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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
Total 30 100Source: Primary data
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
Total 30 100Source: Primary data
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
Total 30 100Source: Primary data
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
Total 30 100Source: Primary data
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
Total 30 100Source: Primary data
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
Total 30 100Source: Primary data
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
Total 30 100Source: Primary data
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
Total 30 100Source: Primary data
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
Strongly Agree 03 10 10
Agree 06 20 30
Not sure 00 00 30
Disagree 10 33 63
Strongly disagree 11 37 100
Total 30 100
Source: Primary data
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
Responses Frequency Valid Percent Cumulative Percent
Strongly Agree 14 47 47
Agree 10 33 80
Not sure 00 00 80
Disagree 06 20 100
Strongly disagree 00 00 100
Total 30 100
Source: Primary data
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.
Responses Frequency Valid Percent Cumulative Percent
Strongly Agree 04 13 13
Agree 07 23 36
Not sure 00 00 36
Disagree 05 17 53
Strongly disagree 14 47 100
Total 30 100
Source: Primary data
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.
Responses Frequency Valid Percent Cumulative Percent
Strongly Agree 05 17 17
Agree 07 23 40
Not sure 00 00 40
Disagree 11 37 77
Strongly disagree 05 16 100
Total 30 100
Source: Primary data
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
Responses Frequency Valid Percent Cumulative Percent
Strongly Agree 00 00 00
Agree 05 17 17
Not sure 06 20 37
Disagree 07 23 60
Strongly disagree 12 40 100
Total 30 100
Source: Primary data
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
Responses Frequency Valid Percent Cumulative percent
Strongly Agree 04 13 13
Agree 02 07 20
Not sure 09 30 50
Disagree 11 37 87
Strongly disagree 04 13 100
Total 30 100
Source: Primary data
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
Responses Frequency Valid Percent Cumulative percent
Strongly Agree 11 37 37
Agree 15 50 87
Not sure 00 00 87
Disagree 00 00 87
Strongly disagree 04 13 100
Total 30 100
Source: Primary data
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
Responses Frequency Valid Percent Cumulative percent
Strongly Agree 16 53 53
Agree 07 23 76
Not sure 00 00 76
Disagree 05 17 96
Strongly disagree 02 07 100
Total 30 100
Source: Primary data
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
Responses Frequency Valid Percent Cumulative percent
Strongly Agree 05 17 17
Agree 14 47 64
Not sure 07 23 87
Disagree 04 13 100
Strongly disagree 00 00 100
Total 30 100
Source: Primary data
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
Responses Frequency Valid Percent Cumulative percent
Strongly Agree 12 40 40
Agree 05 17 57
Not sure 00 00 57
Disagree 07 23 80
Strongly disagree 06 20 100
Total 30 100
Source: Primary data
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!