SMALL BUSINESS DEVELOPMENT IN TANZANIA: THE

ACCESSIBILITY/INACESSIBILITY OF BANK FINANCE

i
 SMALL BUSINESS DEVELOPMENT IN TANZANIA: THE
ACCESSIBILITY/INACESSIBILITY OF BANK FINANCE

By

Nuru Magombe

A thesis Submitted to Mzumbe University Dar es salaam Campus College in

Partial Fulfillment of the Masters Degree of Business Administration (MBA -
Corporate Management) Of Mzumbe University

2013

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 CERTIFICATION

We, the undersigned, certify that we have read and hereby recommend for
acceptance by Mzumbe University a dissertation titled; “Small Business
Development in Tanzania: the Accessibility/Inaccessibility of Bank Finance
Fulfillment of the requirements for the award of a Masters degree in Business
Administration (MBA - Corporate Management)

Major Supervisor.......................................................................

Internal Examiner......................................................................

External Examiner......................................................................

Accepted for the Board of …………………………………………

…………………..………………………………………………….

CHAIRPERSON, FACUTY/DIRECTORATE BOARD

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 DECLARATION AND COPYRIGHT

I, Nuru Magombe declare that, this dissertation is my original work and that; it has
not been presented and will not be presented to any other university for a similar or
any other degree award.

Signature________________________

Date____________________________

©
This dissertation is a copy right material protected under the Berne Convention, the
Copyright Act 2009 and other international and national enactments in that behalf on
intellectual property. It may not be reproduced by any means in full or in part, except
for short extracts in fair dealings, for research or private study, critical scholarly
review or discourse with an acknowledgement, without the written permission of
Mzumbe University, on behalf of the author.

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 ACKNOWLEDGEMENT

I would like to express my sincere gratitude to my family and colleagues who shows
their collaboration in preparations of this research report

Special thanks to my supervisor, who have enabled me to develop ideas and integrate
it to the extent of producing this frame work, are Dr. F. Barongo who was my
research supervisor

Research report work need much guidance, rules and principles in order to complete
this report but without advice and encouragement it could have been a very tough job
to be accomplished, with this regards I would like to convey my thanksgiving to Dr.
[Link] who was my lecture in the course of Business Administration (MBA -
Corporate Management) at Mzumbe university, Dar-es-salaam college of business
school

I appropriate the assistantship of Dr. F. Barongo who has been my in charge and my
key director during my field study of data collections.

It is true indeed that it was impossible to thank everybody individually in this

summarized acknowledgement. However, I would like to put forward my hearties
thanks to those who in one way or the other helped me in the course of my study to
this moment, should regard themselves that their contributions were remarkably and
highly appreciated

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 DEDICATION

This work is dedicated to my family who have been a blessing throughout my life
through their material and moral support, spiritual guidance and who also laid down
the foundation for my education.

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 LIST OF ABBREVIATION

CNFA - Citizens Network for Foreign Affairs.

CRDB - Cooperative Rural Development Bank
DFIs - Development Finance Institution
EAB - East African Bank
EXIM - Experimental Internet Mailer
FINCA The Foundation for International Community
Assistance
MFI - Micro Finance Institution
NBC - National Bank of Commerce
NGO - Non-Governmental Organization
NIPC - Nigerian Investment Promotion Commission
NMB - National Microfinance Bank Ltd.
OSHA - The Occupational Health and Safety Authority
PRIDE Promotion of Rural Initiative and Development
Enterprises Limited
SACCOS - Savings and Credit Cooperative Society
SBA - Small Business Administration.
SELFINA - Sero Lease and Finance Ltd.
SIDO - Small Industries Development Organization
SPSS - Statistical Package for Social Science
STANBIC - Standard Bank.
STEP - Support and Training Entrepreneurship Program me
TFDA - Tanzania Food
TRA - Tanzania Revenue Authority
URT - United Republic of Tanzania

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 ABSTRACT

This study investigated the influence of inaccessibility of bank finance and lack of
financial management knowledge to people doing small business. The general
objective of the research was to investigate the influence of
accessibility/inaccessibility of bank finance to small business development in
Tanzania. Specific objectives: To investigate the influence of accessibility and in-
accessibility of Bank Finance on the Small Business management, to identify effects
of accessibility/y/inaccessibility of bank finance to the development of small
business and to determine challenges faced by small business owners as a result of
inaccessibility of Bank finance.

Both theoretical and empirical literature was reviewed and the latter revealed that
many studies have been done on the similar issues. This was because of the
importance of small business as a source of job creation and eradication/alleviation
of poverty. The survey research design was used to gather information and the
sample included 100 respondents who were randomly and purposively selected.
Interviews, observations and documentary analysis were data collection methods
used to collect both primary and secondary data. Analysis of data was done based on
research objectives and research questions.

Findings of this research showed that small businesses owners in the study area find
it difficult to access bank finance. The research results also showed that
inaccessibility of bank finance have a greater influence on the development of small
businesses. It also highlighted that lack of financial management knowledge have an
impact on survival and development of small businesses. Recommendations: Small
business owners should be financed effectively, business education to be provided
effectively, same research to be done in other places.

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 TABLE OF CONTENTS

Certification ................................................................................................................. i
Declaration and copyright ......................................................................................... ii
Acknowledgement ..................................................................................................... iii
Dedication .................................................................................................................. iv
List of abbreviations .................................................................................................. v
Abstract ...................................................................................................................... vi
Table of contents ....................................................................................................... ix
List of tables .............................................................................................................. xii
List of figures ........................................................................................................... xiii

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

INTRODUCTIONAND BACKGROUND TO THE PROBLEM ......................... 1
1.1Statement of the problem ........................................................................................ 4
1.2Research objectives ................................................................................................. 5
1.2.1General objective ................................................................................................. 5
1.2.2Specific objectives ............................................................................................... 5
1.3Research Questions ................................................................................................. 5
1.4Scope of the Study .................................................................................................. 6
1.5Significance of the study ......................................................................................... 6
1.6 Limitations and Delimitations ................................................................................ 7

CHAPTER TWO ....................................................................................................... 8

LITERATURE REVIEW.......................................................................................... 8
2.1 Introduction ............................................................................................................ 8
2.2.1Theoretical Literature ........................................................................................... 8
2.2.2Sources of bank loans .......................................................................................... 8
2.2.3Other Sources of finance ...................................................................................... 9
2.2.4Supporting Small Businesses and Creating Jobs: The American Experiences .. 10
2.2.5Theories which Guided the Study ...................................................................... 15
2.2.6Commercial Banks ............................................................................................. 17

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[Link] Micro Finance Institutions (MFI)................................................................... 19
[Link] SACCOS ........................................................................................................ 20
2.2.7 Business support services provides by banks to SB ......................................... 20
2.2.8 Access to loans .................................................................................................. 21
2.2.9 Financial management knowledge .................................................................... 25
2.2.10 Bank’s Contribution to the performance of SB .............................................. 29
2.2.11Contextual factors affecting performance of SB. ............................................. 31
2.2.12 Overview of Business environment in Dar es Salaam .................................... 32
2.3 Empirical Literature ............................................................................................ 33
2.4 Conceptual Framework ....................................................................................... 35
2.5 Research Gap ...................................................................................................... 37

CHAPTER THREE ................................................................................................. 38

RESEARCH METHODOLOGY ........................................................................... 38
3.1 Introduction .......................................................................................................... 38
3.2 Research design .................................................................................................... 38
3.3 Research Approach .............................................................................................. 38
3.4 Study area ............................................................................................................. 40
3.5 Study Population .................................................................................................. 40
3.6 Sample size and sampling Techniques ................................................................ 40
3.6.1 Simple Random sampling ................................................................................. 41
3.6.2 Purposeful sampling .......................................................................................... 42
3.7 Data Collection Method and Instruments ............................................................ 42
3.7.1 Questionnaires ................................................................................................... 42
3.7.2 Interview and Interview Questions ................................................................... 43
3.7.3 Documentary Reviews and Documentary Review Guide ................................. 44
3.8 Types and Sources of data ................................................................................... 44
3.9 Validity and Reliability ........................................................................................ 45
3.10 Data Analysis Procedure .................................................................................... 46

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CHAPTER FOUR .................................................................................................... 48
DATA PRESENTATION, ANALYSIS AND DISCUSSION............................... 48
4.1 Introduction .......................................................................................................... 48
4.2 The Influence of In-Accessibility of Bank Finance on the Small Business
Development ..................................................................................................... 48
4.3 Effects of inaccessibility of bank finance to the success and development of
small business ................................................................................................... 50
4.4 Challenges faced by Small Business Owners as a Result of Inaccessibility of
Finance...... ……………………………………………………………………52

CHAPTER FIVE ...................................................................................................... 55

SUMMARY, CONCLUSION AND RECOMMENDATIONS ............................ 55
5.1 Introduction .......................................................................................................... 55
5.2 Summary of the Study.......................................................................................... 55
REFERENCES…………………………………………………………………….63

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 LIST OF TABLES

Table 4.1: Responses on the Extent in-accessibility of bank Finance affected their
Business N=100 ................................................................................................ 48
Table 4.2 Challenges Facing Small Business Owners as a Result of Inaccessibility of
Finance.............................................................................................................. 53

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 LIST OF FIGURE

Figure 2.1: Conceptual frame work ........................................................................... 37

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 CHAPTER ONE

INTRODUCTION AND BACKGROUND TO THE PROBLEM

Small businesses (SB) are considered to be the driving force for the development of
economic growth for both developing and developed countries. SB creates the worth
for the country. It creates new jobs each year hence reduces poverty. Moreover SB
increases productivity and services, stimulate economic competition and introduce
innovation within the country. Innovation contributes much for the production of
different products and services including the methods of producing them. In Korea
up to the end of 1999 there will be more than 2.7 million SB providing employments
for 82 per cent of all Koreans working in the private sector (Korea SME statistics,
2000)

In Canada SB sector over the past 35 years contributed almost half of the economy of
the Canada (Bruce and Pincard, 2005).Similarly for Malaysia, SB development is
highly importance to the economy of the country (Abdullah and Manan, 2010).A
survey of South Africa government (2009) concluded that74% of South Africa
economy is employed by the SB. Similarly in Nigeria SB play a key role in creating
the growth of the economy (Ariyo, 2000)

According to SME policy of Tanzania (2002), SB is most formalized business with

employee’s between5 to 49 with capital investment from Tshs 5 million to Tshs 200
million; however a researcher of this study based on capital investment. In Tanzania
SB is the backbone of the country. It is estimated that about a third of the GDP in
Tanzania originates from the SB sector. The International Finance Company (IFC) of
the World Bank estimates that there are approximately 2.7 million enterprises in the
country of which 98% are SB. Currently Tanzania is faced with unemployment
problem; and it is estimated that there is about 700,000 new entrances
into labour market every year. About 500,000 of these are school leavers with few
marketable skills. The public sector employs only about 40,000 of the new entrant

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into the labor market, leaving about 660,000 to join the unemployed or the under
employed reserve. A large percent of the remaining person join into SB sector
(Ministry of Industry and Trade, 2002). SB plays a vital role in providing
employment and generating income of the country. SB is generally closely
associated with raising income and poverty alleviation (SME Tanzania development
policy, 2002).According to the SME policy of Tanzania (2002), SB is mostly
formalized business with employees between 5 and 49 employees or with capital
investment fromTshs.5 million to Tshs.200 million however a researcher of the study
ignored number of employees and will be basing only on capital.

Although the SB plays a major role in accelerating the economic growth of the
country Research shows that SB decline each year. According to the U.S SB
administration (SBA), 24% of all new business fails within 2 years and 63% within
six years. This is similar to Japan, Hongkong, United Kingdom, Taiwan, South
Africa, Nigeria and Tanzania.

There are many challenges facing the SB sectors, these includes lack of education
and training, insufficient capital, lack of focus, lack of succession plan and poor
management. Lack of education and training reduces the critical decision making in
the business. According to Fatoki& Garwe (2010), lack of knowledge and training
result in highly failure rate of SB in South Africa. Similarly, Boone &Kurt (2006)
argued that bankruptcy can be caused with the same problem.

A number of solutions have been developed for different challenges facing the SB,
such as many governments in developed and developing countries tried to develop
directly and indirectly policy to support or facilitate the SB to grow and survive
hence the better performance of the business. In US there is SB Administration
(SBA) which control and monitor the credit unions actions on SB lending (SBA,
2011).In Malaysia there is directly and indirectly ministries, financial institution and
agency to facilitate the SB access to loans ( Abdulla& Mannan,2010).
Moreover in South Africa the Integrated small Enterprises Development strategy
(2005) aimed at promoting and strengthening the conducive environment for the SB,

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promoting access to finance and market, improved infrastructure facilities and
competitiveness and facilitation of technology transfer. Onugu (2005) revealed that,
in Nigeria there are several non –Government organization like Individual
Development Finance Institution (DFIs), Support and Training Entrepreneurship
Program me (STEP), the Nigerian Investment Promotion Commission (NIPC) that
promotes the growth of SB in Nigeria.

In recognition of the positive contribution of SBs in her economy, the government of

Tanzania established the policy to support the SB. The National Micro Finance
Policy regulates the provision of financial services to small and micro enterprises in
rural areas as well as in the urban areas (Tanzania SME policy, 2002) .Furthermore
the Agricultural and Livestock Policy is aimed at the development of agricultural and
livestock activities that are performed by both small farmers and livestock keepers
however SIDO is the main government tool for promoting SB in the country.

According to SME policy of 2002, The Vocational Education and Training Act of
1994 provide the framework for the vocational training system in Tanzania. There
are about 630 centers in the country offering training in more than 34 different
business skills. The Centre provides consultancy and training in SME related issues.

The government statement is to promote entrepreneurship development through

facilitating improved access of SMEs to financial and non-financial services.
Furthermore the government has established different financial intermediaries and
national microfinance institution such as FINCA, PRIDE, SELFINA, etc to increase
access to loans for SB. The microfinance institution decrease the condition of
collateral during lending by forming forced group whereby if one person fails to
repay the loan, all the group will be responsible of recovering that loan, however
there are some MFI that use both force groups and individual loan.

Although there have been some solutions addressing the challenges facing the SB,
there are still some gaps that needs an attention. One of the important gaps to be
addressed is lack of access to loans from formalized banks. Banks is among of one of

3
the sources of financing (SB). Berger &Udell (1998), in their study on SB finance in
the US, concluded that SB relies heavily on commercial banks and finance
companies to provide capital. This is due to the limited availability and accessibility
of SB financing in the market. A survey by European Commission in 2005 indicated
that 79 percent of European SB gets their financing from banks. This proves the
importance of banks as the provider of finance and at the same time signaling the
reliance of SB to banks’ finance (European Commission, 2005).

Although, the banks play the important role in financing SB but the previous
empirical research reported that the loans are not easily accessible and the problem is
worldwide. This can be justified by Boocock &Wahab (2001) on the comparative
experience of SB in UK and Malaysia which indicated that, the businesses face the
same difficulties in raising funds from Banks despite differences in financial
infrastructure in both countries.

The same problem is faced by the SB in other parts of the world and the reasons are
the same. Lack of financial management knowledge (Financial illiteracy) is another
gap that facing SB. Lack of financial management knowledge has negative impact on
the growth and survival of the business. Berryman (1983) has indicated that poor
financial management is a major cause of SB failure.

1.1 Statement of the problem

Despite the fact that, a number of factors affecting the performance of SB have been
identified by different researchers as provided in the preceding part as well as the
suggested solution to each problem, still the performance of this sector is in
declining. Someone would think that, with the posed solutions, the performance of
SB would be on the increase, but that is not the case.

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This raised the question for this research to further examine as to how the credits
extended to the SB in Dar es Salaam have contributed to the increase/decrease in the
performance of the sector. The rationale of the study is driven by the fact that, even if
there are various factors affecting the performance of SB, but these factors are
contextual. Currently, there is no study documenting on the influence of bank loans
on the performance of SB in Dar es Salaam, therefore this research filled the gap.

1.2 Research objectives

The research was guided by the following general and specific objectives.

1.2.1 General objective

The general objective of the research was to investigate the influence of

accessibility/inaccessibility of bank finance to small business development in
Tanzania.

1.2.2 Specific objectives

The following were specific objectives.

i. To assess the influence of accessibility and in-accessibility of Bank Finance
on the Small Business management.
ii. To identify effects of accessibility/y/inaccessibility of bank finance to the
development of small business.
iii. To determine challenges faced by Small Business Owners as a result of
inaccessibility of Bank Finance.

1.3 Research Questions

The following were research questions.

i. What is the influence of accessibility/in-accessibility of Bank Finance on the

Small Business management?
ii. What are the effects of accessibility and inaccessibility of bank finance to the
development of small business?

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 iii. What are challenges faced by Small Business Owners as a Result of
inaccessibility of Bank Finance?

1.4 Scope of the Study

Although SB spread through out of the Dar es Salaam but the study will be limited in
the contribution of bank loans on performance of SB in Dar es salaam because it will
be not easy for a researcher to collect data due to time and funds constraints.
Moreover a researcher is an employee in one of the organizations in the Dar es
Salaam so will be required to collect data only after working hours and weekends.

1.5 Significance of the study

This study is significant in as follows: Findings from this study may provide useful
information on the accessibility of loans to the SB by showing all possible ways to
get access to loans. The study will help the commercial banks to understand the need
of developing relationship between a borrower and a bank, and this will includes
publication of bank rates in order to help borrowers to make informed decisions
while considering borrowing, easy terms loans-example to allow issue of access to
loans without collateral and establishment of more consultancy centre and training
centre to help the SB to get knowledge about loan.

Second significance is that, this study will provide ways to develop financial
management knowledge to SB .This will be by enhancing financial education and
training that recommend improving basic personal finance knowledge. The study
highlight the government of Tanzania to promote financial awareness among
secondary and primary school children on topics related to banking and finance.

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Finally the study will inform the policy-makers on the need to develop more policies
that would improve the effectiveness of SB by focusing on all condition that limit the
performance of SB. Furthermore like any other research the findings will be used as
reference for further study and the study.

1.6 Limitations and Delimitations

The researcher faced the following limitations; Time for research work was not
enough to the researcher to cover all SME’S present within the district. This
limitation was solved by the researcher effectively utilizing public and week end
hours and also the researcher took annual were which was effectively used in this
study.

Also the researcher experienced financial problems because was self sponsored and
that the researcher did not have enough sources of funds. This was solved by the
researcher borrowing money from the employer. Moreover, some potential data
providers were not available. In this case, at the time of data collection, data
providers some of them were out of job for other duties. The use of triangulation
method during data collection solved this problem.

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 CHAPTER TWO

LITERATURE REVIEW

Introduction

This chapter reviews the key issues relating to this study. It provides the theoretical
framework of the study, the conceptual framework of the study which helps in
understanding the practice and some themes relevant to the study and provides a
summary of the literature review.

2.2.1Theoretical Literature

2.2.2 Sources of bank loans

The following are sources of bank loans available to small business development

Short-Term Finance Sources

Short-term finance solutions are needed on a daily, weekly and monthly basis to pay
for office supplies, rent, utilities, equipment and payroll. Credit cards and trade credit
(credit established with local trades and businesses) can assist a business in
managing cash flow--the use of itemized statements allow for a clear visual
representation of where the cash is being spent and a single payment can be made
instead of multiple payments. Many businesses arrange for short-term lines of credit
with their bank, referred to as working capital, used to manage everyday business
operations. Lines of credit are typically 90-day loans obtained through a commercial
bank to assure that payroll and vendors are paid on time, every time.

Medium-Term Finance Sources

Medium-term financing is used to fund a special business project or expansion that
will increase production and revenue. Banks are a first stop when searching for this
type of financing. Through letters of credit and equipment leases, banks can help
with some of the financial risks involved with medium-term funding. Venture capital
is also a finance source for expansion and special projects. Businesses offer venture

8
capitalists a level of ownership in the business when they contribute funding.
Another medium-term finance source is capital contributed by the existing owners---
this is an additional investment the business owners make directly to the business
coffers and is called owners' equity. Owners' equity is considered a debt owed by the
business to the owners of the business.

Long-Term Finance Sources

Any financial need requiring very large amounts of cash receives long-term funding.
These sources of finance are generally designed to be paid off in one or more years
and not in a few months. Businesses using this type of financing do so to purchase
other businesses or buildings or to invest in long-term product development. Bank
loans, venture capital and private financing are sources for long-term funding.

Long-term business financing can be a combination of funding sources that together

covers overall costs. For example, a private finance source (such as a car
manufacturer like Ford or Honda) could cover the cost of the initial purchase of
fleets of vehicles needed for a business expansion. In addition, a local commercial
bank loan could cover the purchase of the buildings to house the vehicles, and a line
of credit could be used to cover payroll during the training of all the employees
needed to run the expanded business.

2.2.3Other Sources of finance

There are three main options of financing available for SBes in Tanzania. Each type
of finance applies at any stage of the business i.e. Start up, Growing and Expanding a
business.

Personal savings, family and friends

This is the form of finance in which a business client can use own resources to
finance a business. Usually own resources will take the form of savings. Savings are
intended to meet the immediate personal financial needs. An investment into a
business should be viewed with a long term perspective to yield the desired future
outcomes.

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Family and friends involves securing finance from family and friends. This form of
finance is costless and it is easier to get money from others.

Equity Finance
SBes can get money through equity financing or debt financing. Equity financing
means that you sell stock in your company to a buyer, who then has an ownership
interest in your company. The raising of finance through equity comes in the form of
Common stock or ordinary shares and Preference shares. A limited company's shares
are being sold to specific institutions or individuals where as the shares of a public
limited company are open to the general public.

Debt Finance
According to the trade off theory of capital structure a Business can be financed
through debt or equity. Access to formal debt finance is facilitated through registered
financial institutions licensed by the Bank of Tanzania. The institutions which are
used include commercial banks, microfinance institutions and SACCOS.
Development Banks, Leasing Companies, Pension and Insurance Companies,
Securities companies are used in rare case with restricted conditions.

2.2.4 Supporting Small Businesses and Creating Jobs: The American

Experiences

We now face a make-or-break moment for the middle class and those trying to reach
it. After decades of eroding middle-class security as those at the very top saw their
incomes rise as never before and after a historic recession that plunged our economy
into a crisis from which we are still fighting to recover, it is time to construct an
economy that is built to last. The President’s 2013 Budget is built around the idea
that our country does best when everyone gets a fair shot, does their fair share, and
plays by the same rules.

We must transform our economy from one focused on speculating, spending, and
borrowing to one constructed on the solid foundation of educating, innovating, and

10
building. That begins with putting the Nation on a path to living within our means –
by cutting wasteful spending, asking all Americans to shoulder their fair share, and
making tough choices on some things we cannot afford, while keeping the
investments we need to grow the economy and create jobs.

The Budget targets scarce federal resources to the areas critical to growing the
economy and restoring middle-class security: education and skills for American
workers, innovation and manufacturing, clean energy, and infrastructure. These are
all areas critical to small businesses. The Budget is a blueprint for how we can
rebuild and economy where hard work pays off and responsibility is rewarded.
Small businesses are the engine of job growth in our economy. In order to ensure that
small businesses are poised to start, grow and create jobs the 2013 Budget will:

Spur Job Creation by Enhancing Small Business Access to Credit.

The Budget supports $16 billion in Small Business Administration (SBA) 7(a) loan
guarantees, which will help small businesses operate and expand. This includes an
estimated $14 billion in term loans and $2 billion in revolving lines of credit; the
latter are expected to support $46 billion in total economic activity through draws
and repayments over the life of the guarantee.

The Administration also supports $6 billion in guaranteed SBA lending for

commercial real estate development and heavy machinery purchases; $4 billion in
Small Business Investment Company (SBIC) debentures to support new businesses
and new jobs through early-stage and mezzanine small business financing; and $18
million in direct loans, for intermediaries to provide small loans to emerging
entrepreneurs and other borrowers unable to receive credit elsewhere. In addition, the
Department of the Treasury continues to implement key programs it established to
provide capital to community banks and support to innovative state small business
programs in order to spur additional lending.

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Cut Taxes for Small Businesses Seeking to Grow and Expand:
The President is proposing to build on the 17 small business tax cuts he has already
signed into law with new tax cuts to encourage growth and investment, including
expanding and making permanent the elimination of taxes on capital gains for key
small business investments, providing a 10 percent income tax credit on new payroll
for small businesses in 2012 (through either or increased wages), expanding and
simplifying a tax credit for small businesses that provide health care to their workers
and doubling the amount of start-up expenses entrepreneurs can deduct. The
President is also proposing to extend 100-percent first year depreciation into 2012,
giving firms an incentive for investing in plants and equipment now.

Boost Investment in Small Businesses.

The Budget proposes to create incentives for capital investment in small businesses
by permanently eliminating capital gains taxes on investments in small business
stock, enhancing the availability of “patient capital” that small businesses need to
innovate and grow.

Promote Impact Investment in Economically Distressed Regions, for

Disadvantaged Groups, and in Sections of National Significance. In 2013, SBA
will continue to leverage the SBIC debenture program to support impact investments
in regions underserved by venture capital. The SBIC Impact Fund program, which
operates with no cost to the taxpayers, annually guarantees up to $200 million in
debentures that leverage efforts by venture capitalists, private equity firms, and
institutional investors to invest in promising small businesses in underserved
markets. Two other initiatives – the Small Loan Advantage and Community
Advantage programs – increase the number of SBA 7(a) loans going to small
businesses and entrepreneurs in underserved communities.

Help Innovative Small Businesses Obtain Early-Stage Financing.

Within the SBIC debenture program, SBA will continue to expand the Innovation
Fund, which addresses the capital gap many start-ups face between "angel investor"
financing and later-stage venture capital financing. Up to $200 million in guaranteed

12
debentures for matching funds will be available in 2013 to investors seeking to
support innovative companies seeking to ramp up their operations and create new
jobs.

Improve Small Businesses and Exporter Access to Federal Services.

Businesses looking for assistance from the Federal Government should feel like they
are interacting with one entity, rather than a number of separate, albeit linked,
components. This means adopting a "No Wrong Door" policy that uses technology to
quickly connect businesses to the services and information relevant to them,
regardless of which agency's website, call center, or office they go to for help. To
this end, the Budget fully supports the BusinessUSA initiative, a one-stop resource
that will make it easier for businesses to access the wide array of Federal small
business and export promotion services available to them, while also further
streamlining and coordinating Federal programs to reduce costs and provide
customer oriented service.

Help Small Businesses Connect to Regional Innovation.

Small businesses are key players in regional economies. The Administration includes
$3.4 million for SBA to enhance small business participation in regional economic
clusters that integrate economic, business and workforce assets to accelerate
innovation and job creation. SBA will promote and support small business
participation in regional economic clusters by awarding competitive grants to
facilitate business counseling, training, and mentor-protégé partnerships in
coordination with regional clusters. In addition, through the Department of
Commerce’s Economic Development Administration (EDA) and other Federal
agencies, the Administration will support regional cluster development, regional
business plans, investment in science parks, and other activities authorized under the
America COMPETES Act to promote innovation, regional competitiveness, and
employment growth.

13
Strengthen Small Business Exports.
The President, in 2009, set the goal of doubling American exports over five years.
The October 2011 passage of the U.S.-Korea Free Trade Agreement opened up the
market of the twelfth-largest economy to U.S. goods and services and supports
thousands of jobs. The Budget proposes $517 million for the International Trade
Administration (ITA) to continue implementation of the National Export Initiative, a
broad Federal strategy to increase American exports and export-related jobs.

With this funding, ITA will strengthen its efforts to promote exports from small
businesses; help enforce international free trade agreements; fight to eliminate
barriers to sales of U.S. products; and improve the competitiveness of U.S. firms.
This funding will allow the Commercial Service to increase its export promotion
efforts in key, growing markets abroad, as well as support the activities of
SelectUSA, which helps state and local governments attract investment capital that
creates jobs. ITA will play a key role in the interagency Businesses initiative, a one-
stop resource that will make it much easier for businesses to access the wide array of
Federal export promotion services available to them. The Budget also supports the
activities of the Export-Import Bank to strengthen its efforts to promote small
business exports and to meet increased financing demands at no cost to the taxpayer.
This will support billions of dollars in new exports and thousands of U.S. jobs.

Double the Small Employer Pension Plan Startup Credit.

The Budget proposes to expand and improve employment-based retirement security
by establishing automatic workplace pensions. Under current law, small employers
(those that have no more than 100 employees) that adopt a new qualified retirement
or SIMPLE plan are entitled to a temporary business tax credit equal to 50 percent of
the employer's expenses of establishing or administering the plan, including expenses
of retirement-related employee education with respect to the plan. The credit is
limited to a maximum of $500 per year for three years. The Administration proposes
to double this tax credit to a maximum of $1,000 per year for three years (effective
for taxable years beginning after December 31, 2013) and to extend it to four years
(rather than three) for any employer that adopts a new qualified retirement or

14
SIMPLE plan during the three years beginning when it first offers or first is required
to offer an automatic IRA arrangement.

Help Small Businesses Provide Health Insurance to their Employees.

The Affordable Care Act provided a new credit to help small businesses afford the
cost of covering their employees. It is targeted for those with low- and moderate-
income workers, and it is designed to encourage small employers to offer health
insurance coverage for the first time or maintain coverage they already have. The
Budget proposes to expand and simplify this credit. The credit would be expanded to
employers with up to 50 full-time equivalent employees, and would provide a more
gradual phase-out. The proposal would also reduce taxpayer complexity by
eliminating certain requirements related to uniform contributions to premiums

2.2.5 Theories which Guided the Study

The following are reviewed theories which guided this research.

Trade-off theory of capital structure;

This theory defines away in which a firm choose to be financed either by debit
financing or by equity financing in order to balance the cost and benefits. This theory
is important because it explain the fact that the firm is usually financed partly with
debt equity and partly with debit. It states that there is an advantage to financing with
debt, the tax benefits of debt and there is a cost of financing with debt, the costs of
financial distress including bankruptcy costs of debt and non-bankruptcy costs.

According to this theory we expect the firm to have much higher debt than we
observe in reality. Miller & Modigliani (1963) argued that it is possible for a firm to
have 100%debt in its capital structure due to presence of tax-shield during repayment
of the loan, however SB have limited access to external equity finance. This tax
shield allows firms to pay lower tax than they should pay when using their own
capital. The theory argues that the more debt is, the more a firm’s values.

15
According to MacKie-Mason (1990) on a study of the tax impact on the choice
between debt and equity will be found that changes in the marginal tax rate for any
firm should affect financing decisions. This implies that most SB will have to rely
only on internal equity which is often inadequate as a source of capital.

Asymmetric information and moral hazards are the factors that affect the availability
of credit for SB (Stiglitz & Weiss, 1981).The important of debit financing first is
the tax deductibility during interest payment and second it avoid the agency problem
because it limits the free cash flow available to managers and thereby helps to reduce
conflict between managers and shareholders (Jensen & Meckling, 1976). Always
each firm has a target debit ratio in which it is gradually adjusted.

If the firm is above the target debit ratio the value of the firm is not optimal because
costs of financial distress are likely to arise therefore the firm will fail to meet the
interest and principal payments hence the e firm is required to decrease its debit. If
the firm is below the target debit ratio the value of the firm will increase, therefore
the firm is needed to increase its debit.

The pecking order theory of capital structure;

It is a finance theory which suggests that management prefers to finance first from
retained earnings, they prefer to issue severe debt instead of equity in case when need
external source of financing (Myers, 1984). However, only firms that have enough
internal funds can apply the pecking order theory. Small, young or growing firms,
that lack own capital, will depend on equity financing.

A study by Norton (1991b) reveals that 75% of the SB makes financial decisions
through pecking order framework; however Nguyen and Ramachandran (2006)
argued that the information asymmetry interferes the application of pecking order
theory on SB. Information asymmetry negatively affects accessibility of debt
financing Bose and Cotheren (1997).

16
This asymmetric of information tends to under-pricing of the firm’s equity in the
market, therefore undervalue the wealth of existing shareholders. Asymmetric
information occurs when managers wants to use internal financing rather than
external financing. Managers have much information than outside investors.

Due to asymmetric information problem, in securing external financing, firms

consider external to be cheaper than retained earnings (internal financing) many
larger firms prefer financing via debt instead of financing through retained earnings
due to presence of more collateral assets which act as a security during borrowing.
According to Berger & Udell (1995) asymmetric information problem is more
apparent in small firms than in large firms and pecking Order theory is more
applicable to small firms.

2.2.6 Commercial Banks

These are deposit taking and lending institutions regulated by the Bank of Tanzania.
Commercial Banks collect and pay out money on behalf of their clients. Bank based
financing operates on a short to medium term approach which is usually five (5)
years maximum lending period. Banks provide loans and overdraft facilities to their
clients. Overdraft facilities are usually provided for working capital requirements.
Banks will provide loans for growth and expansion.

Currently in Tanzania, financial Institutions (banks) remain as one of the source of

funding SB although recently the commercial banks showed no interest in servicing
SB because banks perceive SB as higher credit risk and high transaction costs.
Banks are generally unwilling to take the higher risk; however, banks are now
realizing the value of SB in the society by improving macroeconomic framework and
lower interest rates.

Commercial banks are known for the provision of loan to both private and public
sectors for aim of raising the economy of the country. Credits of the commercial
banks are important to businesses for it makes possible the financing of the
agriculture, commerce, and industrial activities of the nation. Production,

17
transportation, wholesale, and retails activities are made possible through financial
aid from credits of the commercial banks to the final consumers.

Loans are provided by banks to benefit businesses in many ways; first chequing
account, they are as good as cash in themselves; they make it much easier to buy
goods and services and therefore help both consumers and businesses. Moreover
Loans help businesses finance plant expansion and production of new goods, and
therefore increase employment and economic growth of Tanzania. In Tanzania for
example, there are a lot of financing facilities allocated for SB. The facilities are
either channeled via financial institutions appointed by Bank of Tanzania (BOT) or
through government agencies.

By end of June 2010, the banking sector will be made up of 41 banking institutions,
out of which 19 will be foreign owned. The banking system showed a high
concentration of total assets - 57 percent - being held by four big banks, while 43
percent will be accounted for by the remaining 37 banks.

Generally, foreign owned banks in Tanzania account for about 48 percent of the
banking industry’s total assets (BOT report, 2010). The banks involved in lending
SB are NBC, NMB, ACB, BARCLAYS, BOA, EAB, CRDB, Post Bank and other
banks. Three out of 25 commercial banks provide financial services and products
aimed at the SB sector.

National Microfinance Bank has the largest network of branches followed by CRDB
Bank and currently the National Bank of Commerce is increasing its branches from
42 to over 60 early in 2010. The Tanzania Postal Bank, a state-owned non-bank
financial institution, provides a variety of savings deposit services nation-wide (total
over 100 outlets, and more than 1 million account holders) and has entered into
micro-credit provision on a small scale.

18
In Dar es Salaam the majority of SB had shown dependent on access to finance from
the following banks. These include NBC, NMB, CRDB, BARCLAYS, BOA,
EXIM, and STANBIC.

[Link] Micro Finance Institutions (MFI)

Microfinance institution is used to provide financial services to the poor people who
are not able to access from other forms of financial institution like commercial
banks. These institutions provide financial services like small loans, savings,
insurance and transfer payments to low income households and [Link]
provides loans for start up, growing business or expansion.

MFI aims at providing poor people in rural areas with improved access to banking
services. Therefore, (MFI) meets the objective of reducing the poverty of the
country. In Bolivia, a study on the impact of microfinance on poverty by Mosley
(2001) revealed that microfinance is effective in reducing the poverty than other anti-
poverty measures.

In Tanzania MFI institution are concentrated in the central region, where the
economic activity is at high rate. Recently there are many MFI which distributed into
different region of Tanzania. The following are the major MFI operated in Tanzania;
PRIDE, FINCA, SELFINA, and BRAC,

Majority of the SB clients in Dar es salaam whom their capital ranges between 5-8
million had joined to the MFI .The experience had shown that people will be enter to
the MFI because of the application procedures that will be simple, no collateral will
be required instead MFI used alternative ways of assessing the clients, short
processing periods (between the completion of the application and the disbursement
of the loan) and all clients who paid on time will be allowed to repeat for loans
with higher amounts.

19
[Link] SACCOS

The SACCOS operate under the Co-operative society Act, 1991 in offering saving
and loans to members. Also the institution has been covered under the Banking and
Financial Institution Act, 1991, but it is not under control of Bank of Tanzania. The
responsibility and control of this Institution is under the Ministry of Agriculture and
Cooperative.

The Government of Tanzania believes that SACCOS is among financial institutions

that reduce poverty, therefore the government insists many citizens to join them.
SACCOS performed three activities to its members which are collecting savings,
giving loans to its members and providing financial and non financial advice. To
make SACCOs effective members utilize well the micro loans they have borrowed
from SACCOs and repay the loans on time. Until the end of 2005, there will be
about 1876 SACCOS which are operated in Tanzania.

2.2.7 Business support services provides by banks to SB

A business support service refers to all supplementary business activities that

facilitate smooth functioning of any business in any part of the world. Harper (2005)
defines business support services as support services bought and used by the
business, excluding finance. SB Support Services will be established in 2007 in
western Loudoun County with the purpose to help SB clients with their day-to-day
business.

In U.S. SB Administration (SBA) will be established to aid, counsel, assist, protect

the interests of SB and provides information and advice on starting, financing or
expanding a SB. Furthermore, Business Development Bank of Canada (BDC) will
be established to help and develop Canadian businesses through financing, venture
capital and consulting services, with a focus on small and medium-sized enterprises
(SMEs). The BDC's services are available across Canada in both English and French
through a network of more than 100 Business Centers.

20
Access to business support services provides business owner with business
information and business support including advisory services necessary to improve
their organizational effectiveness. Therefore provisions of information and advice
support services to SB have an impact on their businesses. The actual current state of
provision of business support services is not effective, and SB clients are not
satisfied with advisory services on business environment issues such as those related
to taxation and legal matters.

Majority of SB clients wants to access training in book-keeping as a priority service

followed by training in costing and pricing, business planning and purchasing and
stock control (Swisscontact Tanzania, 2005).Although SB owners, needs various
business services but experience showed that SB have lower demand for business
support services such as training, counseling, advising and consultancy due to cost
considerations. This is because many business institutions need some contribution of
money from SB during conducting such training and consultants.

2.2.8 Access to loans

It has reported that major problem to many SB is lack of capital and credit (Broom &
Longenecker (1985). Studies such as Mulhern (1995), Sentilhes and Nilforoushan
(2003) on the familiar problems encountered by SBes throughout Europe indicated
that, the main reason for their limited access to loans is the inability of the businesses
to provide collateral needed to obtain the required loans.

Hassan (1992) argued that SB are not able to gain access and utilize available
funding due to different factors such as inadequate collateral and lack of
performance record to convince the banks to provide them loans. Other studies in
developed countries like United States of America and United Kingdom also
suggested that SB operating in these countries faced the same problem.

Similar study in Africa found that weak financial base of the SBes, their inability to
provide collateral as required by banks and high interest rate are the main reasons for
the businesses not to get the same access to finance opportunities as large businesses

21
(Beyene, 2002). Moreover, Francesco (2009) reported that, Small firms especially if
they are young, have little collateral and short credit histories, and thus may find it
difficult to raise fund from banks. Garcia-Fontes (2005) reported an outcome of a
survey by World Bank Investment Climate for China and it will be found that SBes
in this Asian continent obtained only 12 percent of their working capital from bank
loans.

Moreover a survey conducted by Daniels (2003) reported that 58 percent of the

businesses in their sample have a problem of access for being financed while 35
percent have a problem in getting the operating funds. Banks are more important
approved to support SB.

Charkraboty & Hu (2006) reported that collateralization is believed to be a useful

tool in resolving problems associated with both symmetric information and moral
hazards in business and consumer lending. They also reported that collateral can be
used to lessen some of the moral hazard and its impact on collateral. According to
the study conducted by Stiglitz& Weiss(1981) proved that lending to SB can be
difficult to financial institutions because of informational asymmetry, moral hazard,
and adverse selection problems Beck et al. (in press).

Schiffer & Weder (2001) argued that larger firms have great chance of accessing
financing than SB. They further recommended that, apart from all rank of obstacle
which SB face when doing business, financing is a top problem for SB, which its rate
is higher than larger firms. According to World Bank (2004) SB are usually more
credit constrained than other segments of the economy because of the following:

i. Financial sector policy distortions

ii. Lack of know-how on the part of banks
iii. Information asymmetries, for example, lack of audited financial statements
iv. High risks inherent in lending to SB.
v. Size; age and ownership are the most reliable predictors of firms’ financing
obstacles.

22
Half of SB in developing countries rating, access to finance is a major constraint. .
Africa’s SB has little access to finance, which thus affects their emergence and
eventual growth. Access to finance is essential for improving SB competitiveness, as
SB has to invest in new technologies, skills and innovation. Furthermore, access to
finance for SB can improve economic conditions in developing countries by
fostering innovation, macro-economic resilience, and GDP growth.

A study by Micah (2007) on factors affecting bank credit management concluded

that, character collateral and circumstance are effective tools in assessing customers’
creditworthiness. This implies that, good character, supported with collateral and
favorable circumstances are the haven for adherence to credit obligations by
borrowers. Collateral and character differ significantly in terms of their effectiveness
in credit risk mitigation.

This is because collateral is something measurable and its stability in value can be
ascertained while character is something invisible and strongly out of control of the
lender. Their main sources of capital are their retained earnings and informal savings
and loan associations, which are unpredictable, not very secure and have little scope
for risk.

In Tanzania the most of reviewed literature indicated that most SBs are owner-
financed. The start-up and operating capital are mainly from the pocket of owner(s)
of a particular enterprise. The sources of these finances are in most cases from
personal savings. They need additional finance for purchasing machinery, equipment
and for expanding their business through transfer technology; however most of the
SB organization do not enjoy the services that formal financial institutions offer.

They normally did not borrow from institutions such as banks. This will be due to
many factors including strict conditions set by these formal financial institutions
.Apart from collateral, there will be a limitation of the amount and the procedures to
access the needed amount by the borrower. This will be followed by the process of
application of loans which starts with small amount and after a certain period of

23
loan repayment the business holder can apply for higher amount. The restriction
provided by banks affected those clients who need large amount of loans just right
from the beginning. The amount of loans received will be not enough to start and
expands business; however there will be an extra layer of bureaucracy to the
borrower including letters from WEOs, to have trustee/sponsor, site visiting, taking
long time to process and covered with an element of corruption.

Inefficiency in the administration of incentive support facilities provided by banks

and government discouraged the SB holder to borrow from banks and at the end SB
holders secured loans from un-trusted/unregistered/ unreliable finance organs like
SACCOSS, village banks, informal savings, self help group, etc.

These groups are not governed by banking laws, their rules are usually made and
enforced by members and they operate largely on the basis of trust among the
members, as a result may end up with loss and quarrel with relatives if failing to pay
as agreed due high interests. Others lost their assets that will be taken as
security/collateral to these lending organs holders.

Fema (2011) in the study of loans for startup highlighted that, in Tanzania banks and
other financial institutions had very low level of penetration across the country
especially in rural areas and focus on bigger profit making businesses and people
who have employment and steady incomes.

The experience showed that most of the young entrepreneurs argued that most banks
have unfavorable conditions and are not supportive of their business ideas and the
procedure for getting loans are complex and sophisticated (Some, 2006).
Other reasons for lacking access to loans are;

i. Poor understanding of services that bank offer

ii. Lack of understanding of Bank loan procedures.
iii. lack of confidence- people did not believe themselves that are able to get
loans

24
 iv. little information on loan offered by bank
v. Fail to prepare business plan- lack of skill to present bankable projects
vi. High interest rates – disparities between savings account returns and
borrowing rates
vii. Delays in processing-bureaucratic and corruption especially in Tanzania
viii. Inflexible conditions
ix. SACCO’s demanding group borrowing rather than individual companies
x. Lack of transparency – Conditions and requirements will be not shown in
advance
xi. People borrow and do not pay back- due to lack of moral hazards
xii. SB access to both formal and informal sources will directly affect their ability
to raise the capital for the business (URT 2002). SB access to finance is
problematic, however the government policy Statement on SB’ access to
Finance reads that; “The Government will enhance financial reforms aimed at
further liberalization of the financial sector and the creation of financial
intermediaries to cater for SMEs” (URT, 2002).

To the extent that this policy statement is implemented until the end of year 2011,
still the SB lacks access to finance from the financial intermediaries. Access to
finance remains a major problem in the majority of African countries. Although
loans from commercial banks are at least possible but the terms of such access are
often punitive for SB. This is a major obstacle for SB development

2.2.9 Financial management knowledge

Financial management is the ability of understanding the financial skills and

knowledge that will make an individual to make effective decisions in business.
Financial skills involves managing the financial resources, including accounting and
financial reporting, budgeting, collecting accounts receivable, risk management, and
insurance for a business. Financial literacy provides greater control of one’s financial
future. Making effective financial decisions and knowing how to manage money are
skills critical to enjoying a secure financial future. A study by Kwame (2010) on

25
Financial management practices of small firms in Ghana argued that
Financial management knowledge covers areas such as: Determining the source of
finance and dividend policy, Investment decisions including capital budgeting,
assessing capital risk and cost of capital and working capital management. In
addition financial management knowledge provides a wide spectrum of a company’s
financial decisions (Parkinson & Ogilvie, 1999).

Nayak & Greenfield (1994) and Lybaert (1998) concluded that management
accounting and information used within the SB sector has a positive impact on
performance of SB. Hence financial management knowledge enables SB holder to
make better decisions on business and to avoid any risk which might appear during
progressing with the business.

Moreover financial management knowledge help to improve efficiency and quality

of products and goods which are produced, however several study recommended that
poor financial decision destroy the productivity in the firm (Joo & Grable,
2000).According to Hilge, Hogarth, & Beverly (2003), lack of financial management
knowledge is directly related to self-beneficial financial behavior. Lack of financial
management knowledge affects the better performance of the business.

Lack of financial management knowledge contribute much for the small firm to lack
accessibility to loans, this is due to that people lacks knowledge on how to get loans
and how to write a business plan which will convince the bank to provide the loan.
Many banks do not finance SB because business plan submitted by SB clients are not
presented properly (Migiro, 2005).

Banks require business plan which has to show the business cash flow of at least two
years, audited accounts, balance sheets and the proposed budget. Due to not be
transparent, most of banks avoid to lend them and if loaned they will be charged with
high interest rate during repayment of loans. Business survival depends on the cash
flow and cash management (Chaganti and Chaganti, 1983).

26
Moreover UK research has found that a focus on cash flow is more likely to be
associated with firm survival (Jarvis et al., 1996; Deakins et al., 2002).
Nieman& Niewenhuizen (2009) reported that the most of the SB fails during the first
two years of their existence due to cash flow problems.

The business clients have not got knowledge on how to prepare financial statement,
how to record the sales in the book and other procedures concerning financial
management about business survival pinpoints the importance of cash flow and cash
management (Welsch & White, 1981; Khan and Rocha, 1982; Chaganti &Chaganti,
1983). Furthermore, UK research has found that a focus on cash flow is more likely
to be associated with firm survival (Jarvis et al., 1996; Deakins et al., 2002). “Money
in the bank “will be found by Dyt & Halabi (2007) to be a critical measure of firm
performance.

The greater the amount of surplus cash ploughed back into the business, rather than
taken as remuneration by the owner, the better the chances of survival (Hall, 1995).
A study on SB at West Midland, U.K. (Nayak & Greenfield, 1994) concluded that
SB which does not do well, is not only because of lack of business records and lack
of awareness in business, but due to the lack of adequate accounting knowledge and
proper financial records.

According to McMahon & Davies (1994), the comprehensive financial reporting and
analysis should generally lead to significantly increase the chance of SB to prosper
through growth. Similarly Vinayak (1987) argued that among the other factors, the
non-use of financial tools and techniques for economic decision-making has resulted
in a variety of financial problems, which the SB faces.

Some of the research in India proved that there is a wide gap between theory of
financial management and the actual practices by the SB in India and show that firms
not doing well are less likely to have knowledge on financial management and proper
business records. Gaskell& Van Auken (1993) has reported that most of the
problems faced SB in US relates with inadequate capital, cash flow management and

27
inventory control. Furthermore a survey did by the Insolvency Practitioner Society,
(CIMA, 1994) indicated that 20% of UK small firms failures will be due to bad debts
or poor credit management.

In addition, Developing countries have especially low levels of financial literacy than
developed countries. In India, for example, more than half of laborers surveyed
indicated that they store cash at home, while borrowing from moneylenders at high
rates. The improved financial literacy brings large benefits for both the economy and
the individual (Foundation, 2006).

According to the Indian National Council of Applied Economic Research (2008),It

is known that lack of financial management knowledge is directly related to lack of
access to financial product or failure to use them when are available. In Zambia and
other countries of Africa, only 29 percent of adults have a bank account and 50
percent use no financial products at all (DFID, 2008).

In South Africa, a recent survey found that nearly 60 percent of the people surveyed
do not understand the term “interest. In Nigeria many Research on SB development
has shown that the rate of failure in developing countries is higher than in the
developed country (Arinaitwe, 2006), and the main reason is lack of accounting
skills Oladejo (2008) .The accounting skills is necessary for successful
entrepreneurial and SB development . This is because the inability to install a proper
accounting system would disallow business monitoring, reporting, and performance
evaluation that affects the business survival.

In Tanzania the rate failure of SB becoming large and the main reason is lack of
financial management knowledge. Most of the SB fails in access to finance due to
lack of knowledge on creating incentives and environments that promote desired
financial behaviors such as saving, budgeting, and not using credit wisely. Tanzania
is among of the developing country which has especially low levels of financial
literacy. Most of the business clients and other laborers surveyed they have no

28
accounts in bank and they store their money at their homes and in their firm
buildings.
Indeed, if the business client could have knowledge on how to operate a business by
managing cash and other financial needs the firm will grow and survive, money only
cannot make a firm to perform well. (Kiyosaki and Sharon, 1995) stated that “Money
is one form of grow power, but what is more powerful is financial education. Money
comes and goes, but if you have the education about how money works, you gain
power over it and can begin building wealth”.

2.2.10 Bank’s Contribution to the performance of SB

The better performance of SB depends on the form of external financing, the higher
the financing by the bank, the greater the growth and survival of the SB. Fogel
(2001); Mambula (2002) & Basel (2003) indicated that access to finance is among
the necessary factor for success and development of SB.

This is true because the SB want more capital to be able to invest in more assets so
as to cater for more customers, lack of bank finance is seen as the biggest challenge
that affect the growth of SB sector. According to Rogerson (2006) bank finance is
the source factor that contributes to the growth of the business. Bank finance is
necessary to create an economic environment that enables firms to grow and prosper.
The World Bank Investment Climate Surveys revealed that bank finance improves
firm performance.

The most important role of Banks in the economy is to create liquidity by funding
illiquid loans with liquid demand deposits (Diamond, 1984; Ramakrishnan &
Thakor, 1984). Banks are among of the sources of financing (SB). Berger & Udell
(1998), for example, in their study on SB finance in the US, concluded that SB relies
heavily on commercial banks and finance companies to provide capital. Furthermore,
Udell (2004) using the data from the United State, found that nearly half of SB
financing comes from externally provided debt.

29
A survey by European Commission in 2005 indicated that 79 percent of European
SB gets their financing from banks. This proves the importance of banks as the
provider of finance and at the same time signaling the reliance of SB to banks’
finance (European Commission, 2005).

Access to bank finance is the major tool that helps SB to increase the economy of
the country by creating new jobs and reduce poverty in developing countries. Access
to bank finance allows SB to undertake productive investments to expand their
businesses and to acquire the latest technologies, thus ensuring their competitiveness
and that of the nation as a whole.

Without finance, SB cannot acquire or transfer new technologies. Broom &

Longenecker (1975) indicated that one problem of major significance to many SB in
developing country is lack of capital and credit. Most of SB in Africa possesses a
lack of financial to expand the business.

Small enterprises and most of the poor population in sub-Saharan Africa have very
limited access to deposit and credit facilities and other financial services provided by
formal financial institutions. For example, in Ghana and Tanzania, only about 5–6
percent of the population has access to the banking sector.

This lack of access to financial services from the formal financial system affects
heavily the performance of SB and the growth of the country. Similarly, other
different study on economic development and corporate finance commented that
inadequacies in relation to finance are key barriers to firm growth. Banks in
developing countries are in turn hampered by the lack of lender information and
regulatory support to engage in SME lending, which results in SB distortion growth,
lack of innovation and poor economic growth. The main objective of the bank is to
improve the economic growth of country by financing the business, private sector
which also contributes to economic growth.

30
2.2.11 Contextual factors affecting performance of SB.

Business environment
Business environment refers to set of conditions that are uncontrollable in nature and
affects the performance of SB. The conditions may be social, legal, political, and
economic and so on. Any business works in environment. Therefore environment is
an important factor that affects performance of SB worldwide. SB can be affected
internally or externally. External factor includes all factors which are beyond the
control of business firm, which are Government and Legal, Geo-physics, Political,
Social-Cultural, Demo-Graphic .In external factor there are operating environment
which are close to the business and affects its capacity to work. These consist of
suppliers, customers, market intermediaries and competitors and public.

Furthermore there is other factor (Macro environment) that includes forces and
institution outside the organization that can potentially affects the performance of the
SB Company. These include the political and government environment, social
cultural environment and international environment study.

According to Coplin L.C.H (2002) on a study of competitive advantage and SMEs:

The role of distinctive competence as determinant of success in America confirmed
that the survival of the business will depend on the environment in which a business
is located. More over a study by McHugh et el (1999) highlighted that business
environment have potential impact to the success or failure of SB.

They had showed four factors that are potential key for the growth and job creation.
These are economic environment which includes contract law, freedom of
ownership, elimination of corruption, tradable currency and minimum taxes and
regulations, the second factor is technological factor which represented by
information technology, databanks and bar codes. The other factors are competitive
environment and social environment

31
According to URT (2003), in Tanzania there are many laws, ordinances,
administration procedures, by- laws that make the business environment to not be
favourable. It also states that poor regulation destroy the economic growth, thus why
Environment Strengthening Tanzania (BEST) will be proposed to be established to
make sure that the environment for business are good and maintained, however the
problem is still existing even if BEST is operating.

2.2.12 Overview of Business environment in Dar es Salaam

The business environment for the SB in Dar es Salaam is not conducive. The
complexity of the regulatory environment and bureaucracy are among of the
constraints that affects the performance of SB in Dar es Salaam. For example when
you want to register a business and getting the required license is an issue for SB.
Majority of the regulatory environment agent like TRA, TFDA, OSHA and TBS are
not friends to their customers (SB clients). Moreover the procedures of tax setting
have been surrounded with an element of corruption and needs of bribes from tax
officers.

Ndlovu (2002) revealed that taxation favors large scale business than small scale
business because large scale has high degree of business resources. Furthermore it
has been highlighted that high cost of operation, low market and inadequate
government incentive affects the growth and survival of SB sector in Mbeya,
however it seems that majority of SB clients are not innovative and creative.
Therefore they fail to compete with SB in neighboring countries like Malawi,
Zambia and Mozambique.

Although BEST will be initiated to strengthening business environment in Tanzania

but majority of SB are not aware with that agency and this agency does not involve
much in educating SB through providing training. Since Dar es Salaam is found in
the boarder of Zambia and Malawi majority of SB avoid paying tax to TRA due to
multiplication of tax they engage in un- lawful business by buying foreign products
from Zambia and Malawi countries.

32
Moreover the inflation rate has affected performance of SB in Dar es Salaam. There
are scarcities of customer due to lack of money however currently there are many
University and other Institutions which due to population density of student has up
rise the economy of Dar es salaam. Furthermore the infrastructure of Dar es Salaam
is not friendly for the SB of Dar es salaam since it poor.

The Ecological factor which includes environment aspects such as climate and
change of weather affects business operations and products offered. Natural
calamities like fire which occurred recently in the business centers of Mwanjelwa,
Sokomatola and Sido, had brought negative impact to the performance of SB. Many
SBes failed and there will be no support from the government and other institution to
support the clients to revive their business. And banks will be not ready to lend those
small clients because banks perceive SB sector as risky.

2.3 Empirical Literature

According to the study done by Fatoki and Garwe (2010), inaccessibility of finance
is the second most reported contributor to low firm creation and failure, after
education and training in South Africa. Herrington and Wood (2003) also concluded
that lack of education and training has reduced management capacity in new firms in
South Africa. Lack of education and skills can as well mean or lead to lack of
financial management knowledge. In support of this notion,

Fatoki and Garwe (2010) also concluded that lack of knowledge and training is one
of the reasons for the low level of entrepreneurial creation and the high failure rate of
small business in developing countries including South Africa. In their study,
Herrington et al. (2009) suggested that access to finance is the major problem for
South African small business. Cassar (2004) makes it clear that inaccessibility of
finance can be a constraint on small business development.

A research conducted by Naude and Havenga (2004) indicated that most

entrepreneurs, specifically small businesses, struggled with accessing finances from
banks due to excessive red tape and administrative burden. They argued that

33
financial institutions rarely finance start up businesses, they are bureaucratic, lack
knowledge or understanding of the owners or operators of small businesses
(entrepreneurs), and are not willing to assist and are wary in providing finance to
people who do not have a small business record.

Access to finance and financial illiteracy are not the only challenges faced by small
business, Rogerson (2006) in the study conducted in the Free State province on
SMMEs identified access to finance, inadequate premises, lack of equipment and
tools, inadequate markets and marketing, theft, registering and transport challenges
as attributes to failure rate in that province. From the findings of Rogerson (2006),
inaccessibility to finance is the primary challenge and all other challenges can be said
to be as a result of inaccessibility to finance.

The findings of the study by Mutezo (2005) reveal the fact that conventional
financing mechanisms do not allow for cost effective provision of finance to large
numbers of entrepreneurs or SMMEs seeking small quantities of finance. Mutezo
(2005) argues that poverty and lack of assets indicate that many people do not have
the collateral needed to access formal financing. According to Mutezo (2005),
entrepreneurial activity is hampered by lack of access to finance. Poor management
is a common reason for the failure of small organizations. A lack of business training
and knowledge often leads to bankruptcy (Boone and Kurtz, 2006).

Mutezo (2005) asserts that the key factor militating against increased investment in
SMME sector is the structure of the financial sector. He argued that the financial
sector is composed by concentrated banking sector targeting corporate accounts and
competing with smaller niche banks. He added that there is a strong dearth of strong
alternative financial institutions providing credit to self-employed for productive
purposes. A larger portion of the SMME sector is said to have no access to adequate
and appropriate forms of credit and equity or financial services.

34
The study by Bbenkele (2007) revealed that SMMEs especially those from rural
areas have a poor understanding of the services that banks offer and they also lack
understanding of the bank loan procedures. Bbenkele (2007) argues that this lack of
information and knowledge leads to SMMEs’ weak bargaining position in terms of
interest paid, asset and liability disclosure, misuse of loan funds and generally bad
preparedness when applying for business loans.

In an article, Christianson (2005) supports that small business face problems in

accessing finances. He asserts that small business in South Africa is often quoted as
not being able to access money from banks to grow their businesses. Inaccessibility
of bank finance is seen as the biggest inhibitor of growth. The main problem facing
the development of small businesses ’s in both developed and developing countries is
access to finance and this has also been supported by the work of Bosa (1969), Levy
(1993) and Keasey and Watson (1994).

Other commentators have however refuted this fact and feel that the problem is not
really inaccessibility of bank finance but how small business owners apply for
finances. South Africa is included in this predicament as a developing country and
the government has tried different options to improve accessibility of finance.
Despite various government initiatives, many SMMEs still have difficulties in
accessing finance in South Africa.

Fin (2006) finds that only 2% of new SMMEs in South Africa are able to access
bank loans. According to Foxcroft et al. (2002), 75% of applications for bank credit
by new SMMEs in South Africa are rejected. This suggests that SMMEs without
finance may not be able to survive and grow. According to Phillips and Wade
(2008), SMMEs without access to finance may find it difficult to purchase necessary
technology.

2.4 Conceptual Framework

A conceptual frame work for analyzing and explaining a study on assessing the
contribution of bank loans to the performance of SB, this framework presents the

35
relationships among bank finance characteristics, other sources of finances, non
financial supportive services to SB and economic performance. In accessibility of
bank finance to SB owners can be caused by lack of collateral, high interest rate,
Lack of financial management knowledge, lack of information and other factors like
Training, Bureaucracy and Bribes. Banks have different conditions in order to allow
SB owners to access loans, which include collateral, business plan and financial
statement.

All these factors affect the way which banks play their role as the financial mediator
and SB supporter. SB owners avoid borrowing from banks due to lack of collateral,
high interest during repayment of loans, lack of training, lack of information,
bureaucracy in processing loans and need of bribes from credit officers. Avoid
borrowing from bank, SB rely on other source of finance like personal savings,
family, friends, relatives, MFI, SACCOS where they get small amount of loan which
affects performance of SB owners. If a SB owner can use non financial services like
Advisory, Consultants, Networking, Information updates and Training will lead to
better

Strategies like technology adoption, expansion and diversification, also will lead to
easy access of loans to SB owners. All these strategies and accessibility of loans will
lead to better performance of SB by achieving growth in terms of Growth in Sales,
Growth in Profit, Growth in number of employees and Growth in Savings.

SB can contribute to the economic development of the country if it will achieve the
growth. The growth of SB can be affected by factors such as lack of bank loans, lack
of training, lack of financial management knowledge, lack of education, business
environment and so on.

36
A CONCEPTUAL FRAMEWORK

Figure 2.1: Conceptual frame work

Lack of Bank SB SB
Finance Strategies Performance
Other Factors • Technol • Growth in Sales
-Collateral ogy • Growth in Profit
• Trainin Adoptio
-High interest • Growth in
g n
rate number
• Expansi of employees
• Bureau on of • Growth in
-Lack of
cracy Busines
financial Savings
s
management
knowledge • Bribe • Diversif
like preparing ication
business plan,
financial
statements.
Other source of
-lack of finances
information Accessibility of
Non Financial
• -personal Supporting Bank Loan
savings Services
• Collateral
• family • Advisor
y • Financial
and
managemen
relatives • Consult t knowledge
ants
• Microfina
nce • Networ
Institution king

• Sacco’s • Informa
tion
updates

• Trainin
Source: Adopted and modified by Bamidele, A. (2011).
g

2.5 Research Gap

The literature indicates that many researches were done similar to this study in
different countries. But the researcher has failed to establish if the same researcher
have been done where this research is done. The researcher therefore contended that
findings from this study, conclusion and recommendations will cover the gap.

37
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter represents the approach which the researcher used to gather and analyze
data. It describes data collection instruments, and what was done to enhance the
validity of the research. Other aspects include study design, research approach, area
of study, study population, sample and sampling techniques, reliability, ethical issues
and data analysis plan.

3.2 Research design

Research design is a plan of how the research was systematically collect and analyze
the data needed to answer the research questions, thus it is a generation of evidence
that is suited both to a certain set of criteria and to the research question in which the
investigation is interested (Bryman, 2001).

Kothari, (2004) provides that research design constitutes the blue print for the
collection, measurement and analysis of data.
This study adopted cross section survey design using a semi structured interview
format with a set of questionnaire and documentary review in seeking to assess the
contribution of bank loans to the performance of SB (Creswell, 2003).

A survey is a method of securing information concerning phenomena under study

from all or selected number of respondent of the concerned universe.

The researcher decided to choose this design because the survey method minimizes
bias and maximize reliability of the evidence collected (Kothari, 2004).

3.3 Research Approach

The study predominantly employed mixed research approaches which were

qualitative and quantitative research approach. The mixed research approaches were
employed because the researcher wanted to capture the different facets of the study,

38
which would not have been possible if only one strategy will be, used (Mbobo,
2010).

Moreover, Babbie (2007) recommended that in social science research, triangulation

is used to employ the complementary diversity thesis which entails adopting one
dominant methodology and borrowing from other methodologies especially at data
collection and analysis stage in order to yield the best results.

Qualitative approach is conducted in natural setting and it is concerned with

viewing experience from the perspective of those involved and attempt to understand
to why individuals react or behave as they do. Krathwolh (1993) defines qualitative
research as research that describes phenomena in words instead of numbers or
measures.

In this study the qualitative approach was used the questions why, how and gives
explanation to various concepts, ideas and opinions while the quantitative approaches
gave the magnitude of the concept, ideas and opinion. For example, in this study
qualitative method gave answers to what are the sources of finances while the
quantitative approach gave the magnitude of how big was one source of finance.
Quantitative approaches measures a phenomenon using numbers in conjunction with
statistical procedure to process data and summarize the results.

Quantitative research has its roots in positivism and is more closely associated with
the scientific method than qualitative research. Rees (1980) defines positivism as a
family of philosophies characterized by an extremely positive evaluation of science
and scientific methods. .Although there is a difference between quantitative and
qualitative research, the two paradigms should not be considered as oppositional but
rather as complementary components of scientific and disciplined inquiry (Gay and
Airasian, 2000).According to Sandelowski (2000) mixed method research is a
dynamic option for expanding scope and improving the analytic power of studies.

39
3.4 Study area

This study was conducted in Dar es Salaam including the SME’s and financial
institutions (Banks) found in the Dar-Es Salaam city.

3.5 Study Population

Population is total number of people or group or organizations who could be
included in a study. Kombo and Tromp (2004) define population as a group of
individuals, objects or items from which samples are taken for measurement. It is a
group of units with common characteristics of which a researcher is interested
(Mbobo, 2010).

The targeted populations for this study in particular, was people with SB within Dar
es salaam with capital ranging between Tshs 5,000,000 to Tsh.200, 000,000, with a
minimum of three years life span operating within the city and the all commercial
bank in Dar es Salaam that have been authorized with the Bank Of Tanzania.

3.6 Sample size and sampling Techniques

A sample is a representative of the population about which the conclusions are

drawn. Kothari, (2004) define a sample as a group of participants drawn from a
population in which the researcher is interested in collecting information and
drawing conclusion (Kothari, 2004). The basic idea underpinning selection of
participants in qualitative studies is involvement of information-rich participants
(Gall et al., 2005).

This is in contrast to what quantitative studies seek to achieve. Quantitative studies

go for representativeness (Leedy, 2001).

The study used probability and non probability sampling technique; more
specifically, snowball, purposive sampling as well as stratified sampling. Probability
sampling was used to ensure that every SB client had equal chance of being selected
for purpose of survey. Snowball sampling refers to “cases that are recommended by

40
individuals who know other individuals likely to yield relevant, information-rich
data” (Gall et al., 2005). However, purposive random refers to “multiple cases
selected at random from an accessible population” (Gall et al., 2005.

In this study a researcher used snowball sampling by asking one SB clients to direct
to other clients who fall in category of the study. A sample of 100 respondents out of
the population of 500 SB was surveyed and the number of population selected was
sound because a researcher assumed the response rate to be 70% of that case who
was supplied with questionnaires. The sample was randomly selected based on the
researcher definition and included SB owners who were operating different types of
business. Sampling techniques

3.6.1 Simple Random sampling

Random sampling (simple random sampling) is the purest of probability sampling or

chance sampling. This is a sampling in which each member of the population has
equal chance of being selected (Kothari, 2004). In this study random sampling was
employed for selection of sample of SB in Dar es salaam, this is because the
population of SB was so large therefore it required random sampling in order to get a
representative sample and this method eliminates all element of biasness during
selecting a representative sample.

According to (Cresewell,2003) random sampling ensure the law of statistical

regularity which states that if on an average the sample chosen is the random one ,
the sample would have the same composition and characteristics as the universe.
From each strata number of respondents were randomly drawn.

The researcher visited the business premises in respective areas. In the business
premises the researcher asked the business owner a number of preliminary questions
to identify if the business owner falls under the criteria for the study. The first factor
was to assess the amount of capital the business owner had and assessed if the
business owner had ever obtained a loan from a bank. The inclusion criteria were

41
capital ranging between Tsh.5, 000,000 to Tsh.200, and 000,000 and if ever obtained
a loan from commercial Bank.

3.6.2 Purposeful sampling

Purposive sampling was used in selecting the Banks, Business Managers and Loan
officers that was included in this study. The researcher asked all the mentioned banks
personnel to participate in the study for the purpose of giving more insight to the
study.

The researcher obtained the information that was not being available to business
owners such laws, rules and regulation that governs bank loans schemes. And a
researcher had chosen this purposive sampling technique because a researcher was
sure that the participants were easily reached since was the area which the researcher
was working.

3.7 Data Collection Method and Instruments

Data are the evidence that a researcher collects in order to shed light on the particular
question he or she asked. Data collection methods help the researcher to collect
necessary information concerning the study. . The data collection method refers to
technique used in collection of data (Enon, 1998).Data collection methods that was
used in this study were questionnaires, interviews and documentary reviews.

According to Bryman (2001), no single technique is necessary superior to any other.

Patton (1990) emphasizes the significance of using a combination of data collection
techniques by maintaining that, no single research technique is adequate in gathering
the required information. The use of more than one specific method enables the
research instruments to counter-check and strengthen each other (triangulation).

3.7.1 Questionnaires

A questionnaire is a least of questions which the respondents answer. It is a method

of gathering self –reported information from respondents through self-administration
of questions (Simba, 2011).Questionnaires can contain either closed-ended or open –

42
ended questions or both. Closed ended questions are asked to elicit structured
responses. The open- ended questions allow the respondents to answer in their own
words and give unprompted opinions.

3.7.2 Interview and Interview Questions

Interview is widely used methods for gathering qualitative data. It is a purposeful

interaction in which one person is trying to obtain information from another (Gay,
1987) and it allows the researcher to clarify the ambiguities, where appropriate, but it
is time consuming and hence cannot be used in large samples (Leedy and Armrod,
2001).

There are three ways of collecting data through interviews, the structured interview,
unstructured interview and semi-structured interview (Creswell, 2003). In the
structured interview the question may require closed-ended, structured responses or
open ended, unstructured responses. Semi-structured interview also, can be used to
gain a detailed picture of a respondent’s belief and perception of a particular
phenomenon (Smith, 1987).

The study employed semi-structured interview because these techniques allows

greater depth than is the case with questionnaires, that is, there is direct interaction
between the researcher and the respondent. The interview method eliminated all
misinterpretation raised during answering question this is because the researcher got
a chance to explain the purpose of the study and clarified queries which raised during
the interview. The semi-structured interview will be particularly useful in the
collection of qualitative data due to their flexibility, (Patton, 2002).

The study used interview in order to gather information from the Managers and bank
loan officers. The Bank managers were asked question from the interviewing guide
that was prepared beforehand. The answers were recorded by pen and paper.
Moreover semi structured interview were used to collect extra information from the
owners. The obtained information was used more in clarifying the findings.

43
3.7.3 Documentary Reviews and Documentary Review Guide

Documentary reviews involves obtaining data from any written or visual sources
such as, novels, review of research incident reports, advertisements, speeches,
official documents, files, films, audiotapes, books, newspaper, journals, .
Specifically, the study employed the review of written documentary, visual and audio
sources.

To a certain extent the method gave some insights concerning the study as a broad
term of which gave a certain direction for the researcher to make decision. More over
this tool is easier and quick method and covers a wide range of different kind of
sources. Documentary evidence acts as a method to cross validate information
gathered from interview and observation given that sometimes what people say may
be different from what people do (Noor, 2008).

A researcher studied the records from files and the information obtained from the
records will be being used for the study. The respondents were asked to provide their
business record books.

In these books the researcher verified the amount of the capital, look at the financial
statements, Banks statements if was available. In the financial statements and bank
statements the researcher was interested to see if the respondent had ever obtained a
loan and the payment mode and the interest charged. From the bank document the
researcher reviewed the documents that showed the defaulters and the reasons for not
paying. An instrument that documentary review guides was used to effect the use of
documentary review schedule.

3.8 Types and Sources of data

Both primary and secondary data were used in getting information of the
contribution of bank’s loans on performance of SB in Dar es Salaam. The primary
data was collected by administering structured questionnaires to the sampled
respondents who were SB owner and who were loaning from commercial banks and

44
other financial institution like Post Office Savings Bank (POSB), non-bank financial
institutions, savings and credit cooperative societies (SACCOs) and MFI. The
informal financial institutions in the study were savings and credit association’s
mutual assistance groups, relatives and friends, organizations and NGOs.

The secondary data was collected by assessing the commercial bank reports in Dar
es Salaam, reading on publications on the subject matter and related topics, news
papers, journals, study of various book, Web based data and looking on financial
statements of SB owners within Dar es salaam.

3.9 Validity and Reliability

To ensure validity the researcher conducted a study by using different tools like
questionnaires, interviews and documentary reviews in order to eliminate ambiguity.
Validity refers to the issue of whether an indicator (or set of indicators) that is
devised to gauge a concept really measure that concept (Bryman, 2001; Sapsford and
Evans, 1984). Validity as used in quantitative research to mean absence of
subjectivity has been found to be almost impossible in qualitative research (Auerbach
and Silverstein, 2003; Patton, 2002 approaches.

Therefore, to achieve validity, triangulation of study instruments was applied in this

study. Therefore, triangulation refers to the use of more than one approach to the
investigation of a research question in order to enhance confidence in the ensuing
findings (Bryman, 2001)
.
A researcher conducted the translation and back-translation purposely to ensure
validity of the instruments and at the same time most of the respondents were likely
to understand better in Kiswahili than in English, and the translation was done by
the experts and after the pilot study back translation were used (Mbobo,2010). For
more validation the instruments were given to the supervisor for further editing.

45
Reliability refers to the quality of measurement method that suggests that the same
data would have been collected each time in repeated observation of the same
phenomenon. McMillan and Schumacher (1993) said reliability “refers to the
consistency of measurement, the extent to which the results are similar over different
forms of the same instrument or occasions of data collecting “.Reliability, on the
other hand, implies that if a method of collecting evidence is reliable, it means that
“anybody else using this method would come up with the same results (McNeil,
1990). Similarly, it refers to the consistency of a measure of a concept (Bryman,
2001). Reliability, like validity, depends on how transparent the narrative is
(Schensulet al., 1999; Silverman, 1993). Lincoln and Guba (1985) also agree with
this p position when they say that findings grounded in data, logical inferences from
data, explicitness and reduction of researcher bias maximize reliability.

The tools for data collection that is interviewing guides and questionnaires were
prepared. The tools was translated into Kiswahili, the language that was used to
collect data from the respondents then the translated tools in Kiswahili was translated
back to English. After the translation back to English the two English versions was
compared for difference. Areas that was shown significant difference was
harmonized. The tools were tested where by a small sample was selected and be
given the questionnaires and some interviewed using the interviewing guide. During
testing of the data collection tools the researcher observed the areas that are not clear.
The areas that shows ambiguity and that are not clear were collected. The tools that
have been collected were used in the study.

3.10 Data Analysis Procedure

Data analysis is the process of making meaning from the data. Kothari (2004) defines
the term analysis as the computation of certain measures along with searching for
patterns of relationship that exist among data–groups. Data analysis begins soon after
collection of data. Before analysis of data a researcher edited the collected raw data
to detect errors and correct when possible. A researcher analyzed raw data by
quantitative and qualitative methods.

46
For quantitatively approach a data base will be created, the questionnaires were
checked for completeness. Statistical Package for Social Science (SPSS) package
was used in analyzing data. The analysis involved coding, data entry, data cleaning,
and the generating of descriptive statistics. The descriptive statistics include
frequency tallies, and their corresponding percentage scores.

After obtaining the descriptive statistics a regression analysis and one sample t-test
were conducted. The one sample t-test conducted so as to test the significance of the
variable. Some variables were cross tabulated to establish their association and
correction by employing a chi-square method. The findings were presented by using
tables and charts as found appropriate. Qualitative analysis involved categorizing of
data from interviews and field notes into common themes and presented by using
frequency distribution tables and charts. Interviews were coded and analyzed by pen
and paper, there after the contents were transcribed.

47
 CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND DISCUSSION

4.1 Introduction

This chapter presents data, analysis and discussion. All of these are based on the
research objectives stipulated in chapter one of this thesis.

4.2 The Influence of In-Accessibility of Bank Finance on the Small Business

Development

Influence of inaccessibility of bank finance on the development of small business in

the study area was intensively studied. Respondents were asked to tell the extent of
in-accessibility of bank finance affected their business performance and the
following Table 4.1 indicates findings.

Table 4.1: Responses on the Extent in-accessibility of bank Finance affected

their Business N=100

Response Number of Responses Percent

Highly affected business 20 20
Affected business 50 50
generally
Did not affect business at 20 20
all
Affected business at low 10 10
rate
Total 100 100

Source: Research Source; research Data, 20-13

Findings indicated that respondents (20%) said that inaccessibility of bank finance
affected the development of small business and respondents (50%) said that it
generally affected business development. Table 4.1 also indicates that respondents
(20%) said that in-accessibility of bank finance did not affect their business and
respondents (10) said that inaccessibility of bank finance affected business at low
rate.

48
The extent of business operation was then probed in order to validate the above
explained findings. It was revealed from the study that respondents (35%) explained
that they have been doing small business for a period of less than one year and
respondents (20%) said that they have been doing small business for the period of 3
years. Respondents (25%) explained that they have been doing the business for the
period of more than seven years. These findings generally indicated that a good
number of people had enough period of doing small business and that had time for
seeking financial assistance from banks.

It was also revealed from the study that possession of finance knowledge and skills
was among indicators for people to be able to access finance from banks. About 48%
of total respondents claimed to have knowledge and skills on finance management
and that they had been striving to get financial assistance from different banks in the
city. Respondents (21%) confirmed that they had adequate financial management
skills. Respondents (55%) said that they once applied for bank finance but only 10%)
managed to access it. It was also revealed from the study that 32% of total people in
small business never applied for bank finance.

Reasons for not applying for bank finance were then sought. For those who never
applied for bank finances provided various reasons. Four main reasons were given.
The majority (60%) explained that they did not know the procedures. Another 14%
said they lacked knowledge on the sources of finance available at banks. Only 5%
said high interest charged by banks discouraged them from borrowing. The
remaining 19% had enough Capital to start and run their small businesses.

Reasons why applications for finance were unsuccessful at banks were also
determined. Findings indicated that 45%of business people who failed to access bank
finance said they never got any response from banks clarifying why they could not
offer them the much needed loans. In light of this, lack of financial deposit was
found to affect 60% of total people doing small business. Respondents in this
category explained that they lacked collateral security which proved to be the
greatest obstacle in accessing finance. Only 9% failed to access bank finance

49
because they had poor business plans. The other reason why other SMMEs were not
funded by banks was that their business ideas were said to be ‘not viable’.

The influence of lack of financial management knowledge on the accessibility of

bank finance people doing small business was also probed. Respondents (39%) were
of view that lack of financial management knowledge has an impact on access to
bank finance. Only 30% admitted that it does not have any influence on access to
bank finance and 70% which is the majority, were of the view that it has affected
their businesses negatively, especially when it comes to accessing funds.

4.3 Effects of inaccessibility of bank finance to the success and development

of small business

The objective intended to determine effects of in-accessibility of bank finance to the

success and development of bank. All respondents (N=……) provided responses
which were validated through the review of documents. Findings indicated that he
majority (80%) of respondents expressed their view of influence of inaccessibility of
finance on survival of

Their businesses revealing that it has a very negative influence. It was also revealed
from the study that 10% of respondents said this had a positive impact on the success
and development of small businesses. Findings also indicated that 18% argued that
inaccessibility of finance had no influence on the development of small business.

Over seven percent (7%) on the other hand, also argued that inaccessibility of
finances never affected growth of their, yet, nearly 6% claim that this impacted the
growth of their businesses positively. Findings also indicated that more than 80% of
total respondents said that were affected negatively and Means that they were totally
depending on bank finances, which was not advisable. Respondents explained that
also have to make use of their retained earnings to grow or else, explore other
options to fund the growth of businesses.

50
Lack of business skills, flexibility, skilled labour, innovation and flexibility in doing
small businesses attributed to inaccessibility of bank finance. The researcher noted
that inaccessibility of finance has also affected performance of small business
negatively in factors like transportation, information technology, exporting activities,
visibility and also, relationships with suppliers.

These findings are in line with what is stipulated in theoretical literature. According
to Nieman and Nieuwenhuizen (2009), these factors contribute to the success of a
business venture. If small business in the study area makes use of poor raw materials,
the quality will obviously be below standard. If poor quality products are to be sold
at a higher price, sales are most likely to be lost and in the long run, the business will
fail.

Parallel to this objective the researcher discovered that lack of knowledge on

financial management influenced development of small business. According to
respondents (85%), lack of financial management knowledge has a negative impact.
Of the remaining 15%, 10% said this strongly affected their businesses negatively,
and only respondents (5%) argued that it never affected their businesses. Lack of
financial management knowledge also has influence on investment decisions,
survival of small business orientation towards the future, innovation, lack of business
skills and small business flexibility. Most, if not all of these factors, affect small
business success.

It was also revealed from the study that financial management knowledge have
influence of on the capacity of people to access financial services from the bank.
Findings indicated that 5% of respondents said it does not have an effect. But
respondents (85%) were affected negatively and the remaining 15% said it strongly
affected them negatively. These findings agree with results from the study done by
Kondrich (2008) that knowledge of financial management is crucial in making
investment decisions and this in turn affects the capacity and capability of people in
small business to access financial support from different financial institutions.

51
Furthermore, Kejo (2007) point out that most small business people that fail to
manage their finances will fail. This is empirically true because lack of education
and training is one of the major causes of failure of small business in developing
countries. Lack of financial management knowledge also affected small business
orientation towards the future. Nieman and Nieuwenhuizen (2009) made it clear that
successful entrepreneurs focus much on the future. Poor financial planning and
management will lead to failure and no future. More than 80% of respondents
indicated that they were affected negatively and were only focusing to achieve short
term financial goals, not strategic goal of their ventures. It was revealed from the
study that depending too much on consultants and experts limited small business
flexibility in making financial decisions that are crucial to the business
performance/development. Nieman and Nieuwenhuizen (2009) stresses that small
business owners must themselves be able to interpret and understand financial
statements.

4.4 Challenges faced by Small Business Owners as a Result of Inaccessibility

of Finance

Data for this objective was collected from the use of interviews and observations and
review of documents. Respondents were asked to tell if there were challenges or not
and the Following table below indicates results.

52
Table 4.2 Challenges Facing Small Business Owners as a Result of
Inaccessibility of Finance

Type of challenge Number of Responses %

inability to expand or 20 20
slow growth of businesses
inability to compete with 30 30
bigger firms in the market
Lack of business knowledge and skills 10 10
and poor financial management
failure to register/poor quality goods or 15 15
services
poor marketing and bad reputation or 5 5
images created
Mismanagement of business/failure to 20 20
access funds
Total 100 100
Source: Field Data, 2013

According to the data in table 4.2, the main challenges faced by SMMEs as a result
of inaccessibility of finance include inability to expand or slow growth of businesses.
According to respondents (20%), there were many same small businesses which
were undertaken in the study area. It was revealed from the study that customers
were getting big opportunities to choose where to buy. In the business industry, this
results into plenty of goods in the market and hence, falls of prices.

Respondents (30%) mentioned another challenge to be inability to compete with

those people doing big business in the market. It was revealed from the study that
being small business also the quality of goods and services were not of high standard
compared to those from big business people. It was revealed from the study that also
people doing small business were not able to produce big quantity of products to the
market due to financial constraint.

According to data in the above table, as explained before, lack of knowledge and
skills on business and finance. Respondents (10%) explained that most of them have

53
no enough basic education and business education and management. The challenge
was explained to negatively affect not only the business performance but also their
abilities to access finance from banks. They explained further that most of people in
small businesses such as those doing ‘mama/baba lishe’ are illiterate to the extent
that they cannot competently read and write.

Therefore, proper keeping planning of business and keeping business records was
explained to be default tasks. Together with this respondents (15%) explain that to
result also into failure to register their business in order to be officially recognized by
relevant authorities. As a result the researcher observed a number of small business
people doing the businesses into unplanned areas that are in informal sector. Doing
businesses in such areas deprives their right to get necessary social services and the
like which facilitates development of any type of business. In light of this also entails
the extent in-terms of quality the provision of services and that is why respondents
(10%) explained that poor provision of services/quality goods was among challenges
they faced during doing businesses.

According to data in table 4.2, other challenges were identified include poor
marketing and bad reputation or images created for small business. Respondents
(5%) explained that the market available for most of those doing small businesses
were mainly locally and encased with the premises where business owners resided.
With regard to bad business reputation/images respondents explained that this was
due to the fact that many business were of short term and frequently collapsed and
that it was difficult for owners to be easily trusted for loans.

According to respondents other challenges were explained to be poor decision

making leading to high failure rate and closure of businesses and failure to develop
due to uninformed budgets and mismanagement of businesses. Findings also
indicated that failure to access finance due to inadequate documentation and poor
presentation were among challenges faced by people doing small business and all
were generally underpinned by lack of financial management knowledge.

54
 CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Introduction

In this chapter, a summary of the study is given and covers the entire study. The
chapter also provides a conclusions and recommendations.

5.2 Summary of the Study

This study investigated the influence of inaccessibility of bank finance and lack of
financial management knowledge to people doing small business. Both theoretical
and empirical literature was reviewed and the latter revealed that many studies have
been done on the similar issues. This was because of the importance of small
business as a source of job creation and eradication/alleviation of poverty. The
survey research design was used to gather information and the sample included 100
respondents who were randomly and purposively selected. Interviews, observations
and documentary analysis were data collection methods used to collect both primary
and secondary data. Analysis of data was done based on research objectives and
research questions.

The following were research findings:

With regard to the influence of In-Accessibility of Bank Finance on the Small
Business Development, generally respondents agreed that inaccessibility of bank
funds have influence and very few said it had influence since they had their own
sources of funds. The results are based on the extent of business operation people
has been doing small business for a period of less than one year others more than five
years. This indicated that a good number of people had enough period of doing small
business and that had time for seeking financial assistance from banks.

Findings indicate that that possession of finance knowledge and skills were among
indicators for people to be able to access finance from banks. However few
respondents indicated to have business education knowledge, skills and lacked
knowledge and skills on finance management. This resulted either not completely to

55
be not aware of sources of finance for their business or not to apply for loans from
the banks because they did not know the procedures. It was also revealed from the
study that failure to get bank loans was also underpinned by the lack of business
plans. Findings also indicated that those who had knowledge did not apply for loans
because they had no collateral and claimed high interest charged by banks
discouraged them from borrowing. Business ideas were said to be ‘not viable’.

Findings also revealed that some who applied for the loans never got any response
from banks clarifying why they could not offer them the much needed loans. In light
of this, lack of financial deposit was found to affect 60% of total people doing small
businesses. It was also revealed from the study that lack of financial management
knowledge on the accessibility of bank finance negatively influenced development of
small business.
With regard to the effects of to the success and development of small business
findings indicated that inaccessibility of bank finance has a very negative
influence. It was also revealed from the study that 10% of respondents said this had a
positive impact on the success and development of small businesses. Findings also
indicated that few argued that inaccessibility of finance had no influence on the
development of small business. Findings also indicated that inaccessibility of
finances never affected growth of their claim that this impacted the growth of their
businesses positively. Findings also indicated that more than 80% said that they were
affected negatively and that means that they were totally depending on bank
finances, which was not advisable. Findings indicated that people doing small
businesses also have to make use of their retained earnings to grow or else, explore
other options to fund the growth of businesses.

Lack of business skills, flexibility, skilled labour, innovation and flexibility in doing
small businesses attributed to inaccessibility of bank finance. The researcher noted
that inaccessibility of finance has also affected performance of small business
negatively in factors like transportation, information technology, exporting activities,
visibility and also, relationships with suppliers. The researcher discovered that lack
of knowledge on financial management influenced development of small business

56
both passively and negatively. Lack of financial management knowledge also has
influence on investment decisions, survival of small business orientation towards the
future, innovation, lack of business skills and small business flexibility. Most, if not
all of these factors, affect small business success.

It was also revealed from the study that financial management knowledge has
influence of on the capacity of people to access financial services from the bank.
Findings indicated that 5% of respondents said it does not have an effect. But
respondents (85%) were affected negatively and the remaining 15% said it strongly
affected them negatively. These findings agree with results from the study done by
Kondrich (2008) that knowledge of financial management is crucial in making
investment decisions and this in turn affects the capacity and capability of people in
small business to access financial support from different financial institutions.

The literature also revealed that most small business people that fail to manage their
finances will fail. This is empirically true because lack of education and training is
one of the major causes of failure of small business in developing countries. Lack of
financial management knowledge also affected small business orientation towards
the future.

With regard to the challenges faced by Small Business Owners as a Result of

Inaccessibility of Finance findings indicated that the main challenges faced by
SMMEs as a result of inaccessibility of finance include inability to expand or slow
growth of businesses. It was revealed from the study that customers were getting big
opportunities to choose where to buy. In the business industry, this results into plenty
of goods in the market and hence, falls of prices.

Another challenge was revealed to be inability to compete with those people doing
big business in the market. It was revealed from the study that being small business
also the quality of goods and services were not of high standard compared to those
from big business people. It was revealed from the study that also people doing small

57
business were not able to produce big quantity of products to the market due to
financial constraint.

Another challenge was lack of knowledge and skills on business and finance. The
challenge was explained to negatively affect not only the business performance but
also their abilities to access finance from banks. Therefore, proper planning of
business and keeping business records was explained to be default tasks. It was
reported that this resulted into failure to register their business in order to be
officially recognized by relevant authorities.

As results the researcher observed a number of small business people doing the
businesses into unplanned areas that are in informal sector. Doing business in such
areas deprives their right to get necessary social services and the like which
facilitates development of any type of business.

Findings also indicates that other challenges were identified include poor marketing
and bad reputation or images created for small business. This was due to the fact that
the market available for most of those doing small businesses was mainly local and
encased within the premises where business owners resided. With regard to bad
business reputation/images respondents explained that this was due to the fact that
many businesses were of short term and frequently collapsed and that it was difficult
for owners to be easily trusted for loans.

Other challenges were explained to be poor decision making leading to high failure
rate and closure of businesses and failure to develop due to uninformed budgets and
mismanagement of businesses.

Findings also indicated that failure to access finance due to inadequate

documentation and poor presentation were among challenges faced by people doing
small business and all were generally underpinned by lack of financial management
knowledge.

58
Conclusion
Based on the study findings, small businesses are important because they help to
eradicate poverty. Although lack of financial management knowledge among those
doing small business does not necessarily influence inaccessibility of bank finance it
is concluded that it affects small business severely on survival and success.

In this regard, many small businesses fail because of lack of financial management
knowledge. It is also concluded that inaccessibility of finance does not have a greater
influence on development of small business. This is mainly because after Small
businesses are established, owners can seek other sources of finance other than bank
finance.

Recommendations
Based on the findings of this study, the following recommendations are suggested.

To small business owners

Inaccessibility of bank finance and lack of financial management knowledge are real
challenges to Small business owners. SB owners need to take time to explore all
financing opportunities and also how they can gain more financial management
knowledge. It is business owners that are supposed to look for institutions that
support them, not the other way round. Business owners also need to show
seriousness when applying for bank loans and in preparing business plans. Making
use of experts at their disposal can help ease the problem of inaccessibility to
finance.

Financial literacy trainings offered to them through SMEs need to be taken seriously.
These trainings are of benefit for they can help ease other challenges affecting small
business especially lack of financial management knowledge and access to finance.
Inaccessibility of bank finance should not kill the entrepreneurial spirit. Small
business owners should now not depend only on bank finance.

59
They can explore other options to grow and start businesses. Money from family,
friends and fools can work for their good for it is usually interest free. Small business
owners need to realize that their success is dependent on what they want to achieve
and how they plan to achieve it, not on banks or the government. This is why some
owners of small business are excelling while others are failing even if they are
operating in the same area and doing the very same business.

The government
The majority of small business owners are not aware of government Initiatives that
are meant to improve the small business sector. There is a need to educate them on
useful government services and how they can access them. The government should
also monitor the services offered to them by banks.

Although the government has a role to play, it has to be careful not to create a spirit
of dependency for it destroys the entrepreneurial spirit in small business. Those
doing small business need to be supported but must not be allowed to be over
dependent on the government.

Banks
Although it is sometimes suggested that those doing small business can explore other
financing alternatives, bank finance remains common and useful to them. Banks need
to realize that their actions and attitude towards SMEs has an effect on the small
business and the nation at large. Banks should not just turn down those doing small
business’ applications for finance without explanations.

60
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