DECLARATION - Makerere University€¦ · Web viewimpact of debt financing on growth of small and medium enterprises. a case study of kisenyi traders. by. namaka esther. 07/u/5113/ext

MAKERERE UNIVERSITY

IMPACT OF DEBT FINANCING ON GROWTH OF SMALL AND MEDIUM ENTERPRISES

A CASE STUDY OF KISENYI TRADERS

BY

NAMAKA ESTHER

07/U/5113/EXT

SUPERVISED BY: MR. TURYAKIRA NAZARIUS

A RESEACH REPORT SUBMITTED TO MAKERERE UNIVERSITY IN PARTIAL FULFILMENT OF THE

REQUIREMENT FOR THE AWARD OF THE DEGREE OF BACHELOR OF COMMERCE

JULY 2011

DECLARATION

I Namaka Esther, hereby declare that this is my original work and that it has never been

submitted to any other University for the award of a Certificate, Diploma or Degree

where the work of others has been consulted due acknowledgment has been made.

Signed ………………………………………… Date…………………………………..

NAMAKA ESTHER

APPROVAL

This is to certify that this research report, “Impact of debt financing on growth of small

and medium enterprise; A case study of Kesenyi traders” has been under my supervision

and is now ready for submission to the examination council for evaluation.

Signed ……………………………………… Date ………………………………………..

MR. TURYAKIRA NAZARIUSSUPERVISOR

DEDICATION

This research report is dedicated to my mother Mrs. Elizabeth Nabuduwa whose financial

support to my education has made me what Iam today.

ACKNOWLEDGEMENT

My respectful sincere gratitude goes to Mr. Turyakira Nazarius, my supervisor, for his

rightful guidance, time, encouragement, constructive criticism and advice through out the

study.

I thank all the traders in Kisenyi for the valuable information and the good relationship

that they provided me during the course of data collection.

It is not always easy to come up with such ideas solely without the contribution of such

good people, dear friends and the well wishers to whom I am greatly indebted to all my

friends and relatives who made my life easy through out my education career up to this

time.

Finally I thank the Almighty God for the priceless gift of life that he has provided me

throughout the years, I ask him to bless the work of my effort.

May the good Lord bless you all!

TABLE OF CONTENTS

Declaration……………………………………………………………………………………..

Approval ………………………………………………………………………………………...

I

ii

Dedication……………………………………………………………………………………... iii

Acknowledgement…………………………………………………………………………….. iv

Table of Contents……………………………………………………………………………… v

List of Tables ………………………………………………………………………………... ix

Acronyms……………………………………………………………………………………… x

Abstract………………………………………………………………………………………... xi

CHAPTER ONE

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

1.1 Background of the study……………………………………………………………... 1

1.2 Statement of the problem…………………………………………………………….. 2

1.3 Purpose of the study………………………………………………………………….. 3

1.4 Objectives of the study……………………………………………………………….. 3

1.5 The research questions……………………………………………………………….. 3

1.6 The Scope of the study……………………………………………………………….. 3

1.8 Significance of the study……………………………………………………………... 4

CHAPTER TWO (Literature Review)……………………………………………………... 5

2.0 Introduction……………………………………………………………………...…… 5

2.1 The concept of debt financing …………………………………………………… 6

2.1.1 Sources of finance to Small and Medium Enterprises (SMEs 6

2.1.2 The importance of debt financing …………………………….…………. 9

2.2 Growth of Small and Medium Enterprises (SMEs 10

2.2.1 Small and Medium Enterprises (SMEs 11

2.2.2 Levels of growth of small and medium enterprises 12

2.2.3 Factors that hinder growth of small and medium enterprises 12

2.2.4 Barriers to growth of small and medium enterprises 15

2.3 ReRelationship between debt financing and growth of small and medium enterprises…… 16

2.4 Conclusion 19

CHAPTER THREE (Methodology)……………………………………………………….. 20

3.0 Introduction ……………………………………………………………………….. 20

3.1 Research design……………………………………………………………………. 20

3.2 The survey population and ……………………………………………………….. 20

3.2.1 Sample size………………………………………………………………………… 20

3.2.2 Sampling procedure………………………………………………………………. 20

3.3 Data Sources, collection methods and analysis……………………………………. 20

3.3.1 Data types…………………………………………………………………………. 21

3.3.2 Data collection methods and instruments……………………………………………. 21

3.3.3 Data collection procedure…………………………………………………………… 22

3.4 Measurement of Variables…………………………………………………………. 22

3.5 Data processing, analysis and presentation ……………………………………….. 22

3.6 Limitations of the study……………………………………………………………. 23

CHAPTER FOUR (Discussion, analysis and interpretation of the findings)…………….. 24

4.0 Introduction…………………………………………………………………………... 24

4.1 Findings on the demographic characteristics of the Respondents……………………. 24

4.1.1 Gender of Respondents………………………………………………………………. 24

4.1.2 Respondents’ Age………………………………………………..………………….. 25

4.1.3 Respondents level of Education…………………………..…………………………. 25

4.1.4 Respondents business sector...…………………………………………………….. 26

4.1.5 Respondents marital status………………………. …………………………………... 26

4.2 The impact of debt financing 27

4.2.1 Ways of financing businesses by the Kisenyi traders………… ……………………… 27

4.2.2 Efficient and effective use of loans by the Kisenyi traders 28

4.2.3 Suitability of loan products to the Kisenyi traders 28

4.2.4 Lending institutions philosophy that does not consider late payments 29

4.2.5 Credit officers skills and experience to handle delinquent clients 30

4.2.6 Advisory services and trainings to Kisenyi traders 31

4.2.7 The rewards for timely repayments 31

4.2.8 The necessary securities for the loans 32

4.2.9 Appropriate and convenient repayment periods 33

4.2.10 Conduciveness of the interest rate charged to the Kisenyi traders 34

4.3 Establishing the growth of small and medium enterprises among the Kisenyi traders 35

4.3.1 Expansion of businesses of the Kisenyi traders 35

4.3.2 Profitability of Kisenyi traders businesses 36

4.3.3 The effect of the number of the people that a business enterprise employee 37

4.3.4 The effect stock levels of the business 38

4.4 Findings on the relationship between debt financing and growth of small and medium

enterprises ..................................................................................................................... 38

CHAPTER FIVE (Summary, conclusion and recommendation)…………..………………. 40

5.0 Introduction………………………………………………………………………….. 40

5.1 Summary of findings………………………………………………………………… 40

5.1.1 Debt financing 40

5.1.2 Growth of small and medium enterprises 40

5.1.3 The relationship between debt financing and growth of small and medium enterprises 41

5.2 Conclusion…………………………………………………………………………… 41

5.2.1 Debt financing 41

5.2.2 Growth of small and medium enterprises 42

5.2.3 The relationship between debt financing and growth of small and medium enterprises

5.3 Recommendation……………………………………………………………………. 42

5.4 Suggested areas of further research ………………………………………………… 43

REFERENCES………….………………………………………………………………….. 44

Appendix 1: Questionnaire………………….……………...………………………………. 47

Appendix 2: Interview guide……………………………………………………………….. 52

Appendix 3: Introduction letter…………………………………………………………….. 53

LIST OF TABLE

Table 1 Composition of respondents ……………………………………………………20

Table 2 Gender of respondents…………………………………………………………..24

Table 3 Age distribution of Respondents………………………………………………. .25

Table 4 Academic qualifications of respondents………………………………………...25

Table 5 Business sectors of respondents…………………………………………………26

Table 6 Marital status of respondents…………………..………………………………..26

Table 7 Ways of financing businesses by the Kisenyi traders………………...…………27

Table 8 Efficient and effective use of loans……………………………………………...28

Table 9 Suitability of loan products to the traders……….……………………………. ..28

Table 10 The philosophy not to consider late payments……………..…………… …….29

Table 11 Credit officers skills and experience………………………….……………… .30

Table 12 Advisory services and training to the traders…………………. ……………...31

Table 13 The rewards for timely payments….…………………………………… …….32

Table 14 The required securities for the loans………….…………………….………….33

Table 15 Appropriateness and convenience of the repayment periods……... …………..34

Table 16 Conduciveness of the interest rates charged by the lenders…...…..…………...35

Table 17 Expansion of businesses……………………………………………...………..36

Table 18 Profit maximization by the traders. ……………………………………………36

Table 19 Employee effect to the growth of businesses .......………………..……………37

Table 20 The stock levels effect to the growth of businesses….…………………… …..38

Table 21 The relationship between debt financing and growth of small and

medium enterprises……………………………..……………………....…..39

ACRONYMS

CEEWA Council for Economic Empowerment for Women in Africa

DFIs Development Financial Institutions

IACE Institute of Adult and Continuing Education

MDIs Microfinance Deposit taking Institutions

MFPED Ministry of Finance, Planning and Economic Development

PSFU Private Sector Foundation Uganda

SMEs Small and Medium Enterprises

SPSS Statistical Package for Social Scientist

UIA Uganda Investment Authority

UBOS Uganda Bureau of Statistics

ABSTRACT

The study was about the impact of debt financing and the growth of small and medium

enterprises among the Kisenyi traders and the major objectives were establishing the

impact of debt financing to the Kisenyi traders, establishing the factors affecting growth

of businesses for Kisenyi traders and establishing the relationship between debt financing

and growth of small and medium enterprises of the Kisenyi traders.

The study took a sample of 30 respondents. A stratified random method and a simple

random method were used to select respondents from the sample. A descriptive research

design was used in order to establish the relationship between debt financing and growth

of small and medium enterprises of the Kisenyi traders. Data collected was both primary

and secondary. Primary data was collected using observation method, interviews and

questionnaires while secondary data was gathered from Journals, reports and relevant

textbooks. Frequency tables were used to analyze data. The findings from the study

revealed that debt financing plays a central role in small and medium enterprise

development however, many SMEs have limited capital resulting in low rate of returns

due to poor debt financing.

Findings on the first objective were that though Kisenyi traders finance their business

with loans from lending institutions, they have not fully utilized this opportunity as many

lack collateral security, many are offered small loan sizes, high interest rates, short loan

periods and the rapidly growing inflation. Findings on the second objective further

indicated that Kisenyi traders businesses had not grown due to low profits, increased

competition, lack of the desirable market share and the overall lack of entrepreneur skills

by the traders. The relationship between debt financing and growth of small and medium

enterprises of the Kisenyi traders was found to be positive with a correlation coefficient

of 0.97. This meant that more efforts were needed in improving debt financing in order to

improve on the growth of small and medium enterprises of the Kisenyi traders.

Recommendations on how debt financing can be improved to increase on the growth of

SMEs of the Kisenyi traders include; improvement of management systems by SMEs,

attainment of management skills through refresher courses and training programmes,

improvement of financial records and accounting systems, regulation of the interest rate

offered by the lending institution by the government, networking and building of linkages

of SMEs with other entrepreneurs.

CHAPTER ONE

1.0 Introduction

1.1 Back ground to the study

Debt financing is a strategy that involves borrowing money from a lender with the

understanding that the full amount will be paid in future usually with an interest (Stearns,

1997). He further says that debt financing involves any money or financial instrument

extended to the borrower by the lender from which the later expects a refund of both

principal and interest. The interest rate charged on the borrowed funds reflects the level of

the risk that the lender undertakes when securing the loan.

Kakuru (2000) argues that debt financing includes both secured and unsecured loans. He

further says that security for the loans involves a form of collateral as an assurance for the

loan. Therefore if the debtor defaults on the loan, that collateral is forfeited to satisfy

payment of the debt.

Growth of small and medium enterprises SMEs involves increased level of out put,

increased number of employee performance, increased level of creativity and innovation,

industrial restructuring and wealth generation in both developing and developed economies

Uganda Investment Report (UIA, 2008). According to Matly and Westhead (2005), healthy

and growing SMEs are perceived to be crucial for sustainable competitive and economic

development at local, regional and national levels.

Small and medium enterprises are businesses which are independently owned and operated

by a few individuals. They can be defined in terms of sales volume and number of

employees in the business indicated by structural development, profitability and

employment levels. They mainly engage in buying produce, market vending, catering and

confectionery, shop keeping, second hand clothing, health/herbal services, secretarial

services, telephone services, handicraft, transport and many others Uganda Bureau of

Statistics report (UBOS, 2004).

Kisenyi traders finance their businesses with commercial banks loans, overdrafts, leasing

facilities, trade financing and loans from money lenders. These loans are taken in different

loan sizes and their repayment period differs depending on the lending authority. Although

traders are exposed to all these debt financing options, most of them have failed to grow

and expand and profitability has remained low meaning debt financing has not made a

positive impact on the businesses in that area. This has been attributed to poor debt

financing caused by lack of collateral security, low rate of repayment, high deficiency

rates, and poor business plans thus discouraging the financial institutions to offer them debt

services (UIA Report, 2008).

1.2 Statement of the Problem

Debt financing directly affects the growth of small and medium enterprises (Padey, 2000).

Proper management of debts lead to growth and smooth operation of businesses and poor

management of debts will not only cripple the ability of commercial banks and other

lending institutions to offer credit facilities to small and medium enterprises but threatens

their profitability and survival (UIA Report, 2008).

Traders in Kisenyi finance their businesses with loans from commercial banks, overdrafts,

leasing facilities, trade financing and money lenders. These loans are taken in different loan

sizes and their repayment period differs depending on the lending authority. Traders either

take group or individual loans depending on the size of the loans and the purpose to which

these loans are to be put and the progress of each group or individual in the lending cycle.

The loan sizes also depend on the collateral security and the capacity of the group or

individual to pay (UIA report, 2008).

Despite the fact that a lot of efforts have been put in providing Kisenyi traders with bank

loans and trade credit as a form of debt financing to promote their growth, this has not been

the case as majority lack collateral security, many are offered small loan sizes with high

interest rates, short loan periods, the rapidly growing inflation rate and high deficiency.

This discourages the financial institutions to offer them debt services thus threatening their

profitability survival and ability to grow. As a failure to perform their operations, many

traders have lost their businesses since they can not be sustained with their own equity

(UIA report, 2008).

1.3 Purpose of the Study

The purpose of this study was to establish the impact of debt financing on the growth of

small and medium enterprises.

1.4 Objectives

i. To establish the impact of debt financing to the Kisenyi traders.

ii. To establish the factors affecting growth of businesses for Kisenyi traders.

iii. To determine the relationship between debt financing and growth businesses of Kisenyi

traders.

1.6 Research Questions

i. What is the impact of debt financing to the Kisenyi traders?

ii. What are the factors affecting growth of businesses for Kisenyi traders?

iii. What is the relationship between debt financing and growth businesses of Kisenyi traders

1.7 Scope

1.7.1 Geographical Scope

The geographical scope was small and medium enterprises located in Kisenyi which in

Kampala Central

1.7.2 Content Scope

The study covered the impact of debt financing on the growth of small and medium

enterprises of Kisenyi traders.

1.7.3 Time Scope

The study covered a period ranging between two (2) years that is between 2009 and 2011.

1.8 Significance

The study will help the private sector foundation Uganda to analyze how the

financial institutions have impacted on enterprise growth through improving their

financial viability.

The study will pave way for other researchers interested in this field to learn from

the expounded knowledge and base upon this to pursue further research on the

problem at stake.

The study will arouse the need to review the policy on financial institution focusing

on the need for better financing of small and medium scale enterprises.

The study will also help small and medium enterprises to learn how to improve

their conditions in order to overcome the challenges in the credit market so as to

achieve sustainable development.

CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

In this chapter a theoretical and practical relationship between debt financing and growth of

small and medium enterprises were looked at as studied by different authors. In so doing

the subject of inquiry was extracted in light with the previous conducted research and

scholarly work.

2.1 The concept of debt financing.

A debt is borrowing money from an out side source with a promise to return the principal

in addition to an agreed upon level of interest. The most popular source of debt financing is

the bank, but can also be issued by a private company or even a friend or a family member

(Richard, 2009).

Debt financing is a strategy that involves borrowing money from a lender with an

understanding that full amount will be paid in future with an interest (Stearns, 1997). He

emphasizes that debt financing is basically money that you borrow to run your business

being divided into two categories based on the type of loan you are seeking either long

term or short term debt financing. Long term debt financing usually applies to assets your

business is purchasing such as equipment, buildings, land, or machinery. With long term

debt financing, the scheduled repayment of the loan and the estimated useful life of the

assets extends over more than one year. Short term debt financing usually applies to money

needed for the day-to-day operations of the business such as purchasing inventory, supplies

or paying the wages of employees. Short term debt financing is referred to as an operating

loan or short term loan because the scheduled repayment takes place in less than one year.

According to (Enterprise Uganda report, 2003), debt financing is a useful strategy

particularly for small and medium enterprises with good credit history. However, small

businesses should think carefully before committing their businesses to debt financing

options to avoid cash problems and reduced flexibility.

2.1.1 Sources of finance to Small and Medium Enterprises (SMEs)

The UIA report (2008), the available business options for financing SMEs today include

debt and equity finance. Debt financing looks at financial institutions, guarantee schemes

by insurance, government programs and regional trade.

In Uganda sources of finance to SMEs include loans, overdrafts, leasing, and trade

financing. There are also guarantees schemes offered by insurance companies as well as

banks to ease access to credit facilities (Balunywa, 2005).

According to Baumback (1988), the sources of debt financing include;

Borrowing from friends and relatives

Most entrepreneurs will require more than they can put into the business them selves. They

then look for other sources of funds else where. Though it is considered a poor business

practice, it may be necessary to borrow from friends and relatives.

Commercial Banks and other lending institutions

According to Scherr, (1990), Commercial banks are a primary source of funds for small

business. Some banks have personal loan departments and many more make small loans

made to individuals as personal loans are used for small business financing. Commercial

banks provide a wide range of banking products and other financial services. In addition,

the banks also play a significant role in assisting the government in agribusiness

development and co-operative. Uniquely, banks have a microfinance window which

provides financial services to low income people and micro enterprises particularly in rural

areas.

To Schmukler (2008), African countries have been actively promoting SMEs in recent

years. Their governments offer grants, tax holidays, and creation of development financial

institutions and extend various business development services to enhance the

competitiveness of national SMEs. The credit guarantee scheme and export financing

schemes have been in practice in Uganda for many years. Guarantee schemes are important

means to facilitate access to financing for a viable SME with no adequate collateral.

Development financial institutions DFIs have played only a minor financing role in

Uganda. However, in Uganda they are institutions like the Uganda Development Bank Ltd

(UDBL) and other agriculture financing institutions and non government organizations like

Care International, World Vision among others that extend financial services to SMEs

(Biryabarema, 1998). These however, have limited reach and capabilities in providing

financial services to SMEs.

Kasekende and Opondo (2003) identify a number of other sources of finance to small and

medium enterprises;

Leasing financing

A lease is a contract between the owner of the asset (Lessor) and the user of the asset

(Lessee) where the former gives right to use the asset to the latter over an agreed period of

time for a consideration called the lease agreement. This has been an alternative means of

financing capital investment of SMEs with the minimum initial outlay. In Uganda the

industry is still too small and young comprising only one leasing company and such

financing is presently provided to only medium and large enterprises.

Venture capital financing

This involves the provision of investment finance to SMEs in the form of equity or quasi-

equity instruments not traded on a recognized stock exchange. It is a long term risk finance

venture whose primary return to the investor is capital gains rather than income. Venture

capital investors actively get involved in the management of the companies that they invest

in to ensure the success of the venture. However, this form of financing has become an

established investment vehicle in only developed economies.

Micro financing

According to Magadu (2003) the typical microfinance clients are low income persons that

do not have access to formal financial institutions. This industry includes micro deposit

taking institutions (MDIs) and co-operative savings and credit societies (SACCOs). Micro

finance clients are typically self-employed, often house hold based entreprenuours who are

poor and non-poor who have a relatively stable source of income. This industry has proved

to be a reliable delivery vehicle for financial services to SMEs and the phenomenon of

micro finance is discussed below;

Trade credits

This is another source of short-term financing for SMEs. The use of trade credits is

widespread among European SMEs and in some countries or sectors it is even more

common than bank financing. Trade credit can however be an expensive form of financing

for the credit user since the supplier charges financing costs and a risk premium. Generally,

a trade credit is a legitimate financial instrument which may be used by SMEs when banks

are unwilling to finance them or avoid direct bank costs and the complexity of banks

credits (Voithofer, 2003).

According to Ministry of finance planning and economic development (MFPED) report

(2000), credit is an important instrument for supporting development activities. However,

there have been problems in providing credit to the poor. In recent years there have been

growths in credit services that are able to reach SMEs and other groups excluded from

access to formal financial institutions.

Factoring

This refers to the sale of book debts by a company to a factor institution on a continuous

basis normally for immediate cash. The sales accounting functions are then provided by the

factor institution which manages the sales ledger and the collection of account under the

terms agreed by the seller (Voithofer, 2003).

2.1.2 The importance of debt financing

According to the bank of Uganda report (November, 2006), the SMEs are increasingly

taking the role of primary vehicles for the creation of employment and income generation

through self employment and have therefore been tools for poverty alleviation and growth

of SMEs.

According to (Mirero, 2004), finance is very expensive and risky yet essential resource in

business growth. SMEs access of debt financing is a real issue in general due several

strenuous conditions that lending institutions require to be fulfilled for example collateral,

repayment terms interest on loans and repayment periods which SMEs can hardly meet.

Balswin et al (2000) asserts that retained earnings are believed to be a predominant source

of financing among growing SMEs. However he argues that growing and successful SMEs

use more debt financing as a source of finance. Modigliani and Miller (1963) argue that

firms are able to maximize their value by employing more debt because of the tax shield

benefits associated with debt use. Interest on debt is considered as a tax- allowable

expense.

According to Malcolm H. (1996), in recent years, financial support for the SMEs has

become a major component of the strategy of poverty alleviation and the growth of SMEs.

Several financial institutions provide loans and trade credit that facilitates entrepreneur’s to

start up SMEs. Finance is very expensive and provides risky yet essential resources in the

business growth. Badagawa (2000) further argues that over the past three decades, debt

services have emerged as one of the most significant innovations in contemporary

development policy and practice among many countries.

Debt financing allows the founders of business enterprise to retain ownership and control

of their businesses. It provides a greater degree of financial freedom than equity financing.

Debt obligations are limited to the loan repayments period after which the lender has no

further claim on the businesses. Well as equity investors claim does not end until their

stock is sold. Further more, a debt that is paid on time can enhance a small business’s credit

rating and make it easier to obtain various types of financing in the future (Miller, 1963)

Debt financing is easy to administer as it generally lacks the complex reporting

requirements that accompany some forms of equity financing (Balunywa, 2005).

SMEs are very important for developing economy because they provide employment

opportunities and a basis for developing new ideas contributing to economic growth and

sustainable development (Ssendaula, 2002).

Debt financing gives ownership of entities to the borrowers. When a client borrows from a

bank he is obliged to make the agreed upon payments on time and when the whole

principal and interest is paid the borrower is free to take the borrowed item.

2.2 Growth of Small and Medium Enterprises (SMEs)

Growth is where management requires relevant knowledge, skills and advice and support to

pursue growth objectives (Helmsing, 1996). Growth is in two dimensions, vertical and

horizontal growths. Vertical growth is within the business enterprises where as horizontal

growth is the increase in the number of business enterprises themselves. Vertical growth in

a business enterprise involves increase in the number of employees, increase in asset value

sales turn over (K’obonyo, 1999).

Growth of small and medium enterprises (SMEs)involves increased level of out put,

increased number of employee performance, increased level of creativity and innovation,

industrial restructuring and wealth generation in both developing and developed economies

Uganda Investment Report (UIA, 2006). According to Matly and Westhead (2005), healthy

and growing SMEs are perceived to be crucial for sustainable competitive and economic

development at local, regional and national levels.

According to Parkinson (1994), growth in an organization could be achieved by making

progress on aspects of business management namely those relating to productivity, labour

relations, research, development and marketing. In addition, Bennet (1994) argued that

managing growth is armed at business owners leading to guidance on how to manage

expansion of their businesses.

2.2.1 Small and Medium Enterprises (SMEs)

According to (Murphy, 2006), small businesses are defined as those employing 50 workers

or less with further distinction between factory types units. SMEs include various features

which may include the number of people employed, sales turn over and capital employed.

SMEs are widely defined in terms of their characteristics which include the size of capital

investment, the number of employees, the turnover, the management style, the location and

the market share. For development countries, small scale enterprises would generally mean

enterprises with less than 50 workers and medium size enterprises would usually mean

those that have 50-99 workers.

In Uganda, a small- scale enterprise is an enterprise or a firm employing less than 5 but

with a maximum of 50 employees, with the value of assets, excluding the land, land,

building and working capital of less than Ug. Shs 50 million and the income turnover of

between Ugs. 10-50 million. A medium sized enterprise is considered a firm, which

employs between 50-100 workers (Kasekende and Opondo, 2003). SMEs employ and

represent more than 80% of the total self employed.

SMEs form the bedrock of most economies. They are frequently the prime source of the

new jobs and play a crucial role in income generation especially for the poor. Many

governments and international donor agencies seek to promote the development of small

and micro enterprises through establishing support agencies and enterprise development

projects (Enterprise Uganda, 2003)

According to the Makerere business journal (2001), 40% of the registered small businesses

in Uganda engage in trade and commerce, 9% in service related industries and the rest in

faming and other activities. In Uganda small and medium scale businesses have small

capital investment, small scale operations that are managed by a few people and

consequently depend on small market share (Gem, 2004).

2.2.2 Levels of growth of small and medium enterprises

Sido (2000), the level of SMEs growth could be reflected in the increase in the number of

employees being employed in terms of sales increase and increase in total assets. The growth

is mostly due to the availability of funds that enable the SMEs to increase in sizes.

To Balunywa (2008), however, there is an observable growth level of SMEs when they

employee more workers. He is supported by Delmar (2003) who suggests that growth of

SMEs is due to different growth patterns due to management influence. Mike (2006) says

that a strategy which involves choice along a number of dimensions represent a firms’ overall

collection of individuals businesses which in the long run suggests growth.

2.2.3 Factors that hinder growth of small and medium enterprises

Although SMEs represent the back borne of local economies in most developing countries,

they are vehicles for accelerating economic growth, generating employment, foreign

exchange and tax revenues. They often face a lot of constraints and challenges in their

operations. These small entrepreneurs operate against heavy odds and slight changes in the

external environment hit them strongly. They are often confronted with fierce local and

international competition, lack general skills in management, marketing and finance

planning, limited access to information on the market opportunities and sources of

competitive technology. These constraints limit substantially the productive capacity and

efficiency of SMEs in Uganda to be competitive within the context of globalization

(Enterprise Uganda, 2003).

According to the Private Sector Foundation (PSF) report (2008/2009), the difficulties in

accessing financing from formal sources are due to high cost of finance, poor information

sharing between banks and SMEs, lack of acceptable collateral, limited sources of long-term

finance and insufficient depth of the financial sector.

SMEs are associated with poor accounting records as a result of failure of the entrepreneurs

to make business decisions on the basis of sound financial records. It also deprives third

parties of vital source of information upon which to evaluate potential relationships with the

company Enterprise Uganda report (2003).

Most of these organizations operate without proper planning and have no sense of direction,

leading to haphazard approach to business challenges. This is mainly due to inner fighting of

most entrepreneurs than giving strategic guidance to business needs. This is because

entrepreneurs tend to concentrate all the key responsibilities upon themselves often assuming

the executive roles of the chief executive, marketing director and financial controller. This

poor delegation creates inefficiencies and apathy on the staff other wise expected to take lead

on those functions Private Sector Foundation report (2008/2009).

Poor customer care is one of the major causes for loss of repeat orders and declining sales.

This coupled with low credit sales yet their purchases are made on cash basis. In spite of this

however, the trend is that there often no formal credit policies in place, resulting in high

incidence of bad debts and perennial liquidity problems Enterprise Uganda report (2003).

SMEs have no strategy for costing and pricing their products or services relying on

predominantly on the competitors to set the price. Yet they incur high costs in accessing

credit from lending institutions. Commercial banks average lending rates have been 23% for

the past three years (Ssendaula, 2002). These rates compare unfavorably with those Ugandas’

neighboring countries. Very few private businesses in Uganda can achieve an internal rate of

return as high as 25% to justify borrowing from the 26ganda’s commercial banking sector.

Inadequate information escalates the cost of borrowing and constrains access to the required

credit. Banks often do not supply all the required information to the SME borrowers except

the lending rates leaving out other fees. When these are added up, the cost of borrowing

escalates. On the other hand, small borrowers do not supply all the information required by

banks thereby constraining their own access to credit (Wavamunno, 2000).

Mixing personal financial affairs with business including running of the same bank account

is a common feature of SMEs and in most cases this behaviour has led to diversion of

business funds to unplanned personal needs. This is a major cause for poor tracking of

proceeds and business failures arising from illiquidity (Wavamunno, 2000).

Many banks particularly the traditional ones do not accept collateral out side a 5 kilometer

radius of the city center. Even for urban-based SMEs, this condition is a severe constraint.

It has been suggested that banks could salvage the small borrowers, but the financial

requirements of SMEs are beyond the limits of many banking institutions. In addition, the

very short-term nature of banks, coupled with the high interest rates, makes banks unsuitable

as a funding mechanism for financing in this sector Wavamunno, (2000).

Uganda’s financial sector is dominated by commercial banks, with a limited number of

development banks. As a result, SMEs frequently use the more available short-term financing

instruments for medium- to long-term investments. In addition to reducing their profitability

and constraining their ability to pay, this diverts investments decisions away from-intensive

ventures (Kasekende and Opondo, 2003).

According to Snyder, (2000), the business needs of enterprises are generally varied. For these

needs to be adequately addressed by the financial sector, the later must be equally diverse.

This calls for a wide variety of long-medium and short-term products, and a healthy

composition of debt and equity instruments, as well as those instruments specifically tailored

to the unique needs of certain sectors. The financial sector in Uganda is narrow with only a

few standard products and this limits the options available to SMEs.

Employing relatives or under qualified personnel in an attempt to cut costs. The employees

lack job descriptions and frequently do not have performance targets against. Again most

promoters have no vision for their businesses and hence tend to drift from one business idea

to another. This is hardly the approach to creating sustainable growth oriented enterprises.

2.2.4 Barriers to growth of small and medium enterprises

Financial barriers

The most persistent worrying class of barriers to business growth is financial barriers. They

pose substantial constraints on the growth of SMEs. The most important financial barriers are

high cost of credit, lack of access to credit, banks not interested in small firms, lack of access

to venture capital, the delays in obtaining loans, the high collateral requirements, banks

bureaucratic procedures, the cost of preparation a business plan, and the too high bank

charges and fees. Lack of finance and the high costs of investment capital are particularly

acute problems in spite of the efforts which have been made to alleviate them (PSFU Report,

2000).

Export barriers

The development of exports is limited by quality, price and the under-developed transport

infrastructure as well as the access to information involving foreign markets and a weak local

currency value (Kasekende and Opondo, 2003). The most important of these turned out to be

access to information about foreign markets. This placed severe limitations on export

development of firms. The other factors limiting export development are the quality and price

of transport to foreign distributors and information about foreign partners. This coupled with

the strict visa regime for traveling abroad, limits local firms from taking initiatives for export

development.

Social barriers

The business environment has not been very friendly towards SMEs. The most important

social barriers are lack of support from the state, the lack of trust in society, the lack of

support from the chamber of commerce and the inadequate information on finance.

Internal barriers

The only serious internal barrier is the low quality of equipment. Firms do not seem to be

troubled by lack of capacity or lack of space in which to produce. This coupled with low

productivity and lack of demand for the product is probably greater problems from increasing

production.

Institutional (Regulatory) barriers

The most serious institutional barriers for SMEs are the high taxes and employers’ wage-

based contributions, high income taxes, high profit taxes, the requirement for too many

licenses and the general concern about the obstructive effects of too much bureaucracy

(PSFU Report, 2000). Prominent problems that are related to start up enterprises are the

difficulties in acquiring the necessary documents from the state institutions and their

bureaucratic procedure.

2.3 The relationship between debt financing and growth of small and medium

enterprises

According to the Private Sector Foundation Uganda (PSFU Report, 2000), a high interest rate

regime undermines the performance of SMEs through increased probability of default and

non performing assets. It further threatens the financial long term solvency of private sector

businesses and especially of local origin mainly SMEs. More so as a result of compounding,

a continually rising interest rate increases loan repayment obligation over time and certainly

constrains SME operations. The high cost of credit and limited access to affordable finance

does not only affect private sector business through increased costs of operation but the civil

society organizations and household alike through reduced purchasing power.

To Carrington (2005), forming up a business has proved to the most challenging aspects to

business people. Access to sufficient levels of capital is a critical component of the

successful growth and development of any business. Several factors may impede a firm’s

ability to obtain this necessary financing, including its stage of development, sector of

operation or size.

According to Ssewagudde (1999), the loan size being small, medium or large can stimulate

an enterprise growth or not. Sufficient loan sizes will stimulate enterprise performance and fit

the borrowers’ repayment capacity. However, if loan sizes are not appropriate, they will

reflect a poor fit between the objectives of the lender and the borrower tending to be bad

loans or non performing loans. Therefore a useful loan is that which stimulates production

and improve performance.

To Njoku et al (1991), a loan to have an effect on performance and be rapid should be

adequate enough to allow production to take place. He further asserts that loans which are too

small to induce commitment to their productive use or repayment should be avoided. Chirwa

(1997) on the other hand asserts that relative large loans may tempt poor borrowers to divert

a portion of the loan to non business purposes. Loan period can be short, medium or long.

Micro finance institutions mainly give short term loans for a period of six months to one year

where repayment is done immediately after getting the loans on a week basis (CEEWA,

1999).

UIA report (2008), says that accessing finance has been singled out as the most limiting

factor to entrepreneurship development and business growth especially for SMEs. The past

years has seen emergency of robust financing options in banks with special facilities for

SMEs introduced by traditionally corporate banks supported by extension of services in the

districts. There has been the introduction of other business term finances like leasing, special

assets acquisition loans and mortgage facilities by several banks.

According to Wright (2000), loans become too big to be paid promptly with in a week as

loans grow bigger. Commercial banks are the main source of financial services however,

they do not readily support SMEs due to the perceived risk in lending to them. Carpenter

(2004) supports the same view that small and micro enterprises present an opportunity to

banks to support growth of the economy. However, small and micro enterprises due to lack

of adequate collateral, low returns on SME investments and high operating costs will remain

unattractive to lending institutions.

Debt financing has various implications on the way banks lend to SMEs. Banks lends less to

SMEs than they would have done if SMEs were more transparent. Lending to SMEs is less

attractive and in equilibrium raises the required returns for SMEs loans. The likely high cost

associated with relationship lending stems from the labor intensive process of collecting soft

information (Schmukler, 2008).

SMEs in developing countries heavily rely on internal funds and funds from the informal

sector for start up and development. But the legal and regulatory frame work in Uganda is

inadequate to provide the right infrastructure to facilitate SME lending from the formal

sector. The lending infrastructures, including protection for creditors, enforcement of

contract and collateral rights, rules dissolving disputes and arbitration are not comprehensive.

This is compounded by strict prudential regulations by monetary authorities, inflexibility and

unfriendly lending rules of commercial banks and unduly complex administrative procedures

(Schmukler, 2008).

SMEs form an important sector in most economies. In recent years financial support for

SMEs has become a major component in the growth of SMEs. The primary advantage of

debt financing is that it allows the fuounders to retain ownership and control of their

businesses. The entrepreneurs are able to make key strategic decisions and also keep and

reinvest more business profits Malcom (1996). He further says that another advantage of debt

financing is that it provides small business owners with a greater degree of financial freedom.

To Balunywa (2008), when a debt is paid on time it enhances a small business’s credit rating

and make it easier to obtain various types of financing in the future. He further argues that

debt financing is easy to administer as it generally lacks the complex reporting requirements

tending to be less expensive for small businesses over the long term, though more expensive

over a short term.

Ugandan SMEs have grown to compete in the global economy and the debt financing have

played the most roles. Without finance, SMEs cannot acquire or absorb new technologies nor

can they expand to serve global markets or even establish business linkages with larger firms

(Anthony, 2007).

Roden and Lewellen (1995) establish a significant positive relationship between debt ratio

and measures of profitability. They urge that there is a positive relation between profitability

and total debt as a percentage of the total buyout-financing package. It is believed that debt

holders have an interest in seeing that managers take performance – improving measures.

2.4 Conclusion

This chapter attempts to discuss the review of related literature on the impact of debt

financing on the growth of small and medium enterprises by various writers. Proper effective

and efficient debt management provide a high growth of SMEs in terms of profitability,

liquidly levels, market share and full resource utilization. However, this is not the case with

the Kisenyi traders. The researcher therefore is set to find more about the situation at hand.

CHAPTER THREE

METHODOLOGY

3.0 Introductions

Under this chapter, the researcher presents the methods that she used to collect data, the

data sources, collection instruments, description of the research design, data analysis and

presentation. It also brings out the limitations the researcher faced during the course of

the study.

3.1 Research design

A cross sectional and a descriptive research design was used to establish the impact of

debt financing on the growth of small and medium enterprises of the Kisenyi traders.

3.2 The study population

The study population was 75 traders which include metal fabricators, produce sellers,

millers, market vendors, and shop keepers.

3.2.1 Sample size

The sample size was 30 traders which were determined using Krejcie and Morgan (1970)

from the survey population as indicated in the table below;

Table 1 Composition of Respondents Respondents Survey population Sample sizeMetal fabricators 13 09Produce sellers 10 07Millers 16 05Market vendors 30 06Shop keepers 06 03

Total 75 30Source: Primary data

3.2.2 Sampling procedure

A stratified random sampling method was used to segregate the study population into

sectors. Then a simple random was then used to give every member of the population a

chance to participate in the study. It was done with replacement and without replacement.

3.3 Data types, collection methods and analysis

3.3.1 Data types

The researcher used both primary and secondary data.

3.3.1.1 Primary data

Primary sources consisted of first hand information obtained from questionnaires,

interview guides and observations from actions of respondents.

3.3.1.2 Secondary data.

The secondary data source comprised of organizational reports, newspapers, journals,

text books government editions and other manuals in a related field. The reviewed

literature about the variables was to help the researcher to support the findings in the

field.

3.3.2 Data collection methods and Instruments

3.3.2.1 The questionnaire method

The main data collection method was a self administered questionnaire with both closed

and open-ended questions which was used to acquire data from respondents. It was

designed in line with the study objectives, pre tested and corrections made. It was then

distributed to the Kisenyi traders in their respective fields to seek for their views.

3.3.2.2 The interview method

Face to face interviews were also conducted using an interview method from an interview

guide to gather rich information from relatively small number of respondents. Questions

were asked logically to necessitate probing where possible.

3.3.2.3 The direct observation method

Lastly the observation technique was used by the researcher to look for the actions of

individuals and groups or get further knowledge for example checking the available

records.

Secondary data was collected through extensive reading and use of documentary reviews

and analysis of the existing literature.

3.3.3 Data collection procedure

The researcher got an introduction letter from the Institute of Adult and Continuing

Education (IACE) to introduce her to the Kisenyi traders’ leadership in order to seek

permission to talk to the concerned respondents. She distributed the questionnaires

among the respondents and sought for their corporation while answering the questions.

Face to face interviews were also carried out with those respondents who are not so busy.

Questionnaires were edited, interpreted and analyzed to give the data meaningful

interpretation.

3.4 Measurement of variables

In the quantitative methods of data collection, the questions were divided into scale of

five categories of strongly agree, agree, not sure, disagree and strongly disagree where

the examinee selected the response that best described his or her reaction to each

statement. The response categories were weighed from 1-5 where 1= strongly agree, 2 =

agree, 3 = not sure, 4= disagree and 5= strongly disagree.

3.5 Data processing, analysis and presentation

3.5.1 Data processing

Data collected from the field was classified, edited, coded and filtered to ensure

completeness and accuracy of the findings using manual and computerized methods. The

research findings were analyzed using statistical tables and percentages. Data was

organized and contrasted to establish the relationship between debt financing and growth

of small and medium enterprises.

3.5.2 Data analysis

A Statistical Package for Social Scientists (SPSS), a computer package of data analysis

was employed to analyze the data to reveal frequencies and percentages. The coded

responses were fed into the program and various commands issued to get the correlation

coefficient that determined the relationship between debt financing and growth of small

and medium enterprises.

3.5.3 Data presentation

Data presentation is in a form of a report in both narrative word processed form and

tables showing the finding of the study.

3.6 Limitations of the study and the anticipated solutions

The researcher faced a number of problems and challenges that included;

3.6.1 Time

Since the researcher was not on a full time programme, time was a limiting factor. Much

time was spent while carrying out interviews and many respondents were too busy or had

limited time for the study. However, the researcher sought for leave from her work place

in order to complete this survey.

3.6.2 Funds

Since the project was privately sponsored, funds to support activities like transport,

typing, printing, photocopy, binding, stationary, surfing on the internet and other

activities was not be readily available. As a solution to this problem, the researcher

mobilized some of her savings and sought for some funds from friends and relatives so as

to finish this study.

CHAPTER FOUR

PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS

4.0 Introduction

In this chapter results of the study are presented and discussed. Findings were done in

relation to the study objectives. In presentation of findings tables, frequencies and

percentages were used to explain the findings. The study objectives were; establishing the

impact of debt financing to the Kisenyi traders, establishing the factors affecting growth

of businesses for Kisenyi traders and establishing the relationship between debt financing

and growth of small and medium enterprises of the Kisenyi traders.

4.1 Demographic characteristics of the Respondents

4.1.1 Gender of Respondents

In order to avoid biased responses, the researcher obtained a sample size of 30

respondents both males and females as indicated in the table below;

Table 2 Gender of RespondentGender Frequency Valid Percent Cumulative percentMale 17 57 57Female 13 43 100


Table 2 indicates that more males participated in the study than females. This is shown by

the biggest percentage of (57%) as compared to (43%) for females. It therefore implies

that the research was gender biased and not fairly distributed. This could further suggest

that more males are engaged in SMEs as compared to women.

4.1.2 Respondents’ Age

Further analysis was made on the age of respondents to determine whether decisions

made when running the individual’s businesses are dependant on age. The respondents

were therefore asked to identify their age and responses were tabulated as below;

Table 3 Age Distribution of respondents’ AgeAge bracket Frequency Valid Percent Cumulative Percent 18- 25 years 06 20 2026-33 11 37 5734-45 05 17 74Above 45 years 08 26 100


Most of the respondents were in the age bracket of 26-33 years representing the highest

percentage of (37%) while 05 respondents were between 34-45 years, 08 respondents

were above 44 years and only 06 respondents were between 18-25 years indicating that

all age brackets were given a chance to be interviewed in this study. Therefore basing on

the age groups interviewed it can be interpreted that data was obtained from mature

respondents who were believed to reliable.

4.1.3 Respondents level of Education

The researcher had an interest in the academic qualifications of the respondents as part of

their bio data and the responses were given as in the table below;

Table 4 Academic qualification of respondentsQualification Frequency Valid Percent Cumulative percent Primary 13 43 43Secondary 09 30 73Certificates 03 10 83Degree 00 00 83Others (none education) 06 17 100


Most Kisenyi traders had at least attended and attained primary education as shown by

the results in Table 4. Of those involved in the study 43% had primary education, 30%

had attained secondary education 10% had attained certificates and only 17% had no

formal education at all. On the whole it implies that data was obtained from all walks of

life.

4.1.4 Respondents business sectors

Data was obtained from different sectors among the businesses that operate in Kisenyi

and the responses were given as in the table below;

Table 5 Respondents business sectorsSectors Frequency Valid Percent Cumulative Percent Metal fabricators 09 30 30Produce sellers 07 23 53Millers 05 17 70 Market vendors 06 20 90Shop keepers 03 10 100


The researcher selected 9 respondents’ from the Metal fabricators’ sector, 7 from the

Produce sellers’ sector, 5 from the Metal fabricators’, 6 from the Market vendors’ sector,

and 3 from the Shop keepers’ sector. The abundant data was got from the Millers’ sector

since they are the majority among the Kisenyi traders.

4.1.5 Respondents marital status

Table 6 Respondents marital statusMarital status Frequency Valid Percent Cumulative PercentMarried 04 13 13Single 06 20 33Widowed 07 23 56Divorced 03 10 66Engaged 10 34 100


Results in table 6 indicates that 20% respondents were single, 13% were married, 23%

were widowed, 10% were divorced while 34% in engagement. This therefore means that

the majority of the respondents had responsibilities and deemed fit for the study.

4.2 Findings on the impact of debt financing to the Kisenyi traders

Finding on the impact of debt financing were considered and can be evidenced in the

tables below;

4.2.1 Financing businesses by the Kisenyi traders

Findings on how Kisenyi traders finance their businesses were considered and can be

evidenced in the table below;

Table 7 Financing businesses by the Kisenyi traders

Responses Frequency Valid Percent Cumulative PercentStrongly Agree 16 53 53Agree 07 23 76Not sure 00 00 76Disagree 05 17 93Strongly disagree 02 07 100


From table 7, 53% respondents strongly agreed and 23% respondents agreed respectively.

This is a bigger percentage as compared with the 17% respondents who disagreed and the

7% who strongly disagreed. This therefore means that most of the Kisenyi traders finance

their businesses through use of loans from lending institutions.

4.2.2 Acquired loans are put to their intended purpose by the Kisenyi traders

Efficient and effective use of loans improves performance of any business enterprise, the

researcher therefore wanted to know how this is done by the Kisenyi traders.

Table 8 Intended purpose for the loans by the Kisenyi traders

Responses Frequency Valid Percent Cumulative PercentStrongly Agree 10 33 33Agree 10 33 66Not sure 00 00 66Disagree 04 14 100

Strongly disagree 06 20


Responses in table 8 reveal that 33% strongly agreed and 33% agreed that they use the

borrowed money for the intended purpose. This further suggests that their businesses expand

and grow. However, 14% disagreed and 20% strongly disagreed that the borrowed loans are

not put to their intended purpose. This therefore means that their businesses can’t expand

and grow since the money is wasted to non profit making activities.

4.2.3 The loan products suit client needs of the Kisenyi traders.

It is always important for managers to understand their clients’ needs in order to provide loan

products that fit such needs. The researcher was therefore interested in finding out whether

lending institutions managers understand their clients’ needs and always provide loan

products that fit them.

Table 9 Suitability of loan products to the Kisenyi traders.

Responses Frequency Valid Percent Cumulative Percent

Strongly Agree 03 10 10

Agree 04 13 23

Not sure 00 00 23

Disagree 14 47 70

Strongly disagree 09 30 100

Total 30 100

Source: Primary data

Findings in table 9 indicate that 10% respondents strongly agreed, 13% agreed, 47%

disagreed and 30% strongly disagreed.

The 30% respondents who strongly disagreed and the 47% who disagreed in table 8 meant

that the Kisenyi traders did not get loan products that suit their needs. This is so according to

the way the loan products are designed by the lending institutions. The traders are given too

short repayment period and too high interest fees with inadequate grace period. The too big

loans with wrong repayment frequencies further encourage creation of delinquent loans as

client fail to pay their loan obligations.

. 4.2.4 The lending institutions philosophy that does not consider late payments

On-time repayment enables credit officers to keep a clean portfolio which in turn eliminates

delinquency in an MFI. The researcher had an interest in finding out whether the lending

institutions have a philosophy that does not consider late payments

Table 10 The lending institutions philosophy that does not consider late payments.

Responses Frequency Valid Percent Cumulative PercentStrongly Agree 09 30 30Agree 14 48 78Not sure 02 06 84Disagree 02 06 90Strongly disagree 03 10 100


Results in table 10 indicate that 30% respondents strongly agreed and 48% agreed, 6% were

not sure, 6% disagreed and 10% strongly disagreed. The 30% respondents who strongly

agreed and 48% who agreed is a high percentage compared to 10%, who strongly disagreed

and 6% responses who disagreed. This therefore means that lending institutions staffs work

as a team in creating an image and philosophy that does not consider late payments. This is in

agreement to what Uganda investment authority training manual (2009) postulate that

creating disciplined borrowers is critical to the success of an MFI and credit without strict

discipline is nothing but charity.

The 6% and the 10% respondents who disagreed mean that some staffs and board of

governors of the lending institutions do not have the right caliber and personal integrity to

implement the philosophy that does not consider late payments.

4.2.5 The lending institutions credit officers’ skills and experience to handle delinquent

clients

Credit officers need to interact with clients, disburse loans, monitor their performance and be

able to recover delinquent loans on time. The researcher had an interest in finding out

whether the credit officers have enough skills and experience to handle delinquent clients

Table 11 Credit officers’ skills and experience to handle delinquent clients

Responses Frequency Valid Percent Cumulative percent


Agree 06 20 30

Not sure 00 00 30

Disagree 10 33 63


Total 30 100


Results in table 11 indicate that 10% respondents strongly agreed, 20% agreed, 33% disagreed,

and 37% strongly disagreed. The 37% respondents who strongly disagreed and the 33%

disagreed that credit officers do not have enough skills and experience to handle delinquent

clients is a bigger percentage as compared to those in agreement. This is because some credit

officers lacked the initiative to collect un paid loans, lacked full understanding of the credit

policies, were dishonest, connived with clients not to pay solicited for bribes and many lacked

exposure in MFI management.

4.2.6 Advisory services/trainings to traders on how to use loans

Traders need to get advisory services and trainings on how effective to utilize the borrowed

funds. The researcher had an interest in finding out whether this is done to the Kisenyi traders

Table 12 Advisory services/trainings on how to use loans by the Kisenyi traders



Agree 10 33 80

Not sure 00 00 80

Disagree 06 20 100


Total 30 100


Results in table 12 reveal that 47% respondents strongly agreed, 33% agreed and 20%

disagreed. From the findings it was revealed that traders were frequently advised and many had

attained trainings on how well to utilize the borrowed funds so as to expand their businesses.

This equipped traders with knowledge and skills to venture into profit making activities and

repay back the loans on time.

However, the traders who disagreed indicate that credit officers need to add value to their

services by increasing training programmes among traders.

4.2.7 Rewards for clients who pay according to their repayment schedules.

Clients who make timely repayments according to their repayment schedules should be

rewarded to encourage them pay well more often. The researcher wanted to find out how this is

done.

Table 13 The rewards for clients who pay according to their repayment schedule.



Agree 07 23 36

Not sure 00 00 36

Disagree 05 17 53


Total 30 100


Table 13 standings were 23% agreed 13% strongly agreed. The 17% respondents who

disagreed and 47% who strongly disagreed is a clear testimony that the lending

institutions credit officers and managers do not give financial and non financial rewards

to clients who make prompt payments according to their repayment schedules in form of

interest rebates as per their lending policies. The financial and non financial rewards

would have encouraged the borrowers to make timely repayments which in return allow

the traders to pay on time to be considered for further loans.

4.2.8 The required securities for the loans by the traders

Traders need to have valuable securities for loans. The researcher wanted to find out

whether they have the necessary securities for the loans.

Table 14 The required securities for the loans by the traders.



Agree 07 23 40

Not sure 00 00 40

Disagree 11 37 77


Total 30 100


From the above Table 14 standings 17% respondent strongly agreed, 23% agreed, 37%

disagreed and 17% strongly disagreed. The 37% respondents who disagreed and 16% who

strongly disagreed is a clear indicated that the majority of the respondents did not have the

necessary securities for the loans. They further said that the lending institutions asked for too

much is as far as securities were concerned such as land titles which demoralizes most of them

to go for further credit.

4.2.9 Appropriate and convenient repayment period given by the lending institutions to

all traders

High performing MFIs should provide appropriate and convenient repayment periods to

traders. The researcher had an interest in finding out how this is done by the lenders

Table 15 Appropriateness and convenience of the repayment periods to the traders



Agree 05 17 17

Not sure 06 20 37

Disagree 07 23 60


Total 30 100


Findings in table 15 shows that 40% respondents strongly disagreed and 23% respondents

disagreed respectively. This is a bigger percentage as compared with the 17% respondents who

agreed and the 20% who were not sure. This therefore means that the Managers of the lending

institutions do not provide appropriate and convenient repayment periods to traders. This

information depended on the portfolio monitoring reports provided by credit officers from the

loan register and summary of the loans outstanding for the traders. This is as a result of some

lending institutions asking for daily, weekly, monthly repayment when some businesses have

not made profits.

4.2.10 Conduciveness and favorability of the interest rate to encourage easy payments by

the traders

The interest rate charged should be conducive to encourage easy payments by traders. The

researcher had an interest in finding out how this is done by the lenders

Table 16 Conduciveness of the interest rate to the traders



Agree 02 07 20

Not sure 09 30 50

Disagree 11 37 87


Total 30 100


In table 16 findings reveal that 13% respondents strongly agreed, 7% agreed, 30% were not

sure, 37% disagreed and 13% respondents strongly disagreed respectively. From the findings it

can be confirmed that the interest rate charged to the traders was so high and quite un fair to

enable them expand their business for growth.

However the 30% respondents who were not sure mean that some traders lack adequate

information on how the interest rate is charged. This there fore calls for increased education of

the traders by the lending institutions to the traders for them to appreciate the effect of interest

rate to their businesses.

4.3 Findings on the growth of small and medium enterprises of the Kisenyi traders

Finding on the impact of debt financing were considered and can be evidenced in the tables

below;

4.3.1 Expansion of the businesses leads to their growth

Expansion of business enterprise is an indicator of its growth. The researcher had an interest in

finding out whether expansion of businesses leads to their growth

Table 17 Expansion of the businesses of the Kisenyi traders



Agree 15 50 87

Not sure 00 00 87

Disagree 00 00 87


Total 30 100


From the findings in table 17, 37% responses strongly agreed, 50% agreed and 2%

strongly disagreed. The percentage of respondents who agreed and strongly agreed is

higher than those in disagreement. This therefore means that expansion of businesses lead

to their growth.

4.3.2 Profit maximization by the traders lead to growth of their businesses

The commonest financial performance measure of an organization is profitability. It is

the main qualitative measure of a business success and growth as it is the excess of

revenue are expenditure. Therefore, the researcher wanted to know whether Kisenyi

traders make profits.

Table 18 Profit maximization by the traders



Agree 07 23 76

Not sure 00 00 76

Disagree 05 17 96


Total 30 100


Table 18 results shows that 53% respondents strongly agreed, 23% agreed, 17%

disagreed and 7% strongly disagreed.

The 53% respondents who were strongly agreed that profit maximization lead to growth

is a clear sign that when the traders maximize the profits and plough them back in the

businesses, their businesses would certainly grow and expand. However, 17% who

disagreed and the 7% who strongly disagree implies that profit maximization is not the

only measure of business growth. This greatly contradicts with what Kakuru (2005)

wrote that profitability is where a firm seeks to maximize its revenue while minimizing

its costs. He further states that profit maximization is the background objective that every

firm strikes to achieve and it’s from profits that owners of the business get returns to their

investments hence profits are a sign of efficiency and effectiveness. Therefore profits are

a yardstick against which performance is measured.

4.3.3 Growth of business enterprise is reflected in the number of people it helps to

employee

The number of the people that a business enterprise employee indicates its growth levels.

The researcher wanted to find out whether this is true.

Table 19 The effect of the number of people a business enterprises helps to employee



Agree 14 47 64

Not sure 07 23 87

Disagree 04 13 100


Total 30 100


Table 19 results shows that 17% respondents strongly agreed, 47% agreed, 23% were not

sure and 13% disagreed. The percentage of respondents in agreement is bigger than those

in disagreement. This therefore means that the number of the people that a business

enterprise employees indicate its growth.

4.3.4 The increased business stock levels indicate its growth

The stock levels of the business can lead to its growth. The researcher wanted to find out

whether this is true.

Table 20 The effect of the increased stock levels indicate to the business



Agree 05 17 57

Not sure 00 00 57

Disagree 07 23 80


Total 30 100


Table 19 results shows that 40% respondents strongly agreed, 17% agreed, 23%

disagreed and 20% strongly disagreed. The percentage of respondents in agreement is

bigger than those in disagreement. This therefore means that the increased stock levels

indicate its growth.

4.4 The relationship between debt financing and growth of small and medium

enterprises

Establishing the relationship between debt financing and growth of small and medium

enterprises was objective number four. This was determined using Pearson’s correlation

coefficient (r). It was established using the statistical package for social scientist (SPSS)

as indicated below;-

Table 21.The relationship between debt financing and growth of small and medium

enterprises

Correlation Debt financing Growth of small and

Medium enterprises

Debt financing Pearson

correlation 1.000 0.79

Sig. (2-tailed) 0.45

N 30 30

Growth of small Pearson

and medium correlation 0.79 1.000

enterprises

Sig. (2-tailed) 0.45

N 30 30

*Correlation is significant at the 0.01 level (2 tailed).

Results in table 21 revealed the relationship between debt financing and growth of small and

medium enterprises effectiveness to be positive and significant with a correlation coefficient (r) of

0.79.

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.0 Introduction

This chapter marks the end of the research study. It is based on research objectives and

brings out the summary of the findings, conclusions, recommendations and highlighting

areas that require further research. The main source of data was primary data obtained

mainly by use of questionnaires. The data was collected and analyzed in tables expressed

as percentages. The researcher has therefore summarized the field discoveries, drawn

conclusions and provided recommendations on his findings regarding the impact of debt

financing and growth of small and medium businesses of Kisenyi traders.

5.1 Summary of findings

5.1.1 Debt financing

It was discovered that debt financing is a useful strategy for SMEs with a good credit and

stable history of revenues earnings and cash flows. It was found out that debt financing is

desirable for small businesses since it provides business owners with a greater degree of

financial freedom and being easy to administer as it generally lacks the complex

reporting requirements that accompany some forms of equity financing.

It was found out also that there is a common misunderstanding that banks are reluctant to

lend money to SMEs as they never believe that lending money to them is commercially

viable.

Again SMEs that are essential to sustainable growth and poverty reduction will never get

enough of the capital they need to build and expand their businesses if their do not

effectively finance their debts.

5.1.2 Growth of Small and Medium Enterprises

It was further found out that those SMEs that prefer to use more of external sources of

financing such as debt financing other than equity capital or retained earnings improved

drastically. This is so because many SMEs have limited capital resulting in low rate of

returns.

It was also found out that although the business owners employ more debt than equity

into their businesses, it would be of great importance for SMEs owners to deploy

appropriate mix of debt so as to amply be rewarded in the market place because all things

being equal, this appropriate mix of debt minimizes a firm’s cost of financing there by

improving its competitive advantage.

5.1.3 The relationship between debt financing and the growth of small and medium

enterprises of the Kisenyi traders

The relationship between debit financing and growth of small and medium enterprises

was found to be positive and significant with correlation ® of 0.79. This implied that

proper servicing of debts by the Kisenyi traders will greatly lead to steady growth their

small and medium enterprises as firms are able to maximize their value by employing

more debt because of the tax- shield benefits associated with debt use.

5.2 Conclusion

5.2.1 Debt financing

From the findings it can be concluded that debt financing is a very important aspects in

the growth of small and medium enterprises since it allows the founders to retain

ownership and control of their businesses. Since a debt is paid on time, it can enhance a

small business credit rating and make it easier to obtain various types of financing in the

future.

5.2.2 Growth of Small and Medium Enterprises

Debt financing plays a central role in small and medium enterprise development but this

is only possible when it is reasonably priced. While SMEs are increasingly seen as

playing a strategic role in economic growth and development, they suffer from liquidity

problems arising from late payments by debtors.

Further more they usually experience difficulties in accessing loans from the banking

sector and other financial intermediaries to finance working capital and provide credit for

a smooth transition through liquidity cycles. The reasons extended for this are lack of

collateral, poor infrastructure, limited management, poor technology, lack of credible

financial accounts, limited markets, small loanable funds and high interest rates.

5.2.3 The relationship between Debt financing and Growth of Small and Medium

Enterprises of the Kisenyi traders

There is a strong relationship that exists between debt financing and the growth of small

and medium enterprises. SMEs require debts to be effectively financed for them to

improve. SMEs are able to maximize their value by employing more debt than other

external sources of finance available to them.

5.3 Recommendations

5.3.1 Recommendations on debt financing

Attain management skills through refresher courses and trainings to the business owners

and their workers of SMEs. This will assert management skills as people acquire

capabilities through observation of effective role models, participation in management

training and learning from work experiences.

Reviews should be done periodically by the lending institutions usually monthly to check

if there is necessity to make changes in the debt repayment period. If there are any

changes, causes of adverse variances should be addressed as soon as they appear.

SMEs need to improve their financial records and accounting systems. Proper records

need to be kept and maintained reflecting a clear realistic picture of their operations and

financial conditions. Proper records are not only helpful to the banks, they are also crucial

in managing and monitoring businesses as well as guiding tax authorities.

The government should provide frame work that will regulate the interest rate offered by

the financial institution hence encouraging the SMEs owners to freely access the debt

financing services hence improved and their rapid growth.

5.3.2 Recommendations on growth of small and medium enterprises

SMEs have to network and build linkages with other entrepreneurs to acquire raw

materials or equipment that they need. The linkage can be an important market outlet.

This feature can increase the credit worthiness in the eyes of the lending institutions.

Information symmetry should be encouraged to enhance awareness among the SMEs

owners about debt financing.

SMEs need to improve their operating efficiencies and capabilities as these impacts on

production costs and profits. Material wastage is a major source of high costs in small

businesses. To increase their capacities and minimize wastage, SMEs need to invest in

skills development and infrastructure to be able to benefit from e-finance.

5.3.3 Recommendations on growth of small and medium enterprises

More efforts need to be made by traders in debt financing in order to improve on the

growth of small and medium enterprises.

5.4 Areas of Further Research

Although this study was about the impact of debt financing and growth of small and

medium enterprises, it could not exhaust all the aspects entailed in debt financing and

growth of small and medium enterprises. Therefore the researcher recommends that

further research should be carried out in the following areas;

The role of record keeping and growth of SMEs

Micro finance services and the growth of SMEs

Debt financing and women empowerment in Uganda

Computerization and performance of SMEs

Evaluation of budgets and employee performance

The role of business development services on performance of SMEs

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MAKERERE UNIVERSITYA self administered questionnaire on the impact of debt financing and the growth of

small and medium enterprises a case study of Kisenyi traders.

Dear respondent, Iam a student of Makerere University undertaking a Bachelor of

commerce degree carrying out a research on the impact of debt financing and the growth

of small and medium enterprises among the Kisenyi traders. This research questionnaire

is prepared for the sole purpose of obtaining information about the impact of debt

financing and growth of small and medium enterprises. It’s purely academic in nature

and the information obtained will be treated with the highest degree of confidentiality.

SECTION A: RESPONDANT’S PERSONAL DATA

Please tick the appropriate

1: Sex: Male

Female:

2: Age: Below 25 years

26 – 30 years

31-35 years

Above 36 years

3: Highest Level of Education attained

Primary

Secondary

Diploma

Degree

Other (please specify) …………………………………

4: Marital status: Married…… Single……Widowed…… Divorced……..

5. SECTION B: AN EVALUATION OF THE IMPACT OF DEBT FINANCING

OF KISENYI TRADERS

You are requested to show the extent to which you agree or disagree on matters relating

to impact of debt financing in your sector.

(Please tick most appropriate of: Strongly agree =1, Agree=2, Not sure=3 Disagree=4,

and strongly disagree=5)

Statement 1 2 3 4 5

You finance your business by use of loans.

Loans acquired are put to their intend purpose

Small loans are not sufficient for your business needs

Big loan sizes given to you makes it difficult for you

to pay

The loan products suit your needs and you feel

respected and cared about by the lending institutions.

The credit officers have enough skills and experience

to handle delinquent clients

You get advisory services/trainings on how to use

these loans

A debt that is paid on time can enhance small and

medium enterprises’ credit rating for further loans

There are rewards for client who pay according to their

repayment schedules

Borrowers appreciates the benefits of on time

repayments and the costs of late repayments

There are punishments for late payments by clients

You have the required securities for the loans

The interest rate charged on borrowed funds reflect the

level of risk that the lender undertakes by providing

the funds

6. SECTION C: AN EVALUATION OF THE GROWTH OF SMALL AND

MEDIUM ENTERPRISES OF THE KISENYI TRADERS

The table below relates to statements that will enable the researcher to assess the growth

of small and medium enterprises.

(Please tick most appropriate of: Strongly agree =1, Agree=2, Not sure=3 Disagree=4,

and Strongly disagree=5)

Statement A B C D E

Expansion of your business results in business growth

The rate of your business performances indicates its

growth

Increased stock levels mean growth of your business

Growth of your business results in creation of employment

opportunities

Profits that are generated in your business can later lead

the to its growth

The level of out reach that is the market share of the

business indicates its growth

The number of clients that you serve is clear indicator of

the business growth

You have acquired asserts due to growth of your business

7. SECTION D: AN EVALUATION OF THE RELATIONSHIP BETWEEN DEBT

FINANCING AND GROWTH OF SMALL AND MEDIUM ENTERPRISES OF

KISENYI TRADERS

The statements here below are to help in assessing the relationship between debt

financing and growth of small and medium (Please tick most appropriate of: Strongly

agree =1, Agree=2, Not sure=3 Disagree=4, and strongly disagree=5)

Statement 1 2 3 4 5

Debt financing has improved your business hence making

it to grow

Debt financing gives you a greater degree of financial

freedom allowing you to control your businesses

Growth of small and medium enterprises is made easy

through debt financing

Debt financing has enabled Kisenyi traders to achieve

their objectives

The loan policies and conditions affect your loan

repayment pattern and growth of your business

8: Do you feel debt financing have improved the performance of businesses of Kisenyi

traders?

Yes

No

Not sure

Thank you for your cooperation!

MAKERERE UNIVERSITYAn interview guide on debt financing and the growth of small and

medium enterprises a case study of Kisenyi traders.

Important Note: introduce your self and explain the purposes for which this meeting has

been called, let members introduce them-selves as well. Note that this information is

purely aimed at helping their businesses to develop products that meet their needs.

1. What are your current financial needs? Probe for the different areas that the

members need finances for e.g. to pay fees, to build a house, purchase in puts,

finance business e.t.c

2. Do the lending institutions meet the needs above? Probe and find out how they

have managed to cope with the needs above i.e. where else do you get finances to

finance your businesses. You may want to find out why they use those particular

lending institutions or sources mentioned.

3. What are some of the things you like or dislike about the lending institutions?

Probe for areas of governance, loan or savings products and repayment patterns

e.t.. we need to see how these affect their utilization of their services.

4. What other services apart from loans or savings would you like to see the lending

institutions introduce? Probe for areas like Money transfers, insurance, document

safety, photocopying but most importantly find out why they need these services?

5. Is there any other issue you would like us discuss in relation to what we have been

talking about?

Do not forget to thank the interviewees!

Documents

DECLARATION - Makerere University€¦ · Web viewimpact of debt financing on growth of small and medium enterprises. a case study of kisenyi traders. by. namaka esther. 07/u/5113/ext