. (Lawson, 2007)

1.2 Statement of the problem

The development of the micro and small scale enterprises is viewed as a major means towards
the improvement in the standard of living of the population. In spite of this, the micro and small
scale entrepreneurs are commonly to have very limited access to deposit, credit facilities and
other financial support services provided by formal financial institutions (FFIs). This is because,
on one hand, these micro and small scale enterprises can’t provide the necessary collateral
security demanded by these formal institutions on the other hand, the Banks find it difficult to
recover the high cost involved in lending with small firms. In addition to this, the associated risks
involved in lending to micro and small scale entrepreneurs make it unattractive to the banks to
deal with them (World Bank, 1994).

According to the National Business Incubator Association (NBIA) (2003), about 80% of new
business fails within the first five year and this high rate of failure makes it difficult for lenders
to assess accurately the variability of entrepreneurs and the likelihood of repayment. As a result,
3
MSEs often can’t obtain long-term finance in the form of debt and equity. The lack of formal
banking facilities underpins the development of MSEs to a very large extent. This has serious
implications for a country where the economy is largely characterized by micro and small
enterprises. The frustration of accessing credit facilities from formal system compel to poor and
informal business enterprises to resort to different non-banking and informal arrangements to
access funds for their operations micro and small enterprises are playing an increasingly
important role in the processing of export-led industrialization in the developing world (Little et
al, 1987); Berry, 1992; Humphrey and Schmitz, 1996; Liedhom and Mead, 1999; Katrak and
Strange, 2002; Weeks, 2002) they are the largest group in terms of the number of industrial units
in most developing countries and make a significance of the micro and small scale enterprises,
government and other stakeholders are committed to curtailing the difficult access to credit on
the part of the micro and small scale entrepreneurs. This study therefore examines the role of the
credits from micro finance institution on the operations of the beneficiaries (micro and small
scale enterprises)

1.3 Objectives of the study

1.3.1 General objective

The general objective of the study is to find out the role of micro finance institutions on MSEs
performance.

1.3.2 Specific objectives

Specifically the study aims at:

 To assess the role of microfinance on productivity of MSEs.

 To find out the challenges MSEs face when they want client of microfinance
institutions.
 To measure the capital of MSEs before and after client of microfinance.
 To examine how access to credit enhances micro and small scale enterprises

1.4 Research questions

1. How does MFIs enhance the productivity of micro and small scale enterprises?
2. What are the challenges MSEs face when they want client of microfinance institution?

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 3. How much the capital of MSEs before and after client of MFI?
4. How access to credit enhances micro and small scale enterprises?

1.5 Significance of the study

As our country is one of the least developed and has rapid growth on establishing micro and
small enterprises and on economy, this study was show the potential of microfinance institutions
on performance of micro and small enterprises.

After completed the study the researches was wishes that the study would an essence for
investigation on the role of microfinance and small enterprises and with problems of
unemployment. From this the study would assume to give different significance to other micro
and small enterprises out client of microfinance, by understanding the study that have the role of
microfinance on performance of micro and small enterprises as must for development of
enterprises and to engage them and to microfinance institution: as a source can would use and to
the researchers: to change theoretical knowledge; organizational behavior, research methodology
in to practical, to acquire B.A Degree in management and to increase the habit of conducting of
true researches and gives significance to unemployment: in order to make group and start as
micro and small enterprises with direct relation with microfinance as it is important for their
performance, and to other researchers: it would be helpful as reference while conducting a
research related to this study.

1.6 Scope of the study

This study was conducted on the role of microfinance institutions on performance of micro and
small enterprises, in Shire city only. In Shire city there are many branches of microfinance and
many micro and small enterprises but, the study was limit on the manufacturing, merchandise
and service sectors only that are customers on that microfinance branch when it establish until
now.

1.7 Limitation of the study

Although the researchers was want to give a detailed analysis about the role of microfinance on
performance of micro and small enterprises but, something, assume may be limit the task to
accomplish in well expected manner by the following reasons:

5
 Members of the sectors are in dispersed locations and may difficult to reach all
and not gain necessary data that are essential to successfully accomplish the
study.
 To reach all of them is difficult because their number is very high and there are
always in activity so may not give data necessary for the study.
 To study all of the sectors: may be lack of time, source and financial capacity.

6
 CHAPTER TWO

Review of related literature

2.1 Definition of Microfinance
Microfinance is a provision of small amount of institutional credit and saving to jointly liable
low income people, who are unable to obtain loans from formal sectors. The term microfinance
refers to provision of financial services which generally includes saving and credit, however,
some microfinance organizations provide insurance and payment services besides giving credits
and accepting savings. In addition to financial intermediation, many micro finance institutions
provides social intermediation services such as group formation, development of self confidence,
and thus significance is not simply banking; it is a developmental tool (Ledgerwood, 2000).

The term micro finance has come to refer to a wide range of organization providing very small
loans and taking back small amount of saving from their own borrowers not from the general
public, NGOs, credit unions, cooperatives, private commercial banks and non-bank financial
institutions (some that are transformed NGOs in to regulated institutions) and part of stat owned
banks, for example (the world bank and micro finance, 2004).

Generally, microfinance institution (MFI) is an organization that provides financial services to

micro and small enterprises and unemployment.

2.2 Characteristics of microfinance

Microfinance services aimed at the poor employed clients, who do not have access to formal
financial sources.

Microfinance has its unique characteristics which are as follows:-

 Mostly it is collateral free

 MFI go to client rather than clients going to MFI
 Simplified saving and loan procedure
 Small size of loans and saving

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  Repeat loan
 Interest role is usually in between money lenders and formal banks

2.2.1 Microfinance in the world

The today use of expression microfinance has started in the 1970s when organization, such as
Grammen Bank of Bangladesh with the microfinance pioneer Mohamed Yunnus, were starting
and shaping the modern industry of micro-financing. At the time a new wave of microfinance
initiatives introduced many new innovations in to the sector; many pioneering enterprises began
experimenting with loaning to the underserved people. The main reason why micro finance is
dated to the 1970s that the programs could show that people can be relied on to repay their loan
and that is possible to provide financial services to poor people through market based enterprises
without subsidiary (ibid).

Today the World Bank estimates that more than 16 million people are served by 7000
microfinance institutions all over the world. CGPA experts mean that about 500 million families
benefits from these small loans making new business possible. In a gathering at a micro credit
summit in Washington DC the goal was reaching out 100 million of the worlds’ poorest people
by credits from the world leader and major financial institutions (ibid).

2.2.2 Microfinance in developing countries

Prior to the 70s, credit delivery intervention to advance development in the third world countries
focused on building agricultural lending institutions. In this respect, the European had tried to
pass their experience to their former African and Asian colonies. Similarly, the American
experience before WWII strongly influenced many of the credit program in Latin America. Their
influence extended to the rest of the world using donor agencies as a means to promote credit
institutions. The emphasis of all the financial services was an over availing agricultural credit to
farmers for investment and inputs to promote agricultural production. Their credit went to those
who can show exploitable resource and provide reliable development credit was promoted in the
60s and 70s in Ethiopia. (www.MFI.com)

2.2.3 Micro finance in Ethiopia

Since the takeover of the present government in 1991, considerable attempt has been made to
liberalize the financial sector. To this effect, proclamation Nº 84/94 was issued, which allows
8
privet domestic investors to participate in banking and insurance activities, which are
monopolized by the government. However, the issuance of this proclamation alone did not
totally solve the financial problems of the economically active poor people in urban and rural
areas (Seifu, 2002). Moreover to address the issues of development and food security, the
Federal Government of Ethiopia has implemented development programs such as the expansion
program to increase agricultural production and productivity and the federal and regional food
security strategies design to increase food and agricultural production, improve food entitlement
and strengthen the capacity to manage food crises. (ibid).

Since mid 1980s, many NGOs, in Ethiopia have stated providing microcredit to the poor
households for the purpose of income generating activities. (Itata, 2000 cited in Seifu, 2002)
besides, NGOs become active in providing microfinance services to the poor since 1984/85
following the great drought as (wolday, 2002) reveals an urban based pilot microcredit scheme
started in 1990 through an agreement reached between government and international
development association. (IDA)

The government also started micro-enterprises lending program after signing development credit
agreement (that that is market town development project) with international development
association (IDA) on March 30, 1990, which has been managed by Development Bank of
Ethiopia. The objectives of the program were to finance very small business and household
income generating activities, and to provide at least 50% of the loan to women entrepreneurs
(implementation completion report, MTDP, 1999 cited in Asmelash 2003).

2.3 Necessity of Microfinance

Microfinance is not panaceas for poverty and related development challenges but rather an
important tool in the poverty reduction programs. Thus microfinance alone can’t improve roads,
housing, water supply, and education and health services. However it can play an important role
in making the above interventions realized. It also empowers the poor and provides them
confidence self esteem and financial mean to increase income and access to social services
(Wolday, 2001).

2.3.1 Basic Principles of Microfinance

A. Financial viability
9
 Microfinance institutions are not charitable institutions. They need to be self-sufficient in
order to provide sustainable services to the poor so clients in this respect, they target at
maintaining cost effective administration system and producers to keep cost of service
delivery as low as possible. It shall change an appropriate interest rate on loans and pay the
same to depositors. It operates in an acceptable financial prudence requires of all financial
institutions.

B. Easy acceptability

The innovation approach adopts the principle of banking door steps of the small scales. This,
in practice, means bringing the financial service to the enterprising. When financial
institutions are far from the target groups, it is impossible to form effective relation and
confidence with the service users.

C. Collateral free loan

Fundamentally, relationship among partner to the microfinance services is characterized by

mutual trust and support. As a result, there is no collateral requirement for loan authorization
and disbursement. Loan is disbursed on the basis of trust debits and collective responsibility
entered among group of clients.

D. Regular Compulsory Saving

One of the disciplines required from target groups to fight poverty and record success to
maintain regular savings. Savings will reduce the economic vulnerability of the poor by
enabling them to break the vicious circle of small scale enterprises poverty (Seifu, 2002).

2.4 Overview of Dedebit Credit and Saving Institution (DECSI)

After years of civil war, droughts and conflicts the Tigray region suffered from severe hardship
during the mid 1990. According to a research made on its socio-economic status in 1993, a
staggering 89% of the population depends on food aid. The study was conducted by the relief
society of Tigray, The significance of establishing an institution to provide financial service to
poor households. Without access to capital or savings, a vast majority of the population simply
could not reliabilities or developed. In response, the rural scheme of Tigray, as one development

10
wing of result, was established in 1994 in order to provide micro finance to the impoverished.
This was later called as a share holding company, Dedebit Credit and Saving Institution (DECSI)
is equally named As Dedebit Microfinance, with a commitment to serving the need of micro and
small enterprises. (CSA, 1977)

 Vision

The vision of DECSI is to see poverty eradicated not only in Tigray Regional State but also in
the country through the provision of high quality financial service by establishing a competent,
strong, efficient, stable and sustainable financial institution in our continent.

 Mission

The mission of the DECSI is to improve the wellbeing of those individuals operating in the areas
of subsistence agriculture, micro, small and medium enterprises by increasing their income and
wealth through provision of and sustainable microfinance services.

2.5 Definition of Micro and Small Enterprises

The definition of micro and small scale enterprises is varying from one country to other country
depending on the number of employee engage and the amount of capital investment. In USA the
criteria for defined as a business activity owned operated by less than 20 employees but the
number o employees extended up to 99 for small business Haily G/tinsai, 2nd edition).

In our country Ethiopia, micro and small scale enterprises are given different meaning at
different times. Even if different are given in different time, for this particular study the
definition given by ministry of trade and industry in 1997 is the basic applicable definition.
(CSA, 1997)

The central static’s authority defines small trade organization that employees less than 10
peoples. Those engaged in hand craft and informal sectors are categorized as micro enterprise.
According, when seen from the current development level or standard and capacity, the
following definition is determined to be applicable by the ministry of trade and industry. (CSA,
1997)

 Micro enterprise
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Micro enterprises are small business enterprises that paid up capital of not exceeding birr 20,000
and excluding high technical and consultancy firms and other high tech establishments.

 Small enterprises

Small enterprises are those business enterprises with paid up capital above 20,000 and not
exceeding birr 50,000 and excluding high technical consultancy firms and other high tech
establishments, thus, micro and small scale enterprise means without including these mentioned
by the two capital level above and trade industry and technical institutions.

2.5.1 Development of micro and small scale enterprises in

Economic development
Basically micro and small enterprise is an old phenomenon but if only in recent year that their
role in the process of poverty reduction has recognized in both developed and developing
countries like China, USA, Australia and India has taken step of encourage the formation of
micro and small scale enterprise also recognized recently in most African countries like Ethiopia,
Kenya and Uganda. In Kenya for example such enterprises were finding to have enjoyed
significant role as means of poverty reduction and the rate of expansion is also high. In towns the
number of MSEs are more than 2000 and expand employment by 80%over 1990-2000 (FDRE,
MWUD, April 2006).

2.5.2 In Ethiopia Micro and Small enterprise development

Strategy is adopted since in 1997 although the lack of compressive and up to date national
statistics make it very difficult to make proper estimates based on the available information in
Ethiopian there are number of micro and small scale enterprises but 80% of activity is done in
rural area with large emphasis on agricultural sector. In order to implement this program the
sector has been evaluated in four national regions and two urban administrations namely
Amhara, Oromia, Tigray, SNNPR, Addis Ababa and Dire Dawa accordingly the study points out
some strong and weak aspects. Strong aspects includes training has been provided to build
capacity of the beneficiary work management and technical skill, organization the beneficiary
and through engaging them in different activities and thus effort made to create job, the urban
administrator as enabled the provision of guarantee for the beneficiaries and equipment lease has
been stated. Weak aspects including inability to improve technology and research work to
12
increase production the market integration created for the enterprise most focusing on the
government development program and failure to look other alternatives on wider base. (CSA)

2.5.3 The Ethiopian micro and small enterprise

Development strategy
In Ethiopia the idea of micro and small scale enterprise development emerged as promising
agenda in 1980s MSE play a vital role in economic development and poverty reduction. The
Ethiopian micro and small scale enterprise has a range of operators, from petty trade to small
shoe factory owner, a peddler in street to a grocery business sector. A verity of reasons has been
cited for the surge of interest in micro and small scale enterprise like:-

 Micro and small scale enterprise are better way from poverty reduction.
 0Micro and small scale enterprise are a plat form for sustainable development.
 Micro and small scale enterprise are important sector within the trade sector and plat
form for economically empowering men and women.
 In providing people with live hood and
 Income generating opportunities

In November 1997 the Ethiopian ministry of trade and industry has established “the micro and
small scale enterprises and development strategy of Ethiopia”. MEI play a great role on the
performance of MSEs by giving loans, insurance, pension, and other that are needed by MSEs.
(CSA, 1997)

In addition MFI contributes non-financial services to MSE growth. Non-financial services,

management and vocational skill training, consultancy and advisory services marketing
assistance, information, technology development and transfer and business linkage promotion.
The non-financial product provide by MFI to MSES boost the growth and competitiveness of
enterprises. It can also increase the impact of existing financial services and improve the capacity
to repay loans. (ILO, 2004]

13
 CHAPTER THREE

3. Research Method and Methodology

The main purpose of this study is to describe the role of microfinance on performance of micro
and small enterprises in Shire city. The study was use the descriptive research method and
quantitative method based.

3.1 Description of the area

This study was conducted in Shire city. Shire is the one of city in Tigray Regional Stat of
Ethiopia.

3.2 Research Design

The research was designed in descriptive type. Our research uses descriptive type, because such
type of research is marked by the prior formulation of specific research problem (questions) and
this study describe about someone; function, role.

3.3 Target group/population

The target population of the study in shire micro and small enterprises that are clients of
microfinance on its branch are totaled 488.

3.4 Method of sampling

The data was collected from the sample of the objective population. The study uses a sampling
method it was appropriate to this population stratified sampling, because the study contains a
heterogeneous populations and the stratified method changes in to homogenous group which is
strata, the study will have three strata.

 Manufacture sector (N1) = 68

 Merchandise sector (N2) = 308
 Service sector (N3) = 112

Total population (N) = 488

From the total population we determine 83 as sample size by using the stratified sampling
method

14
 n= Where: - N = Total population

= n = Sample size

= 83 E = Error

 The sample size selected from each of strata as follow:

Ni= Where: - Ni = population of strata

N1 = = = 12 N = Total population

N2 = = 52 n = sample size

N3 =

Total n=83

3.5 Source of data and method of data collection

The researchers were used both primary and secondary sources of data. The primary data was
collected from questionnaire that contains both close and open ended questions. The secondary
resource of data was collected from records, literatures, books and internet, written documents;
both published and unpublished regarding the problem related issue of the area.

15
 3.6 Data analysis method
The data that was collected by the above data collecting methods was analyzed quantitatively
and qualitatively. The quantitative data which would collect by using tables and percentage,
whereas the qualitative data that was collected by questionnaires was analyzed, which was used
description analysis.

3.7 Organization of the study

The research was consisting of five chapters. Chapter-One contained general back ground of the
study, statement of the problem, objective of the study, research questions, significance of the
study, scope/delimitation of the study and limitation. Chapter-Two contained the related review
literature of the study. Chapter Three was contained research method and methodology, research
design, target population, data source and collection method, sample size determination and data
analysis method. Chapter four about data analysis and interpretation and Chapter Five were
contained of the summary, conclusion and recommendations of the study.

16
 CHAPTER FOUR

4. DATA PRESENTATION AND ANALYSIS

Data analyzed and presented in this study were collected form Micro and small scale enterprises
(MSE) that is client of micro finance institutions (MFI) in shire city, on the role of micro finance
institutions (MFIs) on performance of Micro and small scale enterprises (MSEs). In this regard
83 questionnaires were distributed to the client of shire micro finance institutions (MFIs), micro
and small scale enterprises were properly filled and collected. From the 83 distributed
questionnaires 62 of the questionnaire were collected. There for the reaming 21 questionnaire
paper was not collected because of different reasons such as lack of the willingness of
respondent, and lack of time the respondents to respond the questionnaires paper.

4.1 Personal profiles of respondents

Table 4.1

No Item Alternative Number of Percentage (%)

respondent
1 Sex Male 34 54.83
Female 28 45.16
Total 62 100%

2 Age 18-25 28 45.16

26-33 18 29.03
34-41 9 14.51
41-48 5 8.06
>48 2 3.22
Total 62 100%

3 Educational level Primary 2 3.22

Secondary 18 29.03
Certificate 8 12.90
17
 Diploma 13 20.96
Degree and Above 21 33.87
Total 62 100%
4 Work Experience 0 18 29.03
1-3 32 51.61
4-6 11 17.74
>6 1 1.16
Total 62 100%
5 Type of business Merchandise 37 59.67
you are running? Manufacturing 17 27.41
Service 8 12.90
Total 62 100%
6 Initial capital Up to 20,000 52 83.87
Up to 10 16.12
200,000_500,000
Above 500000 0 0

Total 62 100%

Source, Questionnaire 2009 E.C

Item 1 Table 4.1 indicates the sex group of owners of micro and small scale enterprises out of 62
respondents 34(54.83%) are males and 28(45.16%) are females they are small when compared to
male respondents.

Item 2 Table 4.1 indicates the age group of owners of MSEs out of 62 respondents 28(45.16%)
are group of 18 -25 age, 18(29.03%) are 26-33 age group, 9(14.51%) respondents are 34-41 age,
5(8.06%) respondents are 41-45 age and 2(3.22%) respondents are > 48 age group. This shows
that the MSEs is dominated by the age group of (18-25), this means they are young and
productive.

18
Item 3 Table 4.1 indicates the educational level of the respondents out of 62 respondents
2(3.22%) are primary, 18(29.03%) respondents are secondary, 8(12.90%) respondents are
certificate, 13(20.96%) are diploma and 21(33.87%) respondents are degree and above. This
shows most of the owners of MSEs are dominated by first degree and above this shows most of
the respondents educated regularly and who contribute much to success of the enterprises.

Item 4 Table 4.1 indicates the work experience of the respondents out of 62 respondents
18(29.03%) are on starting, they have “0” experience in years, 32(51.61%) respondents have (1-
3) years of experience, 11(17.74%) respondents have (4-6) year experience and 1(1.6%)
respondents have above 6 year experience. The researchers recommended as the working
experience increase the success of the enterprises are increase, because if individual have higher
experience they familiar with what is business so, this is source of success.

Item 5 Table 4.1 indicates the type of business you are running? Respondents out of 62
respondents 37(59.67%), are runs merchandise, 17(27.41%) are runs manufacturing and
8(12.90%) are runs service sectors. This shows most of the shire city MSES are merchandise
sectors and must expand the other types of sectors.

Item 6 table 4.1 indicates the MSEs Initial capital out of the 62 respondents 52(83.87%) up to
20,000, 10(16.12%) 20,000-500000 and 0(0%) have above 500,000 initial capital. This shows
most of the MSE start with capital interval of up to 20,000. Above 500,000 are big businesses.

4.2General Questions

Table 4.2

The role of MFI on productivity of MSEs

No Item Alternative Number of Percentage (%)

respondent
1 How MFIs have Providing timely 8 12.9
role on loan
productivity of Information about 5 8.06
your enterprise? managing capital

19
 Providing collateral 11 17.74
free credit
By accessing to 2 3.22
information about
saving
All 36 58.06
Total 62 100%

2 What about your Very increase 28 45.16

productivity after Increase 25 40.32
client of MFIs. No change 9 14.51
Decrease 0 0
Very decrease 0 0
Total 62 100%

3 MFI plays a Strongly agree 38 61.29

great role in Agree 21 33.87
increasing Not sure 3 4.83
business outlets Disagree 0 0
Strongly disagree 0 0

Total 62 100%

4 MFI plays a Strongly agree 35 56.45

great role in Agree 24 38.7
increasing the Not sure 3 4.83
production Disagree 0 0
amount of the Strongly disagree 0 0
MSEs
Total 62 100%

Source: 2009 questionnaire

20
Item 1 Table 4.2 indicates 8(12.9%) of the respondents has MFI have role in providing timely
loan, 5(8.06) are said the role of MFI on productivity of MSEs is by providing information about
managing capital, 11(17.74%) are by providing collateral free credit, and 2(3.22%) are by
accessing to information about saving and 36(58.06%) are all the above. This show MFI have a
role in the productivity of MSEs by providing timely loan, providing Information about
information about saving. From the results and discussion afore, it emerged that the role of
microfinance institutions in Kaduna metropolis have positive impact on the productivity growth
of the MSEs, and have significantly enhance the socio-economic development of small scale
traders because viable approach to sustainable growth and development lies in the financial and
economic advancement of small scale trader and rural dwellers in Nigeria. Findings has show
that microfinance institutions has immensely contributed a lot on the, productivity of MSEs,
economy, growth of Nigeria through lending of loans to individual and groups for entrepreneur
activities to bring about general increase in the production of goods and services creates
employment opportunities to the youth, attracts foreign investment. The finding has also made us
understand that microfinance institution is very relevant to the growth of Nigeria, economy this
microfinance institution has contributed greatly on the growth and development of the Nigeria
economy.

Item 2 table 4.2 shows the productivity of MFI after client of MFIS. From 62 respondents
28(45.16%) respondents said very increase 25(40.32%) increase, 9(14.51%) no change 0(0%)
decrease and 0(0%) very decrease. That shows most of the MSEs are very increase their
productivity after client of MFIs.

Item 3 table 4.2 shows the role of MFI in increasing business outlets, out of 62 respondents
38(61.29%) are strongly agree, 21(33.87%) respondents agree, 3(4.83%) respondents said not
sure 0(0%) disagree and 0(0%) are strongly disagree. This show a MFI have a great role on the
increasing of business outlets.

Item 4 table 4.2 shows the role of MFI on increasing the production amount of the MSFs, out of
62 respondents 35(56.45) strongly agree, 24(38.7%) , 3 (4.83%) not sure and no respondents on
disagree and strongly disagree. This indicates MFI have a great role on increasing the
production amount of the Micro and small scale enterprise (MSFs).

21
Table 4.3

Factors challenges MSEs when they want to Clint of MFI

No Item Alternative Number of Percentage (%)

respondents
1 Does the MFI Strongly agree 20 32.25
need high Agree 19 30.64
collateral Not sure 3 4.83
Disagree 12 19.35
Strongly disagree 8 12.9

Total 62 100%

2 Is MFI charge Strongly agree 31 50

high interest rate Agree 23 37
Not sure 5 8.06
Disagree 3 4.83
Strongly disagree 0 0

Total 62 100%

3 Is complexity on Strongly agree 36 58.06

the legal Agree 17 27.41
agreement Not sure 3 4.83
process? Disagree 4 6.45
Strongly disagree 2 3.22

Total 62 100%

4 Fear of risk Strongly agree 27 43.54

failure to repay Agree 17 27.41
loan Not sure 5 8.06
Disagree 11 17.74

22
 Strongly disagree 2 3.22

Total 62 100%

5 Bureaucratic Strongly agree 14 22.58

administration Agree 32 51.61
style in MFI Not sure 10 16.12
Disagree 6 9.67
Strongly disagree 0 0

Total 62 100%

Source: 2009 questionnaire

Item 1 Table 4.3 indicates does MFI need high collateral, out of 62 respondents 20(32.25%) of
respondents said strongly agree, 19(30.64%) of respondents said agree, 3(4.83%) of respondents
are said not sure, 12(19.35%) of respondents said strongly disagree, that means most of the time
MFI needs a collateral like a person who can surety. Historical development and the associated
culture, of the banking system underpin the problem of the emphasis on the provision of
collateral as a primary condition in lending. Banks have always adopted a risk adverse stance
towards small firms, with an accompanying inability to focus on the income generating potential
of the venture, when analyzing the likelihood of loan repayment (Beaver, 2002).
Credit constraints can occur when banks increase collaterals for loans. As a result, low interest
borrowers (including MSEs) may be removed from the list of potential customers and banks may
skip these customers (Stiglitz& Weiss, 1981). Gangata & Matavire, (2013) in their study on
challenges facing MSEs in accessing finance from financial institutions, found out that very few
MSEs succeed in accessing funding from financial institutions, the main reason being failure to
meet lending requirements, chief among them being provision of collateral security.
A study was done on challenges faced by Small & Medium Enterprises (SMEs) in obtaining
credit in Ghana. Based on the responses received through the questionnaires circulated, it

23
became evident that SMEs in Ghana like most SMEs in other countries are faced with major
challenges in accessing credit. These challenges were revealed by the study to include, the
inability of SMEs to provide collateral and other information needed by banks such as audited
financial statement couple with the high cost of loan in terms of high interest rates make it
extremely difficult to access bank loans (Vuvor&Ackah, 2011).
Cressy and Toivanen (2001) say that, “better borrowers get larger loans and lower interest rates;
collateral provision and loan size reduce the interest rate pai.The bank is shown to use qualitative
as well as quantitative information in the structuring of loan contracts to small businesses.”
It is generally recognized that MSEs face unique challenges in Ghana MSEs, which affect their
growth and profitability and hence, diminish their ability to contribute effectively to sustainable
development. These include lack of managerial training and experience, inadequate education
and skills, lack of credit, national policy and regulatory' environment, technological change, poor
infrastructure and scanty markets information. (so, also there is similar problems over the world
that face MSEs.
Item 2 Table 4.3 shows is MFI charge high interest rate, out of 62 respondents 31(50%) of
respondents strongly agree, 23(37%) of the respondents said agree, 5(8.06%) of respondents said
not sure, 3(4.83%) of respondents said disagree and no one said strongly disagree. This indicates
MFI charge high interest rate on MSFs.

Item 3 Table 4.3 shows the complexity on the legal agreement process, Out of 62 respondents
36(58.06%) of respondents said strongly agree, 17(27.41%) of respondents said agree, 3(4.83%)
not sure, 4(6.45%) of respondents said disagree and 2(3.83%) not sure, 4(6.45%) of respondents
said disagree and 2(3.22%) of the respondents said strongly disagree. From the data research
concludes there is much a complexity on the legal agreement process in MFI.

Item 4 table 4.3 indicates fear of risk (failure) to repay loan, out of the 62 respondents
27(43.54%) of respondents said strongly agree, 17(27.41%) of respondents said agree, 5(8.06%)
of the respondents not sure, 11(17.74%) of the respondents said disagree and 2(3.22%) said
strongly disagree, from the above we conclude there is something fear of risk /failure to repay a
loan. Risk factor is another aspect that explains the access to credit facilities by MSEs. Total risk
(both business and financial risk) may be a dimension across which a financing gap might exist.
A firm’s business risk (which focuses on a firm’s operations), represents the uncertainty of the
24
firm’s return on its assets (Correia, Flynn &Wormald, 2008). Whereas, financial risks occurs
when a firm makes use of debt (that is, financial leverage). In such instances, the firm takes on
additional responsibility of financing the debt which is paying interest payments on time. The
inability of the firm to pay the interest payments or repay the principal will result in a default that
might lead to bankruptcy. As the amount of debt used by the firm increases, the chances of it
defaulting will also go up due to constraints on its cash flows as a result of the interest payments.
MSES rely more on external financing, thus the financial risk in the MSE sector is most likely to
be very high. According to:
(Master of Science in Entrepreneurship, Jomo Kenyatta University of Agriculture and
Technology, Nairobi Campus, Kenya1)

Because of the above study business risk or fear of risk is influence MSEs regarding to taking
loan.

Item 5 Table 4.3 indicates the bureaucratic administration style in MFI, of the 62 respondents
14(22.58%) said strongly agree, 32(51.61%) of respondents said agree, 10(16.12%) said not sure,
6(9.67%) said disagree and 0(0%) of respondents said strongly disagree. This shows there is
bureaucratic style in MFI because >50% said agree.

Table 4.3.1

Factors challenges MSEs when they want to Clint of MFI

1 Disagreement Strongly agree 16 25.8

with members of Agree 21 33.8
MSF group Not sure 15 24.19
Disagree 7 11.29
Strongly disagree 3 4.83

Total 62 100%

2 Lack of Strongly agree 18 29

enterprising Agree 33 53.22
culture Not sure 6 9.677

25
 Disagree 4 6.45
Strongly disagree 1 1.61

Total 62 100%

3 High operating Strongly agree 20 32.25

cost Agree 19 30.64
Not sure 8 12.9
Disagree 11 17.74
Strongly disagree 4 6.45

Total 62 100%

4 Poor managerial Strongly agree 18 29

skill Agree 33 53.22
Not sure 6 9.67
Disagree 4 6.45
Strongly disagree 1 1.61

Total 62 100%

5 Poor marketing Strongly agree 10 16.12

strategy Agree 20 32.25
Not sure 14 22.58
Disagree 15 24.19
Strongly disagree 3 4.83

Total 62 100%

6 Low saving habit Strongly agree 35 56.45

Agree 20 32.25
Not sure 7 11.29
Disagree 0 0
Strongly disagree 0 0

Total 62 100%

7 You always Strongly agree 0 0

26
 access loans as at Agree 2 3.22
when you ask Not sure 8 12.9
Disagree 30 48.38
Strongly disagree 22 35.48

Total 62 100%

8 The government Strongly agree 45 72.58

should encourage Agree 17 27.41
MFI to support Not sure 0 0
MSEs Disagree 0 0
Strongly disagree 0 0

Total 62 100%

Source: 2009 Questionnaire

Item 1 Table 4.3.1 shows the disagreement with members of MSF group, out of 62 respondents
16(25.8%) respondents strongly agree, 21(33.8%) of respondents said agree, 15(24.19%)
responses said not sure, 7(11.29%) respondents said disagree and 3(4.83%) respondents said
strongly disagree, That indicates there is a disagreement with members of MSE groups because
21(33.8%) agree and 16(25.8%) strongly agree.

Item 2 Table 4.3.1 indicates the lack of enterprising culture out of 62 respondents 18(29%) said
strongly agree, 33(53.22%) respondents said agree, 6(9.677%) said not sure 4(6.45%)
respondents said disagree and 1(1.61%) respondents said strongly disagree. This shows above
50% of the respondents said there is lack of enterprising culture in micro and small scale
enterprises.

Item 3 Table 4.3.1 shows about operating cost, out of the 62 respondents 20(32.25%) said
strongly agree, 19(30.64%) said agree, so in MSEs there is high operating cost because of this
they cannot be profitable.

Item 4 Table 4.3.1 poor managerial skill out of the respondents 62, 18 (29%) said strongly agree,
33(53.22%) agree, 6(9.677%) not sure, 4(6.45%) disagree and 1(1.61%) strongly agree, this
shows there is a problem of managerial skill in MSEs.

27
Item 5 Table 4.3.1 indicates poor marketing strategy. Out of 62 respondents 10(16.12%) said
strongly agree, 20(32.25%) said agree, this shows there is almost sometimes a problem of poor
marketing strategy.

Item 6 Table 4.3.1 shows low saving ,out of 62respondents 35(56.45%) said strongly
agree,20(32.25%) said agree, 7(11.29%) not sure, and there is no respondent said disagree and
strongly disagree, this indicates in MSEs there is high problem of saving habit (There is low
saving habit). According to Dereje Workie Nigussie thesis in Addis Ababa (since 1950), Savings
and saving mobilization are other financial services provided by MFIs. MFIs provide two types
of savings products: voluntary and compulsory saving facilities.
Compulsory saving may have an advantage of developing saving culture among
borrowers and used as collateral for loan. Enterprises were also used this savings as one of the
instruments for arrears settlement. Cash collections, savings mobilization activities, and loan
disbursements were made both at center or branches level. So, saving must be considered as
culture in MSEs and MFIs.

Item 7 Table 4.3.1 indicates you always access loans as at when you ask out of the 62
respondents 0(0%) said strongly agree, 2(3.22%) said agree, 8(12.9%) nor sure, 30(48.38%)
respondents said disagree and 22(35.48) said strongly disagree, This shows there is a problem on
access to loan for MSE, because most of the respondents said disagree and strongly disagree.

Item 8 Table 4.3.1 indicates is government should encourage MFI to support MSEs, out of 62
respondents 45(72.58%) respondents said strongly agree, 17(27.41%) said agree and 0(0%)
respondents said not sure, disagree strongly disagree. This shows government should encourage
MFI to support MSFs

Table 4.4

The capital of MSEs before and after Clint of MFI

No Before Client of After Client of MFI Number of Percentage (%)

MF respondent
1 Up to 20,000 Up to 200,000 43 69.35
28
2 20,000-80,000 20,000-400,000 19 30.64
3 >80,000 >500,000 0 0
Total 62 100%

Source 2009 questionnaire

Form the 62 respondents 43(69.35%) respondents said the capital before client of MFI, up to
20,000 and increase up to 200,000 after client of MFI, 19(30.64%) said the capital before client
of MFI 20,000-80,000 and increased to 20,000 – 400, 000 and no one said its before capital >
80,000 and after client > 500,000 capital. This shows most of the MSFs capital before client is
up to 20,000 and increases their capital after client up to 200,000 capitals.

Table 4.5

HOW Access to credit enhance MSEs?

No Item Alternative Number of Percentage (%)

respondent
1 What happened Very increase 16 25.8
on your capital Increase 40 64.5
level after client Decrease 6 9.67
of MFI? Very Decrease 0 0
No change 0 0
Total 62 100%

2 Does the credit Yes 58 93.54

access from MFI No 4 6.45
contributed to the
growth of your
business?

Total 62 100%

3 If you answer No Highly positive 10 17.24

2 “Yes” how do growth
you rate the Moderate positive 32 55.17

29
 contribution of growth
credit access to Slightly positive 16 27.58
your business growth
growth Negative growth 0 0
No change 0 0
(growth)
Total 62 100%

4 In what aspect Increase service 14 22.58

from MFI helped quality
your business Increase sales 30 48.38
function? volume
Increase productive 18 29.03
scale
No change (no 0 0
help)
If other specify it 0 0

Total 62 100%

5 How do you rate Very Good 0 0

the performance Good 3 4.83
of your business Satisfactory 7 11.29
adventure before Poor 40 64.51
receiving credit Very poor 12 19.35
from MFI?

Total 62 100%

6 How do you rate High 12 19.53

the performance Very good 38 61.29
of your business Good 8 12.9
after receiving Satisfactory 4 6.45
credit from MFI? Poor 0 0
Very Poor 0 0
No change 0 0
Total 62 100%
30
Source 2009 Questionnaire

Item 1 Table 4.5 indicates about capital after client of MFI, out of 62 respondents 16(25.8%) said
very increase, 40(64.5%) respondents said increase, 6(9.67%) said decrease and no one said very
decrease and no change. This show there is increment on capital after client of MFI, so the
researchers recommended MSEs must be client of MFI.

Item 2 table 4.5 shows is access to credit contributed to the growth of MSEs. Out of 62
respondents 58(93.54%) respondents said yes and 4(6.41%) said no. This shows access to credit
from MFI is contribute to the growth of micro and small scale enterprises. Because of the
majority respondents said yes but when we compare with Nigeria, MFI as practiced in Nigeria
MFI do not enhance growth and expansion capacity of MSEs.The finding confirmed the views
expressed by oiutunla and obamuyi (2008) that growth of MSEs is not just dependent on
accessing bank but accessing the right growth of loan at the right time. But in Ethiopia context as
developing country as accessing to loan enhance for the growth of MSEs because the MSEs in
Ethiopia face with the problem of accessing credit, so in Ethiopia MSEs needed credit accessing.
A crucial element in the development of the MSE sector is access to finance, particularly to bank
financing, given the relative importance of the banking sector in serving this segment. Firm-level
data collected by the World Bank show that access to finance is perceived as one of the main
obstacles to doing business. A number of studies have shown that financing is a greater obstacle
for MSEs than it is for large firms, particularly in the developing world, and that access to
finance adversely affect the growth of the MSE sector more than that of large companies
(Schiffer, &Weder, 2001; Beck, T., Demirgüç-Kunt, &Maksimovic, 2005). It is, therefore,
unsurprising that the international development community has listed small and micro
enterprises (SMEs) access to finance as an important policy priority.
Africa’s MSEs have little access to finance, which thus hampers their emergence and eventual
growth. Their main sources of capital are their retained earnings and informal savings and loan
associations, which are unpredictable, not very secure and have little scope for risk sharing
because of their regional or sectoral focus. Access to formal finance is poor because of the high

31
risk of default among MSEs and due to inadequate financial facilities. Small businesses in Africa
can rarely meet the conditions set by financial institutions. Access to finance helps all firms to
grow and prosper. However, lack of access to credit is a major impediment inhibiting the growth
of micro enterprises (GOK, 2005). Furthermore, firms with greater access to capital are more
able to exploit growth and investment opportunities (Beck, Demirgüç-Kunt, Laeven,
&Maksimovic, 2006). There is no structured institutional mechanism in Nigeria to facilitate the
flow of financial resources from the formal sector through micro finance institutions to such
enterprises. Generally, such enterprises operate on tight budgets, often financed through owner's
own contribution, loans from friends and relatives and some bank credit. They are often unable
to procure adequate financial resources for the purchase of machinery, equipment and raw
materials as well as for meeting day-to-day expenses. This is because, on account of their low
goodwill and little fixed investment, they find it difficult to borrow at reasonable interest rates.
As a result, they have to depend largely on internal resources. The problem is even acute in rural
areas where banks branches are far apart or non-existent (GOK, 2005). This shows access to
credit can enhance micro and small scale enterprise.

Item 3 Table 4.5 indicates the rate of growth credit access to MSE from the respondents 58
they are said yes in the above item “2” out of the 58 respondent 10(17.24%) said highly positive
growth, 32(55.17%) respondents said moderate positive growth, 16(27.58%) said slightly
positive growth and no one can said negative growth and no change. This show the majority of
respondents said there is a moderate positive growth from access to credit.

Item 4 Table 4.5 shows in what aspect MFI helped your business function, out of 62 respondents.
14(22.58%) said in increasing service quality, 30(48.38%) said in increase sales volume,
18(29.05%) respondents said in increase productive scale and no respondent said no change.
That indicates MFI helped in increasing service quality, sales volume and productivity.
Item 5 Table 4.5 shows the rate of performance of MSEs before receiving credit from MFI out of
62 respondents 0(0%) said very good, 3(4.83% said good, 7(11.29%) said satisfactory,
40(64.51%) said poor and 12(19.35%) said very poor. This show MSEs before receiving credit
their performance is poor.

32
Item 6 Table 4.5 indicates the rate of performance of MSEs after receiving credit from MFI. Out
of 62 responds 38(61.29%) respondents said their performance very good after receiving credit
from the micro finance institution.

CHAPTER FIVE

5. Conclusion and Recommendation

The purpose of this study was to assess the role of Micro finance institutions (MFI) on the
performance of micro and small scale enterprises. To achieve this above objective the
researchers was collected data to analyzed, presented and interpreted and as well as views
literature were reviewed to draw relevant conclusion and recommendation.

This chapter deals with both conclusion and recommendation which were drawn by the
researchers.

5.1 Conclusions

Based on the finding of the study researchers was able to point out the following results:

The MFI have the role on productivity of MSEs in different aspects like, providing timely loan,
information about managing capital, by providing collateral free credit and accessing to
information about saving.MFI have the role on increasing productivity scale and it increase the
business outlets of MSEs.Finally, MFI is the key for the life of MSEs.

MSEs have many major challenges when they want a client of MFI, high need of collateral, high
interest rate, complexity in legal agreement process, fear of risk or failure to repay a loan,
disagreement with members of MSEs group, lack of enterprising culture, high operating costs,
poor managerial skill, poor marketing strategy, dealy of loans access and low saving habits.

The capital of MSEs before client of MFI is very low and it is not enough for running a small
business because, the capital is either self saving or families helping sources. But the capital of
MSEs after client of MFI is increase because MSEs simply can take a loan from MFI with
different trainings. So, MSEs need enough capital to run their business effectively and
efficiently.

33
Access to credit enhances the MSEs Productivity and capital because if MSEs access to credit
they can accomplish their activity on time and they have a needed facilities, this shows access to
credit contribute to the growth of MSEs.

5.2 Recommendation

 The employment and welfare contribution of micro and small scale enterprises is not a
mater to be ignored rather appreciated so their expansion should be highly desired by the
government. To make MSEs competitive and profitable, increasing the capacity and skill
of the operators through continuous trainings, experience sharing from successful
enterprises, and provision of advice and consultancy are crucial. Moreover, improved
provision of necessary infrastructure and enabling the environment for business
operations is generally an imperative. Uninterrupted power supply and quick
transportations are basic to effective performance of these enterprises.

 The simultaneous expansion of micro and small scale enterprise with micro fiancé
industry would result in a tangible output in the economy so that expansion of both of
them must be the note to the government. Apart from banks, MFIs were also proven
effective in providing services to MSEs. Securing financial service is the main target for
the establishment MFIs. Do not only grant financial but also provides them with some
non financial services. These non financial services are meant to feed the MSEs with the
necessary business skills to better run the venture. MFIs are assets to the developing and
transition countries, the services they provide are tailored to the needs and aspiration of
the local inhabitants and emphases are towards the poor. The products and services put
forth to the community are not solution by themselves to the numerous problems
affecting the poor. Instead, they only provide a plat-form for those who were considered
no fit to meet bank requirements. MSEs much affected by these constraints and MFIs are
towards bridging the gap. Microfinance is only a portion of what is needed to boost
enterprises which are incapable of getting the necessary assistance from commercial
bank. They develop new markets, increases income, create and accumulate assets and
promote a culture of entrepreneurship. Because of the above reason the simultaneous
expansion of MSEs and MFIs necessary for country economy.

34
  The increase in capital of the workers in the small and micro enterprises must be saved in
banks so that the saved amount would be invested to create farther output. In most of
MSEs saving habit is low, because of this and there is a low investment to create farther
output, so this can solve by MFI by providing training and information how they can
save.

 A lot have to be done by the responsible bodies on up grading skill of the workers in the
sector and on creating market for the output of small and micro enterprises. Marketing
factors are frequently indicated as the explanatory factor for most problems faced by the
studied MSEs. Therefore, it is necessary to solve this deep-rooted problem. Some of the
ways of doing so can be:
 Providing selling and display places in areas close to working area.

 Linking the MSEs with other private contractors working within or around Shire so that
the operators are able to secure market opportunity.

 Changing the perception of the general public through extensive awareness creation
mechanisms, since private individuals are envisaged to be the main buyers of the
products manufactured by MSEs in the long run.

 Allowing those MSEs located and operating at shire cities to participate in biddings
opened in other sub-cities of Shire and around Shire.
The requirements of MFI must match with the condition of MSEs, because different MSEs are
far away from the financial institutions as the requirements number increase and more complex.
MSEs Most of the time needs to be client of MFIs at the time they affected by different
requirements (legal processes) can simplified by MFI as the situations.

35