CHAPTER ONE: INTRODUCTION

1.0 Overview
In essence, Small Medium Enterprises (SMEs) sector is described as the natural home of
entrepreneurship. SMEs have the potential to provide the ideal environment for enabling
entrepreneurs to optimally exercise their talents and to attain their personal and professional
goals. In all successful economies, SMEs are seen as essential springboard for growth, job
creation, and social progress (Kayanula and Quartey, 2012).

Tushabomwe (2013) claims that small businesses face different challenges that limit their
survival and development. Majority of local entrepreneurs establishing micro businesses are
susceptible to failure that is attributed to both internal factors (wrong pribcing, negative cash
flows, poor record keeping, management problems, lack of planning and faulty products) and
external factors (government taxation, load shading, in adequate capital, poor markets and high
rents).

As such, this study assesses the management challenges of micro-business enterprises, a case of
Limbe and Blantyre Market.

1.1 Background
Small and Medium Enterprises/entrepreneurs are businesses that maintain revenues, assets or a
number of employees below a certain threshold. Every country and economic association has its
own description of what considered as SMEs (Robert F Hebert, 2009). Small and Medium
Enterprises play a key role in many economies but a particularly significant role in developing
economies.

The Malawi National Gemini Baseline Survey, undertaken in 2000, estimated the size of the
Small Medium Enterprises (SMEs) sector in Malawi. It noted that, at that time, micro and small
enterprises (SMEs) contributed income to about 25% of Malawian households, employed about
38% of the country’s labour force, and contributed about 15.6% to GDP. The vast majority of
these enterprises were located in the rural parts of the country (Abeberese, 2012). The recent
2012 Malawi SME Survey provides an up-to-date account of SMEs in Malawi. The up-to-date
survey claim that, there are 758,118 small business owners in the country (Paul, 2014). They are
overwhelmingly involved in retailing; although around one on eight (13%) are involved in
service provision. They generate revenue of some US$2bn (Schulz, 2016).

Not only that, it is indicated that there are almost a million SMEs (987 480). The fact that there
are far less business owners (758,118), some people own more than one business. However, the
majority of SMEs in Malawi are very small; 59% are individual entrepreneurs who employ no
other people, while the remaining 41% of businesses generate employment. However, the
majority of them are micro businesses. Given the fact that the majority of SMEs are micro
businesses, the net profit of many businesses is relatively low with 35% of SMEs making 110 to
25 000 Malawi Kwacha a month. SMEs mainly operate either from a trading centre/market
(42%) or from home (42%). Many of those businesses are in the growth phase (3-5 years of
existence). The large majority of MSMEs trade informally (91%), being neither registered nor
licensed (Hove nor Tarisai 2013). In accordance to (Wu 2010), business failure is destructive
event that does not only wipe out benefits of the stakeholders, but it also harms the continuing
growth of the economy and society.

Lilongwe market is located in central region of Malawi. There are more micro- business
entrepreneurs in these areas. Such businesses include, kaunjika sellers, tomato sellers, car spare
parts sellers, and food sellers just to mention a few. Most of vendors rely on their own businesses
to earn a living. Despite wide recognition of SMEs as springboard for a vibrant private sector
and anchor growth and development in an economy, small-scale businesses remain dodged by a
myriad of bottlenecks, emanating from both within and without (Zidana, 2015).

This study therefore aims at assessment of challenges that micro-business enterprises face in
managing their businesses, a case of Lilongwe Markets.

1.2 Statement of the problem

SMEs play a key role in economic growth and industrial development of a country (Opara,
2011). They make vital contributions in improving economic and social sectors of a country
through stimulating large-scale employment (UNIDO, 2000). This has led to the increase in the
number of small-scale businesses to account for at least 80% of business entities in Malawi
(Darroll, 2012). Ever since the world became a global village, business activities have advanced
at very fast rate and this has seen countries being engaged in trade relations with other countries
with little or no difficulties at all.

According to Arinaitwe (2013), SMEs are countenance with the problems of lack of expertise,
lack of managerial skills, inadequate legislature to protect small business enterprise against the
competitions from multinational and imported goods and limited of finance. The financial
institution policies Credit in Nigeria have also a propensity to discriminate against small-scale
enterprises; as a result, most of these enterprises have been force to obtain funds from family
members and from micro credit markets, which interest rates are very high and often injurious.
In line with, Carter & Jones-Evans (2012) also clearly put the followings as the strategic
problems of SMEs like unavailability of financial resources, marketing problems and customer
concentration and poor management skills. They further explained that most SMEs are
undercapitalized and are improperly capitalize in terms of both a high debt-equity ratio.

However, despite of the efforts the government and private sector has made to increase the
growth and performance of small business enterprise in the economy, the majority of the SMEs
net profit is relatively low with 35% of SMEs making 110 to 25 000 Malawi Kwacha a month
with slow growth rate. These SMEs mainly operate from a trading centre/market (42%) or from
home (42%); as a result they exist for a period of 3-5 years. The large majority of SMEs trade
informally (91%), being neither registered nor licensed (Hove nor Tarisai 2013). Henceforth it is
against this background that the researcher has embarked on the study to assess some of
management challenges facing SMEs in Malawi, a case of Lilongwe markets.

1.3 Research objective

1.3.1 Main objective

a) To assess management challenges of SMEs in Malawi (a case of Lilongwe markets in

Malawi).

1.3.2 Specific objectives

a) To establish challenges in managing micro-business enterprises in Malawi
b) To determine on how the management challenges have affected the growth of SMEs in
Lilongwe markets.
 c) To estimate measures taken by the SME owners and the government to address
challenges facing SMEs in Lilongwe markets

1.4 Main research question

a) What management challenges are experienced by SMEs in Lilongwe market in Malawi?

1.4.1 Specific Research questions

a) What are some of the challenges facing SMEs managers in Lilongwe market?
b) How do these management challenges affect growth of micro-business enterprises?
c) What measures should be put in place by the SME owners and government to address
challenges facing in Lilongwe market?

1.5. Significance of the study

The research is expected to benefit various groups of stakeholders as follows:

i. Policy makers
The research will enable the policy makers to come up with a viable and focused
entrepreneurship strategy that can help micro business enterprise access to financial
resources and management. The study will also generate empirical data and information
beneficial to the Government and the University level.
ii. Financial institutions
The research will come up with products that are tailor made to fit into entrepreneurship
financial needs.
iii. Other Stakeholders
To stakeholders like financial institutions, investors, shareholders, employees, pressure
groups, etc., the research provides information for suggesting improvement in service
delivery. This research will assess management challenges that micro-business face in
Malawi and possible solutions. This study will also be helpful to ensure growth in micro-
business enterprises since the challenges of micro-business enterprises will be addressed
with possible solutions.
1.6. Chapter Summary
This chapter presented the background information of the study, statement of the problem as well
as the gap, objectives of the study, purpose of the study, the significance of the study outlining
different stakeholders that benefit from the study.

Chapter two of this study describes the literature review on studies carried out in the past based
on the specific objectives related to management challenges on SMEs.
 CHAPTER TWO: LITERATURE REVIEW
2.0 Introduction
This chapter presented the theoretical and empirical review of management challenges of SMEs.
It therefore follows a particular layout. First, some definitions relating to SMEs are given, which
is followed by looking at the characteristics of the SMEs in Malawi. This paves the way for the
discussion of their contribution to the economic development and growth and also looked at
literatures on the constraints SMEs faced in accessing credit.

2.1 Definitions of terms

Nature of SMEs The International Finance Corporation (2012) defines a Small and Medium
Enterprise (SME) as a firm with less than 300 employees and total assets less than US$15
Million (for large economies). In smaller economies, an SME is defined as a firm with less than
20 employees (PECC finance forum, 2003), but according to International Finance Corporation
(2012), an arm of the World Bank Group.

According to Ward (2005) there is no universal definition for SMEs since the definition depends
on who is defining it and where it is being defined. For example, in Canada SME is defined as an
enterprise that has fewer than 500 employees and small enterprise as one that has less than 100
employees. On the other hand, the World Bank defines SMEs as having no more than 500
employees.

2.2. Theoretical Reviews

2.2.1 SMEs contribution to economic development

Quite a number of studies have been conducted on SMEs concerning their positive contributions
towards the national economy; their growth patterns world over, as well as challenges hampering
their growth and performance, including studies by Zimmerer & Scarborough (2002) and
Nieman, et al (2003). These made significant contributions regarding SMEs’ contributions and
operations. In their assessment of roles of SMEs in national economies, Maserira & Msweli
(2013), argue that the SME sector is and has been acknowledged worldwide as an economic
powerbase to stimulate economic growth. They further claim that Small and medium sized
businesses are not merely necessary, but vital in an emerging and growing economy.
In their study, they find that SMEs account for about 91% of the formal business entities,
contributing to about 51% of GDP, and providing almost 60% of employment in South Africa.
Supporting these arguments is Can’t (2012), who estimates that small business undertakings
create about 80% of all new job opportunities annually in South Africa and that the sector has
been placed on the South African government’s priority list due to its contributions. PECC
Finance Forum (2003), further indicates that SMEs account for about 88.7% of the work force in
Indonesia, and that they are also significant in enhancing the quality of human resources,
nurturing a culture of entrepreneurship, fostering creativity and opening up new business
opportunities Small and medium enterprises play an important role in the development of a
country (Feeney and Riding, 1997).

SMEs contribute to economic development in various ways: by creating employment for rural
and urban growing labour force, providing desirable sustainability and innovation in the
economy as a whole (Fida, 2008). The development of SMEs is seen as the way to accelerating
the achievement of wider socio-economic goals, including poverty alleviation (Cook & Nixon,
2000). According to the findings of Longley (2006), small businesses with fewer than 500
employees drive the US economy by providing jobs for every half of the nation’s workforce.
According to Ackah & Vuvor (2011), the SME sector is considered very important in many
economies because it provides jobs, pays taxes, is innovative and very instrumental in countries’
participations in the global market.

2.2.2 Other constraints of micro business enterprise in Zimbabwe

Arinaitwe (2006) states that despite the potential for growth shown by SMEs in the developing
world, a number of militating factors have had a negative impact on their growth performance
resulting in most of them failing. These factors include unfavourable economic conditions, gross
under-capitalization, poor infrastructure, high operating costs, corruption and lack of government
support. SMEs sector development is hampered by lack of managerial skills, equipment,
technology and access to international market (Gockel and Akoena, 2002).

He further argues that those entrepreneurs with a management qualification have a 30% better
chance for survival in business compared to those with none. Katindi et al. (2007) reckons that
unviable business information provided by SMEs to potential funders for analysis before making
a decision whether to fund a certain project or not is a cause for concern. Business information
reduces information asymmetry. As a result, a comprehensive business plan reduces risk
perception and the likelihood of obtaining capital increases. A negative perception by potential
lenders has negatively impacted on the growth of SMEs (Green et al., 2002).

2.2.3 Government Policy and Support

Ramis (2002) discovered that SMEs faced with stiff competition are three times more prone to
failure than those without competition. There is need for government policies that protect SMEs
from both internal competition (from large corporate) and from external competition. Kaufman
et al (2003) opined that in Africa, SMEs are weak because of very difficult business conditions,
which include cumbersome official procedures and unattractive tax regimes. Import’s
competition is negatively impacting on SMEs (Koush, 2008). Regulatory constrains also pose a
serious threat to SMEs. These include start up points and licensing and regulatory requirements.
World Bank (2004a) states that in Zimbabwe for example, it takes 952 days to deal with
licensing issues. It is recognized that although various initiatives have been put in place to
support the SMEs sector there is need for an integrated and coherent policy and strategy for the
development of the SMEs sector in Zimbabwe (Nyoni, 2008).

The study concluded responses indicate that SMEs were getting little financial assistance from
financial institutions. The study revealed that there is management deficiency in the SMEs which
results in their collapse mainly due to poor decision making. The study further revealed that
government policies were not clearly spelt out so as to enhance the performance of SMEs. The
current tax regimes and regulatory framework is making business by SMEs difficult.
Competition from imports and larger corporations coupled with shortage of raw materials
compounded the operations of SMEs. The study concludes that a coherent SMEs policy, sound
business management and availability of financial resources to SMEs by the financial services
sector will be a welcome relief to the challenges faced by SMEs in Chitungwiza.

2.2.4 SMEs challenges to growth

A lot of research has been done on investigating challenges facing SMEs in their quest to
expansion, both in Africa and the world as a whole. In his study, can’t (2012) made a direct link
to the lack of marketing skills and the failure of businesses and concluded that there is a positive
correlation between the success of a business and the need for marketing skills in South African
SME’s. In agreement with Cant (2012); Van Aardt (1997); April (2005); Bowen, Morara &
Moreithi (2009) and Jones (2009); argue that small entrepreneurs lack proper management skills
which help to control a wide range of functions when running a business and be able to compete
amongst themselves and other large firms.

Other than lack of proper management skills as highlighted by some scholars, Rudjito (2003) and
Ramukumba (2014) mention lack of appropriate technology and low production capacity as
another challenge hindering SMEs’ growth in the African region. It is argued, according to Monk
(1991), that if productivity is to be increased, the efficiency of an existing production process
must be increased and the way in which production is organised must be improved through
innovation. Most SMEs use old and traditional equipment in their operations and they lack
transportation and communication infrastructure not befitting the current business environment
where almost everything is automated. This challenge leads to another challenge of having a
restricted market access (Rudjito, 2003 and Can’t, 2012).

Small and Medium Enterprises resort to the use of informal lending sources or worse still they
cease to operate. Other researchers further discussed reasons why it is harder for Small and
Medium Enterprises to access debt financing. Berger & Udell (1995) found that small and young
firms, with generally shorter banking relationships.

2.2.5 Managerial Challenges

There is lack of knowledge of entrepreneurial and managerial capacity, and marketing
experience. Lack of skill leads to problems in production due to the unfamiliarity of workers
with rapid changing technology, lack of coordination of production process, and inability to
troubleshoot failures on machinery and/or equipment’s is a critical problem that SMEs are facing
since they cannot afford to employ specialists in the fields of planning, finance and
administration, quality control, and those with technical knowledge (Commission on Legal
Empowerment of the Poor, 2006).

Moreover, SMEs lack resources required for research and development and there are inadequate
technical and entrepreneurial skills (Commission on Legal Empowerment of the Poor, 2006).
There is lack of formal education and training in SMEs operators. The most common form of
acquiring skills in the SMEs sector is through apprenticeships. Though the formal education
system prepares students for paid employment, there are very few vocational institutions that
cater for developing skills. This inevitably leads to low level of innovation in almost all sectors
of the economy and severe shortage of training opportunities for potential entrepreneurs
(Gebrehiwot and Wolday, 2004). Mbonyane and Ladzani (2011) found that more than 50 percent
of micro-enterprises lack training in proper business management. As a result, there is lack of
technology available to micro and small businesses enterprises.

The results of this research show that the government does not have enough support mechanisms
available to ensure that small business owners and their employees receive the training that
would enable them to run the business successfully. Most owners do not have management
experience and adequate training and skills to operate a business (Okpara, 2011). Olawale and
Garwe (2010) also found lack of business skills and shortage of skill labor which results from
absence of proper training are affecting micro and small enterprises negatively.

2.2.6 Collateral Requirements

Historical development and the associated culture, of the banking system underpin the problem
of the emphasis on the provision of collateral as a primary condition in lending. Banks have
always adopted a risk adverse stance towards small firms, with an accompanying inability to
focus on the income generating potential of the venture, when analysing the likelihood of loan
repayment (Beaver, 2002).

Credit constraints can occur when banks increase collaterals for loans. As a result, low interest
borrowers (including MSEs) may be removed from the list of potential customers and banks may
skip these customers (Stiglitz& Weiss, 1981). Gangata &Matavire, (2013) in their study on
challenges facing MSEs in accessing finance from financial institutions, found out that very few
MSEs succeed in accessing funding from financial institutions, the main reason being failure to
meet lending requirements, chief among them being provision of collateral security.

A study was done on challenges faced by Small & Medium Enterprises (SMEs) in obtaining
credit in Ghana. Based on the responses received through the questionnaires circulated, it
became evident that SMEs in Ghana like most SMEs in other countries are faced with major
challenges in accessing credit. These challenges were revealed by the study to include, the
inability of SMEs to provide collateral and other information needed by banks such as audited
financial statement couple with the high cost of loan in terms of high interest rates make it
extremely difficult to access bank loans (Vuvor&Ackah, 2011).

2.2.7 Cost of Credit

The cost of credit accessibility refers to the amount of money the entrepreneurs pay in process of
borrowing money from financial institutions. The key indicators of cost in this respect are
processing fees, negotiation fees, interest rates, personal insurance, legal fees and travelling
expenses that the entrepreneurs meet in the process of acquiring credit. Hallberg, (2002) singled
out high risks associated in lending SMEs and fixed costs associated in acquiring sound
information about the borrower by financial institutions as the major driving force to the high
cost of credit.

High transaction costs do therefore not only increase the cost of borrowing, but can also restrict
access to external finance for some borrower groups. While transaction costs are restraining for
all borrowers, there are arguments that they are even more constraining for small and micro
enterprises. Their diverse characteristics and their relative opaqueness increase assessment and
monitoring costs. Unlike other credit categories, such as consumer credit or mortgage lending,
SME lending is still considered a high-cost lending product. More specifically, unlike other
lending products that can be reduced to simple transactions, SME lending often still depends
heavily on relationships between borrowers and lenders (Berger&Udell, 2006).

2.2.8 Availability of Information on finance

The access to credit information and the technology in local lending environments determine the
extent to which small enterprises obtain sufficient external financing to exploit profitable
projects. The extent to which the business environment inhibits the optimal provision of credit
determines the size of the funding gap that small enterprises might face (Berger et al., 2004).
Access to information is important both from the SMEs perspective and from the perspective of
the providers of financial services and products. The SME requires information with which to
identify the potential suppliers of the financial products. It requires this information to evaluate
the cost of the financial services and products that are being offered. The financial service
providers require information with which to evaluate the risk of the SME which is applying for
finance, and to assess the prospects of the SMEs within the market segment.
One of the problems faced by small firms when attempting to raise finance is information
asymmetry in that they cannot prove the quality of their investment projects to the provider of
finance (usually banks). Small firm managers often suffer from a lack of financial
sophistication, as they are often product or service specialist, not specialists in the area of
finance. Thus, the information asymmetry problem is partly one relating to difficulties in the
spheres of communication and credibility. This is compounded by the fact that new or recent
start-ups businesses may be unable to provide evidence of a good financial performance track
record. Banks in particular rely on past financial performance as an indicator for the future
profitability of projects (Tucker & Lean, 2003).

2.2.9 Access to Credit Facilities

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

As emphasized by Hatega, (2007), Kauffmann (2005) and the IFC (2006) report “Making
finance work for Africa”, it is relatively clear that weakly functioning financial markets is the far
most important obstacle for SME entry, growth investment. Ntakobajira, (2013), in his study
found out that access to finance affected performance of SMEs to a great extent because it
limited the entrepreneurs’ ability to take advantage of opportunity as and when they arose.
Nalwelishe (2003) as cited in Ondieki, Nashappi, and Moraa (2013) carried out a research on
sources of finance available to small scale enterprises in Nairobi. His objectives were to identify
which types of credit are easily obtainable by SSEs and to evaluate the credit policies of SSEs.
On access to credit, majority of entrepreneurs relied on limited own and family savings for start-
up and additional capital. They hardly rely on external sources of finance. Therefore, these
enterprises have poor access to credit. Concerning supply of credit; urban-located enterprises
were noted to have achieved a higher success rate than the rural ones.

2.3 Empirical Review

Access to external sources of finance may increase growth possibilities since it facilitates the
development and improvement of firm’s products and services or hire new employees. In
transition economies, the development that financial markets experience may create barriers
linked to the access to finance. Hence, academic research considers financial constraints as an
important obstacle for entrepreneurship and firm growth. Empirical evidence supporting the
importance of access to external finance for business growth can be found in Brown, Earlem &
Lup, (2005), who examines firm growth determinants. Conversely, Johnson, McMillan and
Woodruff (2000) evaluate institutional reforms in five Eastern European countries (including
Romania), and they conclude that access to bank finance does not prevent business growth.

According to the study of Mulugeta (2011), the critical problems of SMEs has recognized and
classified in to market-related problems, which are caused by poor market linkage and poor
promotional efforts; institution-related problems including bureaucratic bottlenecks, weak
institutional capacity, lack of awareness, failure to abide policies, regulations, rules, directives,
absence of training to executives. Also, poor monitoring and follow-up; operator-related
shortcomings like developing a dependency tradition, extravagant and wasting behaviour, and
lack of vision and commitment from the side of the operators; MSE-related challenges including
lack of selling place, weak accounting. In addition to this record keeping, lack of experience
sharing, and lack of cooperation within and among the MSEs and finally society-related
problems such as its distorted attitude about the operators themselves and their products.

2.4. Conceptual Framework

INTERVENING VARIABLE
 High Interest Rates
 Competitive Advantage
 INDEPENDENT VARIABLES
DEPENDENT VARIABLE
 Illiteracy
 Income/capital  Business performance
 Record Keeping
 Access to credit

MODERATING VARIABLES
 Laws and Regulations
 Political affiliation
 Economic variables

Figure 1; Conceptual flamework

2.5. Research Gap

Similar research around the world about assessing challenges that SMEs face and how these
challenges have impacted the performance of SMEs have been discussed. However, in Malawi
there less documentation addressing the challenges that the SMEs face and the impact to
performance. The researcher therefore aimed at assessing the management challenges faced by
SMEs, a case study in Limbe and Blantyre Markets.

2.5 Conclusion

This chapter provided a critical analysis of the literature used, through a survey of important
literature related to the study. Special focus was given in the theoretical and empirical overview.
The literature review included surveys of related literature in other countries in the region, in
Africa and globally.