CHINHOYI UNIVERSITY OF TECHNOLOGY

GRADUATE BUSINESS SCHOOL

THE IMPACT OF MICROFINANCE ON SMALL BUSINESSES. A CASE STUDY OF

HARARE

BY
RONALD NHENDE C13121082T
A dissertation submitted to the School of Sciences and Mainagement in Partal
Fulfilment

Requirements of the Award of the Master of Science in Strategic

Management Degree

JUNE 2014

Declaration
I hereby declare that this submission is my own work towards the Master of Science in
Strategic Management and that, to the best of my knowledge, it contains no material
previously published by another person nor material which has been accepted for the award
of any other degree of the University, except where due acknowledgement has been made in
the text.

Ronald Nhende
(C13121982T)

.
Signature

..
Date

Supervised by:
Dr G. Munyoro

...
Signature

Date

Dedication

Acknowledgement
I wish to take the opportunity to thank my supervisor Dr. G. Munyoro for the support he gave
me throughout my dissertation. Heartfelt thanks go to my mum and dad and my siblings for
the encouragement, support and inspiration they give me. I wish to show appreciation to
small business operators and microfinance institutions and everyone else who made this
research a success.
Over and above everything, I wish to thank the almighty for getting me this far.

Abstract
The study discusses the impact of microfinance on small businesses in Harare. The study
assessed the accessibility of microfinance by small businesses in Harare, identified the
challenged being faced in the financing of small businesses and determined the extent to
which microfinance was effectively used by small businesses. A survey was carried out in
Harares small buniness sites of Siyaso, Gazaland and Machipisa as well microfinance
institutions which operate in Harare. Two sets of questionnaires were administered; 50 for
small business operators and 12 for microfinance institutions which comprised the sample
size. Data was analysed with the aid of Statistical Package for Social Sciences (SPSS)
software.The study showed that microfinance institutions in Harare do not have adequate
capacity to meet financing requirements of small businesses. It was observed in the research
that loan requirements and terms and conditions of most microfinance institutions. It was also
observed that most of small business operators who received credit from microfinance
institutions did not utilise the loans as intended thereby compromising the success of such
businesses from credit received. Capacity building was found to be necessary to small
businesses for effective utilisation of credit. It was recommended that MFIs should boost
their capacity and deviate from the traditional asset based lending inorder to effectively
finance small businesses as well as encourage the uptake of credit. Also for small business

operators, it was imperative that they do not abuse credit and that they operate in a
professional manner.

Table of Contents
Contents
Declaration................................................................................................................................ii
Dedication................................................................................................................................iii
Acknowledgement....................................................................................................................iv
Abstract.....................................................................................................................................iv
Table of Contents......................................................................................................................iv
List of Tables...........................................................................................................................vii
CHAPTER 1..............................................................................................................................1
1.0 INTRODUCTION...............................................................................................................1
1.1 Background of the study..................................................................................................1
1.2 Problem statement............................................................................................................3
1.3 Research objectives..........................................................................................................3
1.4 Research Questions..........................................................................................................4
1.5 Significance of the study..................................................................................................4
1.6 Scope of the research.......................................................................................................5
1.7 Dissertation structure.......................................................................................................5
1.8 Chapter summary.............................................................................................................6
CHAPTER 2..............................................................................................................................7
2.0 LITERATURE REVIEW.....................................................................................................7
2.1 Introduction......................................................................................................................7
2.2 The Concept of Microfinance..........................................................................................7
2.3 Background of Microfinance in Zimbabwe.....................................................................8
2.3.1 Classification of Providers Microfinance in Zimbabwe............................................9
2.4 Microfinance Products and Services................................................................................9
2.4.1 Financial intermediation..........................................................................................10
2.4.2 Social intermediation...............................................................................................11
5

2.4.3 Enterprise development/ capacity building.............................................................11

2.4.4 Social services.........................................................................................................12
2.5 Approaches to the supply of microfinance services to clients.......................................12
2.6

Organisation of Microfinance Institutions................................................................13

2.6.1 Co-operative financial institution............................................................................14

2.6.2 Group Lending........................................................................................................14
2.6.3 Individual Lending..................................................................................................15
2.6.4 Self-help groups (SHG)...........................................................................................15
2.6.5 Village Banking.......................................................................................................16
2.7 Lending methods and used by MFIs..............................................................................16
2.7.1 Financial Statement Lending...................................................................................16
2.7.2 Small Business Credit Scoring................................................................................16
2.7.3 Asset-Based Lending...............................................................................................17
2.7.4 Relationship Lending..............................................................................................17
2.8 The Definition of small business from the Zimbabwean perspective............................18
2.9 Types of small businesses..............................................................................................18
2.9.1 Start-up or existing small businesses.......................................................................19
2.9.2 Levels of small business development....................................................................19
2.10 Significance of Small businesses to the Economy...................................................20
2.11 Small business growth..................................................................................................21
Market size.......................................................................................................................22
2.12 Characteristics of the target population of microfinance institutions..........................22
2.13 Constraints to small business financing.......................................................................23
2.13.1 Problems Associated with MFIs............................................................................23
2.13.2 Problems associated with small businesses...........................................................24
2.14 Capital requirements considerations of small businesses............................................26
2.15 Alternative Sources of Small Business Financing.......................................................26
2.16 Arguments on why microfinance has not worked........................................................28
2.17 Chapter Summary........................................................................................................30
CHAPTER 3............................................................................................................................31
RESEARCH METHODOLOGY............................................................................................31
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3.0

Introduction..............................................................................................................31

3.1

Research Philosophy.................................................................................................31

3.2

Research Design........................................................................................................31

3.3

Population................................................................................................................32

3.4

Sampling Procedure..................................................................................................32

3.5 Research Instruments.....................................................................................................33

3.6

Data Collection Procedure........................................................................................33

3.7

Limitations................................................................................................................33

3.8 Reliability.......................................................................................................................34
3.9 Validity...........................................................................................................................34
3.10

Ethical Considerations..............................................................................................34

3.11

Data Analysis Procedure...........................................................................................34

3.12

Chapter Summary.....................................................................................................35

CHAPTER 4............................................................................................................................36
4.0 DATA PRESENTATION, ANALYSIS AND INTERPRETATION..................................36
4.1 Introduction....................................................................................................................36
4.2 Research findings...........................................................................................................36
CHAPTER 5............................................................................................................................55
5.0 CONCLUSIONS AND RECOMMENDATIONS.............................................................55
5.1 Conclusions....................................................................................................................55
Importance of small businesses............................................................................................55
Access to credit....................................................................................................................55
Challenges faced by small businesses in accessing credit...................................................56
Effective utilization of credit...............................................................................................56
Impact of microfinance on small business growth indicators..............................................56
5.2 Recommendations..........................................................................................................57
MFIs to boost their capacity.................................................................................................57
Monitoring of credit.............................................................................................................57
Order financing....................................................................................................................58
Credit Reference Bureaus....................................................................................................58
Regulation of Microfinance Institutions..............................................................................58
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Recommendations for further research................................................................................58

List of Tables
List of figures

Abbreviations
MFIs Microfinance Institutions
SME Small and Medium Enterprises
RBZ Reserve Bank of Zimbabwe
SEDCO Small Enterprise Development Corporation

CHAPTER 1
1.0 INTRODUCTION
This chapter gives an outline of the study on the impact of microfinance on small businesses
in Harare. It sets out the background of the study, discusses the problem statements, and
outlines the objectives, significance as well as the scope of the research.
1.1 Background of the study
Small businesses are recognised world-wide to be a key source of dynamism, innovation and
flexibility in industrialised countries, as well as in emerging and developing economies. The
development of small businesses is seen as accelerating the attainment of broader economic
and socio-economic objectives, including poverty alleviation. The development of small
businesses has seen a simultaneous growth of the microfinance sector because of the
supportive role it plays to small businesses.
Small businesses have contributed immensely in the social and economic development of
several nations including Zimbabwe (UNDP, 2000). The growth of small businesses is
important agenda to Zimbabwe because small enterprises are believed to be an important
source of employment among other benefits. For example, in 1998 around 860,000 small
businesses carried out activity in manufacturing, commerce and service activities, according
to Barnes (2001). In addition it is suggested that small businesses are responsible for more
than 50% of the Zimbabwe's Gross Domestic Product (GDP) and account for the livelihood
of 80% of the population through self employment and jobs (RBZ, 2007). Furthermore,
Barnes (2001) identified the HIV/AIDS epidemic as another major factor giving rise to small
businesses as the curse has in some cases taken away breadwinners in family setups and
significantly increased healthcare costs. With a prevalence rate of 13.7%, according to
UNAIDS and WHO (2000) HIV/AIDS negatively affects households by increasing
dependency ratios, reducing the level of household income, and diverting resources. The
affected will start small businesses inorder to survive and turn to microfinance for assistance.
The year 2000 saw a decline in employment levels in Zimbabwe as witnessed by company
closures in the informal sector as well as retrenchments mainly caused by low capacity
1

utilisation. This has in turn caused a rise in small businesses as a source of livelihoods for
many families.
SEDCO (2004) reports that 85% of small businesses fail in their first three years of
establishment while only 15% are likely to survive. Access to finance, poor marketing
channels, inadequate management resources, insufficient capacity to do research and
development, weak business structures among others were cited by RBZ (2009) as the main
challenges facing the growth of small businesses. Many scholars point out to lack of finance
as the major challenge faced by small businesses. Medium to large businesses have many
sources of finance at their disposal. They can access long term finance from issuing shares
and debentures. They also have access to bank loans for projects which are short to medium
term in nature with medium businesses also accessing finance from MFIs. In addition, they
enjoy trade credit for their short term financing needs. Small businesses access financing
from banks, microfinance institutions and family and friends. Small businesses on the other
hand have remained financially excluded to a larger extent. Microfinance Institutions have
not quite intervened to address the challenges of financially excluded small businesses.
RBZ (2007) proposes the need to support and nature growth of small businesses so as to
enable the sector to contribute meaningfully to national economic development. Lack access
to finance has been argued to be the most critical factor that has hampered the development
of small businesses by many scholars. The financing needs of small businesses have
traditionally been excluded by established financial institutions like commercial banks. This
has seen the emergence of Microfinance Institutions (MFIs). According to Mutambanadzo et
al (2013) Microfinance Institutions (MFIs) play a pivotal role in the provision of services to
the financially excluded population, particularly the poor and the informal sector. However,
in Zimbabwe, small business operators receive the least support from MFIs that are supposed
to give a hand to small businesses. This might be because the majority of small businesses
are informal and as such very little information about the significance of their contribution to
the economy (i.e. to the GDP, employment levels, per capita income, exports, savings,
investments etc) is not properly appreciated.

Despite the emergence of MFIs the bulk of small businesses have remained technically
financially excluded. Working capital financing, equipment financing are some of the major
financing challenges faced by small businesses in Harare.
1.2 Problem statement
Despite the contribution of small businesses to economic development in Zimbabwe in
Zimbabwe they remain n marginalised in as far as access to finance is concerned. Financing
efforts made to intervene in the Small and Medium Enterprises (SME) sector in Zimbabwe
have largely targeted medium sized to large firms with small businesses remaining largely
excluded. Small businesses have found it difficult to access finance from the mainstream
financial system made up mainly by banks whose lending requirements like collateral and
financial statements to mention but a few are impractical of the majority of small businesses.
This has seen emergence of microfinance institutions whose major motive seeks to address
challenges of such marginalised parts of the society as supported by Ledgerwood (1999).
Small businesses continue to fail and their growth remains subdued owing to the lack of
finance according to RBZ (2012). Furthermore, Muchemwa (2012) claims that there are too
few MFIs in Zimbabwe are operating on thin capital bases against a very large number of
small businesses. Access to microfinance remains a major impediment in the development of
small businesses. If the problem is unabated, small businesses will continue to fail,
unemployment will continue to rise, and so will poverty and the countrys economy will
decline. This has necessitated the study on the impact of microfinance on the growth of
small businesses in Harare.
1.3 Research objectives
The following are the objectives of the research:

To establish the impact of access to microfinance on small businesses.

To assess the accessibility of microfinance by small businesses in Harare.

To identify the challenges being faced by small businesses in accessing finance from
MFIs.

To determine the effective utilization of credit by small businesses.

3

1.4 Research Questions

The research will attempt to answer the following questions:

What is the impact of microfinance on small businesses in Harare?

To what extent is microfinance accessible to small businesses in Harare?

What challenges do small businesses face in accessing microfinance from

mifrofinance institutions?

To what extent is credit effectively utilized by small businesses?

1.5 Significance of the study

The extraordinary growth of small businesses in the past few years created employment to
millions of people as the country pulls through a challenging phase, according to RBZ
(2007). Social and economic goals can be achieved by promoting the growth of small
businesses in Zimbabwe. Small businesses are important as they play a pivotal role in
promoting grassroots economic growth and equitable sustainable development. The results of
the study will enlighten small business owners of the challenges they have to overcome
inorder to survive and grow. Small businesses will learn about the critical success and failure
factors of small businesses.

It will provide the necessary recommendations on how MFIs

can successfully finance small businesses. The study will expose the microfinancing gap that
exists that might be important input in the governments policy making. Government policy
should be crafted to synchronize efforts of MFIs and small businesses so as to ensure survival
and growth of both parties.
1.6 Scope of the research
The study shall seek to find out the impact of small businesses on the growth of small
businesses in Harare. However, owing to time and financial constraints the research will
cover sites of Siyaso of Mbare and Gazaland of Highfield and Machipisa. Respondents of
this research shall be small businesses operators and microfinance institutions. Small

business operators include largely vendors, retailers and artisans. The study shall also cover
microfinance institutions operating in Harare and registered by RBZ.
1.7 Dissertation structure
The research will comprise five chapters which are introduction, literature review, research
methodology, data

presentation,

analysis

and

presentation

and

conclusions

and

recommendations.

Chapter 1: Introduction

This chapter presents an overview of the research study. It highlights the research
background, problem statement, research objectives, questions, significance of and scope of
study.

Chapter 2: Literature review

The chapter covers a review of related literature to the topic area with emphasis on
microfinance and small businesses. The literature is reviewed in light of the impact of
microfinance on the growth of small business.

Chapter 3: Research methodology

This chapter outlines how the research will be carried out describing research philosophy;
research design; population and sampling and data collection methods and data analysis
procedure.

Chapter 4: Data presentation, discussion and analysis

This presents data which was gathered during the research project. Data analysis is done and
conducted with reference to the findings of literature review.

Chapter 5: Conclusions and recommendations

This chapter, presents recommendations, identifies potential areas for further research and
conclusions drawn from the study.

1.8 Chapter summary

This chapter has served as an overall introduction to the research project. The background
and scope to the research, combined with the research justification and research problem,
provide an insight into what needs to be achieved during this research project. The next
chapter will present and review literature that is related to the current research topic and
problem. That review will, most likely, assist in identifying the fundamental sources and
potential solutions to problems similar to the current research problems.

CHAPTER 2

2.0 LITERATURE REVIEW

2.1 Introduction
This chapter focuses on some of the concepts of microfinance and its impact on small
businesses. The chapter gives a review of the background of microfinance, an assessment of
the contribution of microfinance to small businesses highlighting the challenges to the
financing of small business as well.
2.2 The Concept of Microfinance
Microfinance is considered as a development tool that seeks to address the financing needs of
the marginalized members of the population and small businesses excluded part of the
population. The concept of microcredit became prevalent in the 1980s, although an early
experiment of this scheme dates back 30 years ago in India, Brazil and Bangladesh.
Microfinance provides financial services and products such as small loans, savings, insurance
and money transfer to assist the poor in expanding or establishing their businesses. Robinson
(2003) asserts that microfinance is mostly used in developing economies where small
businesses have limited access to financial services. In addition to financial intermediation,
some MFIs provide social intermediation services such as the formation of groups,
development of self confidence and the training of members in that group on financial
literacy and management (Ledgerwood, 1999). There are different providers of microfinance
services and some of them are; nongovernmental organisations (NGOs), savings and loans
cooperatives, credit unions, government banks, commercial banks or non bank financial
institutions. The target group of MFIs are self employed low income entrepreneurs who are;
traders, seamstresses, street vendors, small farmers, hairdressers, rickshaw drivers, artisans
blacksmith among others (Ledgerwood, 1999). Bennett (1994) also subscribes to the same
viewpoint that MFIs can offer their services to individuals who are generally below or
slightly above the poverty line. These are the less privileged group of the society.

2.3 Background of Microfinance in Zimbabwe

Microfinance is a fairly new industry in Zimbabwe which began to show face in the early
1990s which grew tremendously in the 2000s because of the unprecedented growth of
Zimbabwes informal sector that was propagated by various factors. According to ZAMFI
(2012), chief of the factors stimulating microfinance activity in Zimbabwe was the high
unemployment rate that was pegged at 80% in 2011 according to UNDP (2012). This has
caused a significant rise in activity in the informal sector in Zimbabwe. The informal sector
is characterised by large numbers of small businesses. Small businesses have become the
source of livelihood for the majority of the population. Regrettably, small business operators
are unable to access funding from the mainstream financial system because they lack
collateral and the cumbersome nature of loan requirements as suggested by ZAMFI (2012).
The demand for microfinance is rapidly growing along with the growth of the small
businesses in Zimbabwe. ZAMFI (2012) identified the major microfinance activities to
usually include:

Small loans, especially for working capital

Informal appraisal of borrowers and projects

Collateral alternatives such as group guarantees or compulsory savings

Access to repeat and larger loans sizes based on repayment performance

Streamlined loan disbursement and monitoring

Secure savings clubs and cooperatives

The providers of microfinance services in Zimbabwe are broadly classified under deposit
taking microfinance and credit only microfinance institutions. These can be NonGovernmental Organisations (NGOs), savings and loans cooperatives, credit unions, banks,
or non bank financial institutions. The target group of MFIs as suggested by Ledgerwood
(1999) are self employed low income entrepreneurs who are; traders, seamstresses, street
vendors, small farmers, hairdressers, rickshaw drivers, artisans blacksmith amongst others.
Such methods include group lending and liability, pre-loan savings requirements, gradually
increasing loan sizes, and an implicit guarantee of ready access to future loans if present
loans are repaid fully and promptly.

The common understanding of the term microfinance refers to the provision of small loans
by service providers which are microfinance institutions (MFIs). The terms microfinance and
microcredit are often used interchangeably though they are different. Banerjee at al., (2009)
define microcredit as small loans, while microfinance refers to small loans and other
supplementary financial services like savings, insurance and capacity building. Microcredit is
therefore a component of microfinance in that it involves providing credit to the poor.
Microfinance institutions use modern methods to provide small loans to unsalaried borrowers
with little or no collateral.

2.3.1 Classification of Providers Microfinance in Zimbabwe

The providers of microfinance in Zimbabwe are classified under the following: banks, nonbank microfinance institutions (NBMFIs), moneylenders, savings and credit cooperatives
(SACCOS). In Zimbabwe, NBMFIs and moneylenders are more commonly known as MFIs
as pointed out by Ernst and Young (2006). NBMFIs are also known as NGO-MFIs in other
countries. In the same report, Ernst and Young (2006) found out that almost all NBMFI loans
were for enterprise purposes and not for consumption, while most (93%) of micro lenders
lending was for consumption purposes.

Banks According to Ernst and Young (2006), 5 banks provided microfinance

services in Zimbabwe.

Non Banking Microfinance Institutions (NBMFIs) These are non deposit taking
microfinance institutions whose major purpose is enterprise financing

Savings and credit cooperatives (SACCOS) these

2.4 Microfinance Products and Services

The services provided by microfinance institutions can be categorized into four broad
different categories discussed below:

2.4.1 Financial intermediation

Financial intermediation refers to the provision of financial products and services such as
savings, insurance, credit cards, credit, and payment systems in the process connecting
surplus and deficit units (Gorton and Winton, 2002). Financial intermediaries are firms that
borrow from savers and lend to those that need resources for investment such as the case with
deposit taking microfinance which consolidate deposits and use the funds to transform them
into loans. Lopa (2009) defines this role of MFIs as the indirect facilitating of channelling of
funds from people who have extra money or surplus savings (savers) to those who do not
have enough money to carry out a desired activity borrowers.

Credit: These are funds borrowed with definite terms of repayment. Individuals
borrow when there have insufficient savings to finance their business operations.
They also compare the return on borrowed funds and interest charged on the loan and
if it is beneficial to borrow rather than to defer business operations until a time they
can accumulate sufficient savings assuming the ability to service the loan is certain
(Waterfield and Duval, 1996). Loans are usually acquired for productivity reasons;
that is to generate revenue within a business.

Savings: The mobilasation of savings in microfinance is quite a contentious issue.

Paxton (1996) pointed out that there has been increased scrutiny and awareness
among policy makers and practitioners over a large number of informal savings
schemes. Microfinance institutions such as credit unions around the globe have been
successful in encouraging clients to save.

Insurance: Insurance is one of the services that are tried out by microfinance
institutions. A number of group lending programs provide insurance or guarantee
scheme in place of collateral and the Grameen bank is such an example (Ledgerwood,
1999). A proportion of the loan is required to be offered by group members as their
contribution to insurance of the loan.

Credit cards: Credit cards allow borrowers to have prviledge to a line of credit
whenever neccessary. The card can also be used make purchase provided the supplier

10

of the goods accepts the credit card. A client is access his or her own savings in which
case the card will be known as a debit card according to Ledgerwood (1999).

Payment Services: these services include cashing cheques and cheque writing for
clients who maintain deposits as suggested by Caskey (1994). In addition, payment
services also include the remittance and transfer of funds from one area to the other
(Ledgerwood, 1999).

2.4.2 Social intermediation

This refers to the process of building human and social capital needed by sustainable
financial intermediation for the poor. Subsidies should be eliminated but social
intermediation may require subsidies for a longer period than financial intermediation.
Edgcomb and Barton (1998) assert that it is mainly aimed at the marginalised sectors of
society in terms of credit and savings facilities.

2.4.3 Enterprise development/ capacity building

These are non financial services that assist small business operators include skills
development, business training, technology services, marketing and subsector analysis.
UNDP (2000) defines capacity building to cover human resources development and the
strengthening of managerial systems, institutional development that involves community
participation and creation of an enabling environment. Azikiwe (2006) defines capacity
building as the process by which individuals are equipped with skills and knowledge they
need to perform effectively and efficiently in their different callings. The key issue is that it is
imperative for entrepreneurs to undergo trainings that will enhance capacity which will in
turn drive sustainable development. Ledgerwood, (1999) observed that there is little or no
difference between enterprises that receive credit alone and those that receive both credit
packages and integrated enterprise development services.

11

2.4.4 Social services

These are non financial services that focus on advancing the welfare of micro entrepreneurs
and this includes education, health, nutrition, and literacy training (Bennett, 1997;
Legerwood, 1999). These social services mostly require ongoing subsidies and are provided
by donor supporting NGOs or the state.
2.5 Approaches to the supply of microfinance services to clients
Microfinance institutions adopt principally either the minimalist approach or integrated
approach in the manner they operate depending on the degree to which they offer each of the
services discussed above. The minimalist approach according to Ledgerwood (2009) offers
only financial intermediation services and partial social intermediation services in some
cases. This approach is based on the idea that there is a single missing piece for the growth
of enterprises and it is believed to be the lack of accessible, affordable, short-term credit
which the MFIs can offer.
The integrated approach, on the other hand, takes a more comprehensive view of the client.
Under this approach, clients benefit from financial and associated services like social
intermediation, social services and enterprise development. MFIs take advantage of its the
niche market they serve and provide value added services that are recognised as important to
small businesses, giving competitive advantage at the same time. Ledgerwood, 1999 suggests
that the demand and supply of these services will determine the approach that a MFI will
choose and also the circumstances in which it is operating. The diagram below illustrates the
two different approaches used by MFIs in the supply of services.

12

Source: Ledgerwood (1999)

2.6

Organisation of Microfinance Institutions

Microfinance institutions are organised under cooperative financial institutions, group

lending individual lending, self help groups (SHGs), and village banking which dertemine
their approaches to lending.

13

2.6.1 Co-operative financial institution

These are semiformal financial institutions constitute credit unions, loan and savings
cooperatives and other financial cooperatives. They are commonly known as credit unions or
savings and loan cooperatives and offer savings and credit services to its members. There are
no external shareholders and these operate the same as a cooperative with members
responsible for implementing all its principles. Members who are also clients of the
cooperative are the policy makers. They are either nominated or work on voluntary basis.
They are not often affected by banking regulations but have their own regulations and are
under the regulation of the ministry of finance of the country as claimed by Schmidt (1997).
Individual financial cooperatives are often governed by committees that coordinate activities
of these credit unions, trains and assist their affiliates, act as a point where they deposit and
provide inter lending facilities and act as a link between external donors and the cooperative
system (Schmidt, 1997). They raise capital through savings but obtaining a loan is not so
easy. Loans are granted following the minimalist approach where the loan requirements are
relatively preferable to meet by customers; little collateral is required, character and cosigning for loans between members. Loan sizes are usually based on the savings of individual
members.

2.6.2 Group Lending

Group lending is a method of providing small credits to the marginalised is mainly used by
microfinance institutions that provide loans without collateral. Natarajan (2004) asserts that
interest rates are not much different from those of commercial banks but far lower than those
charged to individuals by money lenders The Grameen bank is a classic example of
microfinance institution adopting this method. There are high repayment rates since all
members are accountable for the debt of a group member according to Stiglitz (1990). Group
formation is made up of members who know each other very well or have some established
social ties. Loans are provided to members as a group rather than individuals; and the whole
group stands as collateral which is termed social collateral. Armendariz (1994) suggests that
it is a measure to curb the problems of adverse selection as well as reduce costs of
monitoring loans as members are liable for the loans.

14

2.6.3 Individual Lending

This is the lending of loans to individuals with collateral. Besley and Coate (1995) propose
that it is an advantage over group lending as some members of groups may default in
repaying their loans. Montgomery (1996) in support of individual lending adds that this
method of lending avoids the social costs of repayment demands that are exerted to some
group members in case of default. Stiglitz (1990) points out that members in group lending
bear high risk because they are not only accountable for their loans as individuals but for that
of all group members loans. Navajas et al. (2003) suggested the importance of regular visits
to the clients to ensure the effective utilisation of credit. These monitoring is important while
it increases operating costs to the microfinance institution at the same time.

2.6.4 Self-help groups (SHG)

Self helps groups are common among women in rural areas who are involved in income
generating activities according to Ajai (2005). Availing credit to women through SHGs is
considered effective means of empowering them. This group is an institution that assists its
members sustainably with the essential inputs to improve their livelihoods. A self help group
provides its members, in addition financial intermediation, services like health awareness
programs, environmental support and education. These SHGs are supported both financially
and technically and to enable them carry out income generating activities such as; tailoring,
bee keeping, weaving and hairdressing, among others. Ajai, (2005) asserts that this institution
has a bureaucratic approach of management and is an unregistered group of about 10 20
members who have their priorities as savings and credit. Members of SHGs have set dates
where they contribute constant and equal sums of money as savings. These savings are then
given out as loans to members in need for a fixed interest rate (Bowman, 1995).

2.6.5 Village Banking

This is a method of lending to individuals who have constant access to money for their small
business daily transactions (Nelly and Stock, 1998). Borrowers, under this method, are
appraised in relation to being able to earn money sustainably. Loans would enable them to do
more business and increase profitability. There are relatively high interest rates that make the
15

model financially sustainable. Hatch and Hatch (1998) claim that village banking loans and
savings continue to grow over time.
2.7 Lending methods and used by MFIs
This section discusses the various lending methods used by MFIs in offering credit to small
businesses.

2.7.1 Financial Statement Lending

Financial statement lending refers to the issuing of loans based on the strength of a clients
financial statements. Berger and Udell (2004), suggest that borrowers provide informative
financial statements as an important requirement for this lending technique. Audited financial
statements would be preferred. Microfinance Institution s will seek out to lend those
borrowers with good financial perfomance and sound expected future cashflows. Contrary to
the idea of MFIs helping small businesses, this form of lending shuts out small businesses as
most of them do not have financial statements. Colletaral can be used as as a secondary
source of repayment.

2.7.2 Small Business Credit Scoring

This is a lending method based on the information available about the business and its owner.
Lenders under this method compile information about the owner which is primarily personal
consumer data such as personal income, debt, financial assets and home ownership obtained
from consumer credit bureaus (Feldman 1997). Inorder to evaluate a borrowers credit
worthiness the data is entered into a loan performance prediction model, whose score would
form basis of underwriting decisions.

Nakamura (1993) emphasizes the existence of

significant information asymmetries between borrowers and lenders in small business credit
markets. Such market imperfections are believed that they can result in credit rationing by
lenders, especially when loans are unsecured (Stiglitz, 1998). However, borrowers and
lenders use long term relationships as a counter strategy to mitigate such problems as this
will generate useful information about the borrowers as suggested by Frame, 1994.

16

Moreover, small businesses are thought to be dependent on local banks for such relationshipbased borrowing.

2.7.3 Asset-Based Lending

Asset-based lending is a form of secured lending that is principally based on the quality,
value and adequacy of the collateral that a borrower pledges. MFI would look at a firms
underlying assets as the primary source of repayment. Under asset based lending, the lenders
interest is secured by the borrowers assets (collateral), which forms the basis for the
determination of the amount of credit a borrower can access. Financial institutions would
require short term highly liquid assets like inventory and accounts receivables for working
capital financing. On the other hand, assets like equipment and motor vehicles would be
required for long term financing.

2.7.4 Relationship Lending

Relationship lending is designed to address information problems that are not feasible or
cost-effectively solved by the other technologies. The primary information used by lenders is
based on soft information about the relationship between the lender and the borrower
(Rajan:1992). Under relationship lending, the lender acquires proprietary information about
the borrower and the business over time with respect to the provision of loans (Petersen and
Rajan:1994, Berger and Udell:1995) and the provision of other products (Nakamura:1993,
Cole:1998, Mester, Nakamura, and Renault:1998, Degryse and van Cayseele: 2000).
Relationship lenders collect information beyond that which is available on the firms
financial statements or readily available to the public. This includes information on the
entrepreneurs local community/business environment and the entrepreneur and the small
businesses interaction with that environment. The labour-intensive nature of relationship
lending makes it quite costly. These costs may be passed on to the borrower in the form of
higher fees and a higher interest rate. Under many circumstances opaque borrowers have an
alternative to relationship borrowing.
2.8 The Definition of small business from the Zimbabwean perspective
17

Small businesses in have been defined differently world over. Business scale is usually
measured in terms value of assets, turnover and number of employees. The most commonly
used criterion is the number of employees of the enterprise as suggested by Kayanula and
Quartey, (2000). The value of assets of the firm has also been used as another criterion for
defining small businesses. Steel and Webster (1991) defined small business in Ghana as
enterprises with employment cut-off point of 30 employees. Osei et al (1993), on the other
hand classified small businesses s into three categories which are micro employing less than
6 people; very small employing 6-9 people and small employing between 10 and 29
employees.
In Zimbabwe small businesses are usually defined in terms of turnover and number of
employee. Below are some of the definitions of small business in Zimbabwe:

Small and Medium Enterprise Association of Zimbabwe (SMEAZ) defines a small

business as one with a turnover of less than US$240 000 or assets less than US$100
000.

ZIMRA defines a small company as one with six to 40 employees, annual turn-over
of US$50 000 to US$500 000 and assets valued at between US$50 000 to US$1
million.

The researcher in this study defines a small business as an enterprise employing less than 30
people.
2.9 Types of small businesses
According to Ledgerwood (1999), small businesses exist at different levels and the products
and services provided to them by the MFIs are aimed at addressing their financing needs.
Small business financing is determined by the level of development of the firm. Small
business exist either in the start up phase or existing one phase. The various stages of
development of small business are stable, unstable, or growing.

18

2.9.1 Start-up or existing small businesses

Microfinance institutions consider whether to focus on already existing entrepreneurs or on
potential entrepreneurs seeking finance to start up new business ventures when identifying
the market. Working capital was identified by Berger and Udell (2004) as the main challenge
in the development of already existing small businesses who borrow finance mostly from
informal financial providers such as; families and friends, suppliers and moneylenders.
Findings of a survey by Hulme and Mosley (1996) found out that most finance obtained from
such informal financial services bear high interest rates and they do not benefit from other
services offered by the formal financial services providers. MFIs find it less risky to deal
with existing small enterprises because they have a history of success as postulated by
Ledgerwood (1999).
Businesses that are financed by MFIs from scratch consider that they will create an impact in
the society by alleviating poverty by increasing their level of income. An integrated approach
lay down the foundation for start-up businesses to pick up since financial services alone will
not help them. They need other services such as skills training and to equip them with all the
necessary tools that can hinder them from obtaining loans. Existing businesses with part of
their capital being equity is preferred by most MFIs to work with since the level of
involvement is high and consequently lower risk (Ledgerwood, 1999).

2.9.2 Levels of small business development

MFIs provide small business products and services based on the level of development of the
businesses. Ledgerwood (1999) grouped small into three main levels of business
development for the purposes of accessing financial services.

Unstable survivors are enterprises that are considered not credit worthy for financial
services as they are generally not sustainable as proposed by Ledgewood (1999) and
supported by (Sharma and Buchenrieder, 2002). Unstable survivors are believed to
survive only for a limited time and MFIs find it expensive and time consuming to try
and make efforts to assist such small businesses with extra services like capacity
building.
19

Stable survivors are those who gain from having access to the financial services
provided by MFIs to address their production and consumption needs. Stable
survivors were mostly found to be women who engage in kinds of business activities
to provide basic needs such as food, water, child health, cooking for the household
according to Ledgerwood (1999). These types of small enterprises rarely grow due to
small profit margins which inhibit reinvestment and an unstable operating
environment caused by seasonal changes which makes them to consume at the
expense of investing in their businesses.

Growth enterprises are small enterprises with high prospects to grow. MFIs focusing
on these types of small enterprise are those that have as goal to create jobs, and to
move small entrepreneurs from an informal to a formal sector (Ledgerwood, 1999)..
MFIs prefer serve the needs of this group since they are more reliable, have high fo
potential for future business and are the least risky.

2.10 Significance of Small businesses to the Economy

The private sector is the engine of growth of the economy therefore they must be given the
necessary tools to increase their growth (Anyima-Ackah, 2006). Small businesses are
considered vital in many economies as they create employment, contribute to a nations
revenue and are innovative. Beck and Kunt (2004) are of the opinion that small business
activity contribute immensely to economic development because of their large numbers in
most developing nations. Small businesses play significant role in economic development by
providing employment opportunities, opening up new business opportunities, enhancing
entrepreneurship, and fostering creativity among many other things. Mensah (2005) observed
that small business encourage competition and entrepreneurship therefore recommends that
direct government support can enhance economic growth and development. Small business
growth boosts employment more than large enterprises because of their labour intensive
nature and make efficient use of with small amounts of capital.
Small businesses are also important in the fight against poverty especially in developing
countries as they employ poor and low income workers and are often the only source of

20

employment in marginalized societies. Their contribution in poverty alleviation cannot be

overlooked.
2.11 Small business growth
Growth is one of the primary goals of small businesses. The term growth Penrose (1995) can
be defined as an increase in size or other objects that can be measured or a process of
changes or improvements. The firm size is the result of growth over a period of time and. The
growth of small businesses can be determined by supply of financing, labour and appropriate
management and profitable opportunities for investments. Enterprise development services or
capacity building are like marketing and technology services, production training, business
training, and subsector analysis and interventions are provided in an effort to stimulate
business growth (Ledgerwood, 1999). Enterprise development services can be classified out
into two categories. The first is enterprise which is the offering of training to individuals to
acquire specific skills in a particular sector as well as those who want to start up their own
business. The second category of service is rendered to its clients in enterprise transformation
which is the provision of technical assistance, training and technology in order to enable
existing small businesses to advance in terms of production and marketing. The enterprise
development services may be very important to businesses but the impact and knowledge
gained is difficult to measure since it does not usually involve any quantifiable commodity.
Ledgerwood, (1999) observed that there is little or no difference between enterprises that
receive credit only and those that receive both credit and additional enterprise development
services.
The principal indicators of small business growth are basically level of sales, profitability,
job creation and value of asset as cited by Storey (1994).

Market size
The size of the small enterprise market is estimated by the MFIs to ascertain if it can benefit
from financial services offered, in case self reported credit need be confused with the

21

repayment capacity and effective demand. The market for MFIs takes into consideration the
type of microenterprise being financed and the characteristics of the population group.
2.12 Characteristics of the target population of microfinance institutions

Female clients/ Empowerment

Most MFIs direct their efforts in empowering the women by who are generally considered
marginalised especially in African economies as suggested by Moyoux (2001). They seek to
afford women equal opportunities to those of men. The poorest people in the society are
commonly women and they are responsible for the upkeep of families including education
and health. Cultural barriers are characteristic in African communities where women are
known to stay at home making thereby depriving them of access to financial services. Some
financial institutions are unwilling to lend women because most of them do not possess any
property acceptable as colletearal security as contended by Paxton (1996). Based on research,
women generally are very responsible (Moyoux, 2001); when the income level of a woman
increases, the effect is noticed throughout the household and into community than with a man
(Paxton, 1996). They are also the least defaulters and have high savings rate compared to
their male counterparts as observed by Ledgerwood (1999).

The level of poverty

Poverty alleviation is the focal point of microfinance institutions and the poorest form a
majority of the population. The outreach of microfinance services to the poor is measured in
terms of scale, the number of clients that is reached and the depth of the clients they reach
(Ledgerwood, 1999). (Hulme and Mosley, 1996) suggest that institutions contributing in the
fight against poverty are very effective in the improvement of the welfare of those under and
those just above the poverty line.

Geographic focus

MFIs serve both rural and urban areas but their focus is more in the rural areas which are
considered marginalised according to Ledgerwood (1999). Products and services provided by
22

the MFIs are intended to meeting the expectations of the target location or area. Those in the
rural areas have greater need for microfinance than those in the urban areas and the
infrastructural development in those areas also matters. The challenge to produce and
distribute goods because of lack of infrastructure will hamper growth of businesses thus
limiting the financial services that will be available. Grameen Bank is a good example of a
successful microfinance institution that has branches in geographical areas right where their
clients are located as claimed by Ledgerwood (1999).
2.13 Constraints to small business financing
Financial support to small businesses has remained limited, due to a number of factors,
hindering their ability to grow and contribute meaningfully to the economic recovery of the
nation. These factors include the following:

2.13.1 Problems Associated with MFIs

The below discussed are problems associated with microfinance institutions that limit their
ability to extend credit to small businesses.

MFIs risk-averse behaviour

Most MFIs especially are hesitant to lend to small businesses which are perceived to be high
risk due to high rates of business failure as proposed by RBZ (2009). The absence of credit
reference bureau for tracking defaulters has compounded the risk-averse behaviour of MFIs
as most small businesses particularly start-ups lack borrowing history.

Lack of understanding of to small businesses needs

Pack (1993) observed that MFIs do not fully understand the nature and operations of small
businesses thereby hindering their ability to assess business feasibility and financing needs of
to such businesses. As a result, microfinance institutions fail to offer appropriate products to
suit to small businesses.

Cumbersome administrative procedures:

23

There relatively large numbers of small businesses which require small loan amounts
required make small businesses financing cumbersome and expensive to administer (RBZ,
2009). A loan amount of say $100,000.00 which can be ordinarily lent to one client could be
lent to 200 small businesses getting $500 each.

High lending rates:

Due to the high risk associated with small businesses, microfinance institutions charge a risk
premium, resulting in high borrowing costs. RBZ (2009) is of the opinion that the high
interest rates charged by MFIs are also not conducive to the development of small businesses.

2.13.2 Problems associated with small businesses

The below discussed are problems associated with small businesses that compromise their
ability to obtain finance from microfinance institutions.

Lack of suitable collateral

Due to the perceived risk related to small businesses, microfinance institutions demand
collateral which most small businesses, particularly start-ups fail to avail. On the other hand,
microfinance institutions which conventionally are expected to place less dependence on
collateral are also demanding security from the small businesses. As a result many small
businesses are left to rely on informal sources of funds such as family, friends, supplier credit
and customer advances because the formal banking sector prefer selected customers such as
large corporations with collateral, thus crowding out small businesses.

Inadequate financial records

Many of small business enterprises are owner or family operated. As a result, they do not
usually keep business and personal finance separate as observed by RBZ (2009). Further,
many small businesses do not have adequate skills to ensure maintaining of financial records
and accounts. This is worsened by the lack of investment in information technology and
accounting systems.

24

Informalisation of Operations

Many small businesses have poor corporate governance systems resulting in lack of
professionalism as highlighted by RBZ (2009). In addition, most small businesses do not
have adequate succession planning structures which are required for sustainable business
operations.

Weak Managerial Capacity

Many small businesses lack skilled manpower and managerial capacity as suggested by
Barnes (2001). In support of this view RBZ (2009) claim that a large number of small
businesses are owner managed and operated compromising professionalism in the manner
the businesses are run. This results in limited ability to manage the operating environment in
a sustainable manner.

Diversion of Funds

Small business operators often divert funds from the proposed business purpose resulting in
high default rates. As such small businesses are perceived risky at loan repayment. Due to the
relatively high prevalence of non-performing assets in the small businesses sector, MFIs
become too strict in lending this sector. Scattered research suggests that less than half of loan
proceeds are fully used for business purposes (Bennett, 1997). The remainder is used for a
wide range of household needs, including stabilizing consumption and other cash needs like
education fees, medical expenses, or lifecycle events such as weddings and funerals as noted
by RBZ (2009).

Inconsistency in Products and Services offered

Most small businesses lack adequate technology and skills to ensure production of
standardized quality products and services. In addition, small businesses fail to establish
backward and forward integration with key stakeholders such as suppliers and their markets.
This limits their chances of survival, particularly in the face of fierce competition.

2.14 Capital requirements considerations of small businesses

25

Small businesses rely mostly on informal finance as sources of start-up capital for their
businesses since credit markets are limited. Most of the start-up capital of small businesses is
personal savings and borrowed money from friends and relatives. Few obtain start-up capital
the formal institutions like banks. The granting of loans for large enterprises is relatively easy
than for small ones (Gary and Guy, 2003). Microfinance institutions consider ones ability to
honour debt and assess the minimal amount small scale businesses can contribute as equity
before granting a loan. The rationale to this is that business should not be entirely financed
using borrowed money. A business that is in the start-up phase would it require assets of a
minimum value for the MFI to consider the loan application. In situations where enterprises
are unable to meet the required equity capital, some MFIs would require household items to
be held as a security before the loan can be granted. These microfinance institutions use some
form of financial and psychological judgements and grant loan to prospective borrower upon
satisfaction. (Zeller, 2003) proposes that people generally care more for they have worked for
or things that they own which explains the idea why MFIs see it necessary for borrowers to
meet minimal equity contribution in order to apply for a loan. Enterprises with little
borrowed capital stand a better chance of obtaining financial assistance from the MFIs as
claimed by Ledgerwood (1999).
2.15 Alternative Sources of Small Business Financing
There are a number of alternative sources of financing available to small businesses which
include friends and relatives, business suppliers, banks and joint ventures among others.

Friends and Relatives

Loans and aid from friends and relatives are a common source of funds to small businesses,
especially for start-ups since the financial institutions are reluctant in funding because of the
risk involved. Friends and relatives usually interfere with policy and operational issues
(Kuriloff et al. 1993; Longenecker et al. 1994). Many friends and relatives find it very hard to
stay as passive creditors or investors thereby making this source of financing complicated.

Banks

26

Hisrich and Peters (1995) assert that banks constitute the most widely used source of
financing for small enterprises. Supported by Longenecker et al. (1994), they claim that
banks offer loans to small businesses mostly short-term, though a few offer long-term loans.
According to Kuriloff et al. (1993), banks usually working capital financing or for the
purchase of capital equipment. They require evidence of a businesses ability to pay the laon
as scheduled. This evidence required is usually in the form financial statements. They also
require some form of security in the event of default .

Business Suppliers

Small businesses can enjoy some credit from their business suppliers known as trade credit,
equipment loans and leases. Suppliers allow the enterprise a credit period for the supplies
whose period vary from a few days to a number of years according to Broom et al. (1983).

Trade Credit it involves the purchase of goods and services from a supplier on
credit. The purchaser is allowed a few days usually between 30 and 120 days, to settle
the credit (Broom et al. 1983). This form of credit is very important to small
businesses as it is flexible on terms and conditions of credit and amount of credit can
always be reviewed.

Equipment Loans and Leases are important as many small businesses find it
difficult to raise funds for purchase of equipments and machinery. They resolve to
purchasing such equipment in installments as noted by Longenecker et al. (1994).
This practice is known as equipment loans. A substitute to this is leasing of
equipment. This agreement allows firms greater flexibility in investments and smaller
amounts of capital are needed by the firm at any given time (Broom et al.,1983).

Personal Resources

Longenecker et al. (1994) found out that personal savings owners of businesses constitutes
an important source of financings, particularly in the start-up stages. Significant financial
contributions made by owners of a business tend to build confidence among potential
investors. Kuriloff et al. (1993) suggests that other personal resources apart from personal
savings include borrowing using the owners assets as collateral.
27

Joint Venture

There are various forms of strategic alliances which can be taken advantage of by small
businesses. The most common is joint ventures. A joint venture typically involves two or
more enterprises come together to form a new entity. Combining the resources of the
enterprises involved in a joint venture often leads to the synergy. The new enterprise may be
able to operate more effectively and efficiently.
2.16 Arguments on why microfinance has not worked
Various scholars have put forward arguments of why microfinance has not worked as
intended.

Household debt

Dichter (2006) observed that microfinance has often been utilized to cater for basic
consumption needs rather than drive enterprise. In light of such evidence, the microfinance
sector now represents consumption smoothing as a new argument for microfinance as
described by Collins et al. (2009). Consumption smoothing can definitely reduce risk, but it
can also lead poor persons to substituting microcredit for non-existent income unsustainably.
Growing reliance upon microcredit alongside high interest charges results in a growing
proportion of the unsteady income of the poor being drawn off to cater for interest charges.
This was the dynamic behind the microfinance crisis in India as suggested by Srinivasan
(2010). Muhammad Yunus claimed that microfinance would help to separate the poor from
loan sharks charging ridiculous interest rates as cited by Kevany (2010) thereby the need to
promote microfinance to international donors. By granting social legitimacy upon microfinance, rather than loan sharks, poor remain exposed to debt. Untenable microcredit
indebtedness characteristic in developing countries like India and Bangladesh (Banking with
the Poor, 2009).

Market saturation and displacement

28

Hasluck (1990) found out that poor communities in advanced countries often experience
significant displacement effects. The research showed that demand for the basic products
and services of most small enterprises is generally limited, with new enterprises doing little
more than displace existing enterprises. Only a few additional jobs or income are created as a
result.

Promoting growth and development

Robinson (2001) is argues in support of microfinance promoting growth and development

claiming that it helps to grow successful hubs of entrepreneurial activity with many escaping
poverty by building their small enterprises. Storey (1994) proposes that policy-makers should
consider the dangers linked with the high rates of failure for small enterprises especially new
start-ups. For instance, George (2005) found a study that less than 2% of small enterprises
continued to operate three years after their establishment. Similar observations were made in
Bosnia and Herzegovina where up to 50% of small enterprises collapsed within one year of
their establishment (Demirg-Kunt et al., 2007). Such failure can lead to irreversible
poverty as claimed my Davis (2007). A common assertion made that microfinance can lessen
the credit constraints of potential entrepreneurs in deprived communities precludes enterprise
development (Stiglitz,1998). A differing viewpoint is that credit constraints of small
individual enterprises are not the real problem but rather the overall lack of access to credit
for small and medium enterprises sector that limits microenterprises growing substantially.
In light of the above discussed, access to finance remains a significant constraint to small
businesses in Zimbabwe. Microfinance institutions prefer have a tendency to have harsh
credit conditions that seek to protect their positions against default risk thereby scaring small
businesses away. As a result, small businesses are finding it difficult to obtain financing
thereby necessitating a research on the impact of small microfinance on small businesses in
Zimbabwe.
2.17 Chapter Summary
The chapter gave a review of literature on the concept of microfinance, its products and its
objectives and gave an insight into its role in the growth of small businesses. It also discussed
29

about small businesses, their nature and the challenges they face in accessing finance. It
thereby paves way for research methodology in the next chapter.

30

CHAPTER 3

RESEARCH METHODOLOGY
3.0

Introduction

This chapter focuses on the research methodology used for this study with the purpose of
achieving the research objectives. It discusses the research philosophy, design, research
instruments, sampling procedure, data collection procedure and data analysis procedure. It
also defines the population and sample of the study and highlights issues to do with
reliability and ethical considerations while carrying out the study.
3.1

Research Philosophy

This research will adopt both a quantitative/positivist and qualitative/phenomenology

approach. In the quantitative philosophical approach, scientists give their viewpoint to
evaluate social world with the help of objectivity in place of subjectivity (Cooper and
Schindler 2006). In line with this paradigm, the researcher is interested in gathering general
data/ information from a large sample to capture many various viewpoints as opposed to
focusing details of research. On the other hand, phenomenology seeks to gain understanding
of the subjective view of participants under study in order to be able to draw judgements, and
comprehend their intention and actions in a manner that is meaningful to the research as
coined by Polit et al., (2001). The purpose is mostly to understand in depth the characteristics
of the situation and the meaning brought by participants and what is happening to them at the
moment. It is in light of the weaknesses inherent to each of the approaches that the study
makes use of both approaches. The researcher thereby uses both methods to on the study of
the impact of microfinance on the growth of small businesses in Harare whereupon
conclusions will be drawn and appropriate recommendations will be made.
3.2

Research Design

31

A survey research design is adopted in this research to assess the impact of microfinance on
the growth of small businesses in Harare. A survey is a non-experimental, descriptive
research method as suggested by Saunders et al (2007) where the study can be a case study or
a survey. The researcher chose the survey research as it allows the observation of sampled
elements and variables without making effort to control and manipulate them. Also the
design is chosen because quantitative and qualitative information can be collected through
the use of a semi structured questionnaire.
3.3

Population

The study areas selected for the research are the sites of Siyaso of Mbare and Gazaland of
Highfield and Machipisa. These are the most industrious small business sites of Harare.
These sites fall in the highly populated surbubs of Mbare and Highfield and draw customers
all over Harare. The sampling frame of the study comprised 788 small businesses in Harare.
An enquiry from the Harare Home Industries Association showed that 788 small businesses
have registered with by 31 December 2013 to operate in these areas. In addition, a population
of 103 registered Microfinance Institutions are based Harare according to RBZ MFI Register
(2014) as at 28 February 2014. Registered MFIs have been used for the purposes of this
study. Business activity carried out by small businesses is predominantly trade and commerce
with manufacturing for selected products. Various business activity carried out ranges from
vending, hardware, vehicle repair and maintenance, spare and accessories, electrical products
and services, farming equipment and many more. Commercial activity is basically on
wholesaling and retailing.
3.4

Sampling Procedure

Cluster sampling technique was used to select participants according to areas they operate in
this case from Siyaso, Gazaland and Machipisa. A simple random sampling technique was
used to select a total of 50 small business operators that constituted the sample size. Simple
random sampling was used because it gave all the respondents equal chance of being
selected. Purposive sampling technique was used to select 12 microfinance institutions out of
the registered 103. Microfinance respondents were chosen whose operations are in Harare.
3.5 Research Instruments
32

The study employed the use of questionnaire. The questionnaires were used to gather
information from small business owners and microfinance institutions. The major advantage
of using a questionnaire is that it allows the collection of large amounts of data in a relatively
short time. Also, responses are collected in a standardised way. The availability of a number
of respondents in one place makes possible an economy of time and provides a high
proportion of usable responses (Kaln and Best, 2006). The questionnaire was designed by the
researcher.
3.6

Data Collection Procedure

The research makes use of both primary and secondary data. Primary data from the study was
obtained study through the use of questionnaires. The primary data will that collected from
the field by the researcher from small business operators and microfinance institutions in
Harare.

The researcher personally administered the questionnaires inorder to encourage quick

responses. The effort enables the researcher to clarify some of the items contained in the
instrument with the respondents while, at the same time, respondent attention were drawn to
some items yet to be filled.

Secondary data was collected from reports, magazines from authoritative sources like by the
RBZ and SEDCO and journals papers on the subject matter.

3.7

Limitations

The researcher does not have information of unregistered micro lenders, hence the decision
to limit the research to RBZ registered MFIs. In addition, owing to the time available for this
research, the researcher chose to target small businesses clustered in certain business sites to
enhance speedy administration of questionnaires.

3.8 Reliability
33

In order to collect reliable data, the researcher will design the interviews and questionnaires
through an elaborate procedure which involved a series of revisions under the guidance of the
study supervisors to ensure that fieldwork will be conducted by use of high quality data
collection.
3.9 Validity
To ensure validity study will apply the triangulation technique by using both quantitative and
qualitative approaches. Questionnaires and secondary data will be used concurrently to
collect data. Piloting of the data collection instruments will be done to capture as mush
responses as possible. The data collection instruments will also be designed in a manner that
allows the researcher to measure attitudes and opinions of respondents. Issues developed
from conceptual framework will be compared with issues obtained from interview
questionnaires so as to ensure construct validity.
3.10 Ethical Considerations
The research carried out will be purely for academic purposes. The researcher will disclose
full information on the purpose of the study, his role and status in the study. The researcher
will also get informed consent from the university authorizing participation in the study.
Respondents of the survey will be treated equally and there shall be respect for views and
opinions
3.11 Data Analysis Procedure
Data collected from the questionnaire were analysed, summarised, and interpreted
accordingly with the aid of descriptive statistical techniques such as frequencies and simple
percentage. Qualitative as well as quantitative methods were used in the analysis of the
primary data collected. The quantitative data will be analysed using Statistical Package for
Social Scientists (SPSS) and Microsoft Excel. The findings were presented in the form of
tables, charts and figures.
3.12 Chapter Summary

34

The above discussion gave detail of the how data will be collected, defined the study
population and sample and highlighted important issues regarding validity and reliability of
the study in an attempt to carry out a research in an ethical manner. The data collected in this
chapter will pave way for discussion and interpretation in the following chapter.

35

CHAPTER 4
4.0 DATA PRESENTATION, ANALYSIS AND INTERPRETATION
4.1 Introduction
This chapter is concerned with presentation, analysis and interpretation of findings of the
study with reference to the responses received in the survey. Data will be presented, analysed
and interpreted through the use of relevant tables, figures and charts. Data collected for the
study were quantitatively and qualitatively analyzed.
Two sets of questionnaires were distributed, one category for small businesses and the other
for microfinance institutions. A total of 67 questionnaires were distributed for responses. Out
of 67 questionnaires issued, 62 were received representing an overall response rate of 91%.
Collected responses comprised of 12 completed questionnaires from MFIs, and 50 from the
small business.
Table 4.1 Response rate
Category
Questionnaires issued
Small businesses
50
MFIs
12
Totals
67
Source: Field Survey (2014)

Responses Received
50
12
62

Response rate (%)

100
100
100

4.2 Research findings

4.2.1 Demographics

Table 4.1.1 below shows the gender distribution of small business respondents. There were
33 male respondents representing 66% of responses while 17 were female representing 34%.
This implied that males have a greater entrepreneurial drive than females. From the data,
statistics indicated that 16% of the respondents were below 25 years of age, 28 % were aged
25-34 years, 34% aged 34-44 years, 14% aged 45-54 years while 8% were more than 55
years old. Responses from the survey show that 26% of small business operators are single,
58% are married, 4% are divorced while 12% are widowed. Most of the small business
36

operators were married. The implication is that the married are lured into business because of
the need for extra income to provide their families and growing responsibilities Similar to the
survey carried in Copperbelt Zambia out by Lopa (2009) the married makes up the majority
of small business owners (63.1%). However, contrary to these findings there was an almost
balanced gender distribution with males representing 54% while females represented 46%.

4.2 Gender
Frequency Percent

Male

Valid

Cumulative

Percent

Percent

33

66.0

66.0

66.0

Valid Female 17

34.0

34.0

100.0

Total
50
100.0
Source: Field Survey (2014)

100.0

4.3 Age
Frequency Percent

Valid

Cumulative

Percent

Percent

16.0

16.0

16.0

25-34 years 14

28.0

28.0

44.0

35-44 years 17

34.0

34.0

78.0

Valid <25 years

37

45-54 years 7

14.0

14.0

92.0

55+ years

8.0

8.0

100.0

100.0

100.0

Total
50
Source: Field Survey (2014)

4.4 Marital_status
Frequency Percent

Valid

Cumulative

Percent

Percent

Single

13

26.0

26.0

26.0

Married

29

58.0

58.0

84.0

4.0

4.0

88.0

Widowed 6

12.0

12.0

100.0

Total
50
Source: Field Survey (2014)

100.0

100.0

Valid Divorced 2

Of the 50 small business respondents, 21 were educated up to ordinary level, 7 up to

Advanced Level, 17 were holders of degrees / Diplomas while 5 were holders of Masters
Degree and above.

The implication is that Degree/Diploma holders are motivated to get into small business
because of the high unemployment they fail to secure formal employment in line with their
qualifications as supported by findings of Bhattacharjee et al. (2008).
38

4.5 Qualifications
Frequency Percent

Ordinary

level

and

below
Advanced Level
Valid Diploma/ Degree
Masters

Degree

above
Total
Source: Field Survey (2014)

and

Valid

Cumulative

Percent

Percent

21

42.0

42.0

42.0

14.0

14.0

56.0

17

34.0

34.0

90.0

10.0

10.0

100.0

50

100.0

100.0

The study revealed a declining trend in length of small business operations as shown in FIG
below. It was noted that 32% of small businesses are less than 3 years old, 32% again are
aged 3 4 years while 22% are aged 5 6 years and 14% are 7 years and above. The most
common business carried out falls under commerce with 31 respondents followed by service
with 11 respondents and manufacturing with 8. As supported by Ledgerwood (1999), small
businesses exist for a limited period of time, and are termed stable survivors. He also claimed
39

that these are less preferable to serve. A cross tabulation between period of business
operation and number of people employed also showed an association between the two
variables as showed by results of the chi-square test (p=0.00). The implication is that small
businesses create more jobs as kthey grow. This finding is similar to that of Ledgerwood
(1999) that growth enterprises tend to create more jobs.

Period of business operations*type of business carried out

16
14
12
10
8
6
4
2
0
Primary_business Manufacturing Primary_business Commerce
Primary_business Service

Fig 4.1

Table 4.6 Commencement_of_operations * Number_of_people_employed Crosstabulation

Count
Number_of_people_employed

40

Total

0-5 people 6-10

Commencement

of_operations

11-15

16-20

people

people

people

0-2 years

14

16

3-4 years

12

16

5-6 years

11

29

18

50

7 years and
above
Total

Table 4.7 Chi-Square Tests

Value

df

Asymp. Sig.
(2-sided)

Pearson Chi-Square

34.109a

.000

Likelihood Ratio

30.712

.000

17.270

.000

Linear-by-Linear
Association
N of Valid Cases

50
41

a. 11 cells (68.8%) have expected count less than 5. The

minimum expected count is .14.
Source: Field Survey (2014)
Accessibility of credit by small businesses
The research showed that only 6 small business operators had enough financing while 44 did
not. Lack of financing is a serious challenge facing small businesses growth as postulated by
RBZ (2009).

Availability of adequate financing

Yes; 12%

No; 88%

Fig 4.2
42

Source: Field Survey (2014)

The survey found out that banks were the most preferred source of financing with a
frequency of 24 out of 42. MFIs were ranked second with a frequency of 10. Friends and
relatives and other sources had frequencies of 4 each. Other sources observed included
partnerships and trade credit.

Prefered sources of financing

Other
Friends and relatives

Frequency

MFI

Bank
0

10

15

20

25

30

Fig 4.3
Source: Field Survey (2014)

4.8 Have_you_ever_applied_for_credit_from_an_MFI
Frequency Percent

Valid Yes

28

56.0

Valid

Cumulative

Percent

Percent

56.0

56.0
43

No

22

44.0

44.0

Total 50
100.0
Source: Field Survey (2014)

100.0

100.0

Out of the 50 respondents in the study, 38 indicated that they would not want to borrow from
MFIs. The majority (17 respondents) indicated that interest rates charged by MFIs were high,
7 respondents indicated that that they feared defaulting, 6 respondents were not happy with
the short loan tenures of MFIs while 4 claimed the loan amount were too little. The
remaining 4 respondents had other reasons.

Reasons why small businesses despise MFIs

Other

Fear of default

7
Frequency

Loan amounts are too low

Short loan tenure
High interest rates

4
6
17

0 2 4 6 8 10 12 14 16 18

Fig 4.4
Source: Field Survey (2014)

44

Reasons for borrowing from MFIs

Other
Accessibility

Frequency

Capacity building

Speed of processing loans

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5

Fig4.5

Lending technologies used by MFIs

Group Lending; 18%

Asset based lending; 82%

Fig 4.6
Source: Field Survey (2014)
It was observed that MFIs used predominantly asset based lending as 23 out of 28 small
business operators accessed asset secured loan while 5 accessed under group lending method.

45

Survey findings show that microfinance has a generally positive impact on sales volumes. 12
small business operators were of the perception that sales volumes slightly increased as a
result of microfinance credit while 16 perceived an increase. There is an average 69.2%
positive impact of microfinance on sales volumes of small business.

According to the below graph, microfinance has had the most desired impact on sales
volumes which recorded a frequency of 16 and the least desired impact on liquidity with a
frequency of 0 out of 28. On the other hand, the most undesired impact of microfinance was
recorded on liquidity were 6 respondents claimed that microfinance had a negative impact on
liquidity of their enterprises. Most of the small business respondents claimed that
microfinance had no impact at all on management skills, employment creation and value of
assets.

Impact on liquidity
Impact on management skills
Decreased
Slightly Decreased

Impact on sales volumes

Did not change

Slightly increased

Impact on number of employees

Increased

Impact on value of assets

0 5 10 15 20 25

Fig 4.7
Source: Field Survey (2014)

46

4.9 Crosstab Use of loans*Existence of capacity building

Count
Use of loans

Total

Other

Family

Personal

business

upkeep

emergencie of

expenditure

Acquisition None
non

business
assets

Does_your_MFI_of Yes

19

Total
1
Source: Field Survey (2014)

14

28

fer_capacity_buildi
ng

No

4.10 Chi-Square Tests

Value

Df

Asymp. Sig.
(2-sided)

Pearson Chi-Square

13.263a

.010

Likelihood Ratio

16.916

.002

47

Linear-by-Linear
Association
N of Valid Cases

8.736

.003

28

a. 9 cells (90.0%) have expected count less than 5. The

minimum expected count is .32.
Source: Field Survey (2014)
The survey findings revealed that there was a significant positive relationship between
capacity building and loan use (p = 0.010). However, contrary to Ledgerwood (1999)
observations, capacity building had an impact on enterprise development.
It was observed in the study that 5 out of 12 MFIs (41.7%) were below 2 years old
representing the majority. 25% of MFIs were 3- 4years, 16.7 were aged 5 6 while 8% were
more than 6 years old. Of the 12 microfinance institutions, only 3 (25%) offered capacity
building to ensure effective of credit while 9 (75%) did not.

Period of business operations

6
5
4
3

Frequency

2
1
0

Fig 4.8
Source: Field Survey (2014)
48

Existence of capacity building services

Yes

No

25%

75%

Fig 4.9 Source: Field Survey (2014)

It was observed in the study that the success rate of loan applications ranged from 41% up to
100%.The majority (50%) of MFIs claimed to have a success rate of 81 10% for loan
applications while 33% had a success rate of 61 -80% and 17% had a success rate of 41
60%. This is illustrated in FIG below.

Success rate for loan applications

41 - 60%

61 - 80%

81 - 100%

17%
50%
33%

49

Fig 4.10
Source: Field Survey (2014)
Challenges faced in financing small businesses
The capital adequacy of MFIs posed a major limitation in financing of small business. The
study found out that 7 (58%) of MFIs did not have adequate capital to meet financing
requirements of their clients while 5 (42%) had adequate capital. Due to limited capacity to
finance small business MFIs end up setting maximum loan amounts. The FIG below shows
that 16.7% offer loans up to $2500, 33.3% up to $5000, and another 33.3% up to $7500
while only 33% offered more than $10000. Furthermore, of the 7 MFIs that did not, have
adequate capital to meet clients requirements, 2 (29%) managed to handle 41-60% of
potential capacity while 5 (71%) could manage 61-80%. This represents a major deficiency
in the financing of small businesses.

MFI capital adequacy

Yes

No

42%
58%

Fig 4.11
Source: Field Survey (2014)

50

Maximum loan amount granted

4.5
4
3.5
3
2.5
2
1.5
1
0.5
0

Frequency

Fig 4.12
Source: Field Survey (2014)

Possible capacity
41 - 60%

61 - 80%

29%

71%

Fig 4.13
Source: Field Survey (2014)

51

The limited financing capacity on the part of MFIs because of limited capital has an effect on
the uptake of credit by small businesses. It has resulted in some of the following:

Shunning of MFIs by small businesses when operators deem the amounts offered too

low
Turning down of some credit applications by MFIs in the event that they cannot grant

requested loans beyond their capacity as illustrated in FIG

Credit rationing by MFIs as suggested by (Stiglitz, 1998).

The above highlighted give an indication that MFIs are operating on thin capital bases and
cannot fully meet loan demands of small businesses as claimed in press a statement by
Chitambo (2013)

Research findings claim that 33.3% of MFIs have average interest rates of 6 10%, 25%
have interest rates ranging 11 15%, 33.3% have interest rates of 16 20% while 8.3% have
interest rates of above 20%. A cross tabulation of interest rates and default rate show at 95%
confidence level interest rates do not influence clients ability to meet their loan obligations
as shown by shown by the p value of 0.322 in the table below.

4.11 Average_monthly_interest * Default_rate Crosstabulation

Count
Default_rate

6 - 10%

Total

0 - 20%

21 - 40% 41 - 60% 61 - 80%

1
52

11 - 15%

Average_monthly_inter 16 - 20%

12

est
Above
20%
Total
Source: Field Survey (2014)

4.12 Chi-Square Tests

Value

Df

Asymp. Sig.
(2-sided)

Pearson Chi-Square

10.357a

.322

Likelihood Ratio

10.214

.333

3.236

.072

Linear-by-Linear
Association
N of Valid Cases

12

a. 16 cells (100.0%) have expected count less than 5. The

minimum expected count is .08.
Source: Field Survey (2014)

Accessibility of microfinance by small businesses

53

The study found out that MFIs mostly prefer to offer credit for working capital purposes
which was ranked 1 by respondents with a weighted average score of 1.25. Order financing
was preferred second with a weighted score of 1.75 while capital financing was least
preferred with a weighted score of 2.33 as illustrated in TABLE below. Indications are that
MFIs prefer working capital financing because of their low credit ceilings, short loan tenures
and incapacity to finance all successful applications. Long term capital projects are least
supported.
Loan Purpose

Average

Rank

Working capital

Score
1.25

Order financing

1.75

Capital financing

2.33

Source: Field Survey (2014)

The table below shows the relationship between loan tenure and maximum loan amounts
granted. The majority of MFIs (5) have loan tenures of 0-3 months while only 2 have long
loan tenures of more than a year. On the other ;hand , 2 MFIs have maximum credit set at
less than $2500 while 2 again have maximum credit of $10000 and above. The cross
tabulation of loan tenure and maximum amount of credit granted shows that there is an
association of the two at 95% level of confidence (p=0.012). This result indicates that the
majority of MFIs prefer short term financing because of their thin capital bases.

4.13 Loan_tenure * Maximum_amount_of_loan_granted Crosstabulation

Count
Maximum_amount_of_loan_granted
$2500

and $2501

below

$5000
54

- $7501
$10000

Total
- $10001 and
above

0-3 months

4-6 months

10-12 months

12

Loan_tenur
e

More

than

12

months
Total
Source: Field Survey (2014)

4.14 Chi-Square Tests

Value

Df

Asymp. Sig.
(2-sided)

Pearson Chi-Square

21.200a

.012

Likelihood Ratio

21.363

.011

8.385

.004

Linear-by-Linear
Association
N of Valid Cases

12

a. 16 cells (100.0%) have expected count less than 5. The

minimum expected count is .33.
Source: Field Survey (2014)
55

Challenges MFIs face in granting credit

Efforts of the MFIs in financing small businesses were due to a number of challenges
observed during the study. Out of 12 MFIs, 8 pointed out the high default rate of small
businesses as a challenge they face in their operations. The high rate of default is associated
with the instability of small businesses. Lack of acceptable was a common observation
among the majority of MFIs whose loans were primarily asset based, and the represented
75% of total responses. MFIs unanimously pointed to misappropriation of loans a challenge
they face when dealing with small businesses. Half of responses from MFIs cited lack of
credit history as challenges they face in granting credit while 7 out of 12 cited lack of
relevant documentation like business registration documents and financial records. Other
challenges faced by 41.6% of MFIs include unwillingness to meet loan obligations by small
businesses, non disclosure of other financial obligations by MFIs and general economic
challenges.

Challenges faced by MFIs in granting credit

Other
Lack of relevant documentation
Lack of credit history
Misappropriation of loans
Inadequate security
High risk
0

Challenges faced by MFIs in granting credit

Fig 4.14
Source: Field Survey (2014)

Effective credit utilization

56

10

12

14

A cross tabulation of responses by MFIs between the requirement of collateral and default
rate shows no relationship as proven by chi-square value (p=0.223). It therefore does not
follow that the requirement of collateral does not encourage clients fail to repay their loans.
This is contrary to observations made by Buckley (1997) that there is minimum default on
asset based loans compared to others.

4.15

Default_rate

Do_you_always_require_colleteral

Crosstabulation
Count
Do_you_always_require_col Total
leteral
Yes

No

21 - 40% 2

41 - 60% 0

61 - 80% 2

12

0 - 20%

Default_rat
e

Total
9
Source: Field Survey (2014)

57

4.16 Chi-Square Tests

Value

Df

Asymp. Sig.
(2-sided)

Pearson Chi-Square

4.381a

.223

Likelihood Ratio

5.120

.163

.078

.780

Linear-by-Linear
Association
N of Valid Cases

12

a. 7 cells (87.5%) have expected count less than 5. The

minimum expected count is .25.
Source: Field Survey (2014)

58

CHAPTER 5
5.0 CONCLUSIONS AND RECOMMENDATIONS
This chapter presents a summary of findings of the research, addressing the research problem
and gives recommendations based upon the research findings. It also provides
recommendations for further studies.
5.1 Conclusions
Importance of small businesses
Small businesses play an important role in the in the economy. Small businesses have an
immense contribution in the creation of employment. Small businesses are made up of
various sub-sectors such as; commerce, service, manufacturing and other artisan bodies. The
research shows that the small businesses are largely dominated by commerce which is
basically buying and selling. This is due to the fact that very little capital is needed to begin
and operating such businesses requires minimum regulatory processes.
The research revealed a downward trend in the number of small businesses over time
implying that most small business are closing shop because of various reasons including
financing challenges. Small businesses are also exploiting new opportunities in the market
which cannot be efficiently exploited by large corporations.
Access to credit
The study found out that MFIs do not have adequate capacity to deal with financing needs of
small businesses. As observed, the majority of MFIs (58%) did not have enough funds to
meet loan requirements of their clients, not mentioning those who do not even approach
MFIs for credit. In order to deal with inadequate capacity, MFIs have resorted credit
rationing and directing preference to short term financing in the form working capital
financing.
Challenges faced by small businesses in accessing credit

59

Despite the contribution of MFIs in the activities of small businesses, there are some
challenges that small businesses face in the process of accessing credit. Some of the small
business respondents find the process of accessing credit as cumbersome. Some these
challenges are:

Some small business operators borrow from many different financial institutions and
fail to disclose such borrowings when they seek additional funding from MFIs. This
results in the overburdening of small businesses cash flows thereby compromising

their ability to service their debts.

Some small businesses do not have sufficient assets to satisfy asset based lending

requirements of microfinance institutions.

High interest rates charged by MFIs deter small businesses from lending and is the

major reason for default to those who acquire lending as well.

Misappropriation of loans is common among small business operators
Most small business operators do not have adequate documentation like business

registration and financial records to facilitate their loan applications.

Other challenges include unwillingness of small business operators to repay loans,
and lack of professionalism.

Effective utilization of credit

Most small business operators have misappropriated credit because of the general
inseparability of business and personal needs. Business loans have often been used for
personal emergencies, family upkeep and acquisition of non business assets in most cases.
However, most of the small business operators that received capacity building services
effectively utilized their business loans as opposed to those who did not.
Impact of microfinance on small business growth indicators
There was observed a generally good impact of microfinance on sales volumes of small
business operators who received funding from microfinance institutions. It was observed that
access of microfinance had insignificant impact job creation and management skills in small
businesses. They were general indications that microfinance loans were a huge constraint on
the liquidity of small businesses.

60

The research which was undertaken to find the impact of microfinance on the growth of
small businesses reveals that MFIs have little positive impact on the growth of the latter,
notwithstanding the inherent
5.2 Recommendations
In light of the findings made and conclusions drawn from the study, the following
recommendations are made to help enhance the growth of small businesses as far as
microfinance is concerned.
MFIs to boost their capacity
Microfinance institutions should seek more funding in order to boost their capacity to finance
small businesses. They could seeks lines of credit from the mainstream banking system and
also seek aid from non-governmental organizations. Strong capital bases would enhance
MFIs capability to finance required loan sizes in the market and also finance capital
equipment project of small businesses that are currently being neglected as a result of thin
capital bases.
Monitoring of credit
It is the responsibility of MFIs to ensure effective utilization of credit by small business
operators. It is therefore apparent that MFIs revise their systems to encourage effective use of
credit rather than just covering their positions from default risk. For such an effective system,
the researcher would propose that MFIs strengthen their efforts inconstant monitoring of
loans that they advance. This might seem an unnecessary cost to MFIs, but does create
lasting relationships for long term benefit to MFIs and sustained growth of small businesses.
Order financing
Order financing involves MFIs offering short term loan facility that allows small businesses
to finance orders issued by clients when they do not have sufficient funds to meet costs of
such orders. This facility is beneficial to small businesses as it frees up cash that can be used

61

to meet other business obligations. On the other hand, it benefits MFIs as they can reduce
default exposure as payments are.
Credit Reference Bureaus
The setting up of a credit bureau will seek to correct the information asymmetry which is
being exploited by small business operators who commit against the same cash flows from
different financial institutions. A credit bureau will enable MFIs to evaluate risks more
accurately. These will go a long way in controlling levels of default in the in microfinance
institutions, ensuring their survival and sustainable growth of MFI.
Regulation of Microfinance Institutions
The Reserve Bank of Zimbabwe is making remarkable efforts to regulate MFIs such as
evidenced by the minimum capital requirements. The researcher is however of the opinion
that interest rates charged by MFIs should encourage sustainable borrowing which should
stimulate the growth of small businesses.
Recommendations for further research
In light of the above noted conclusions and recommendations the researcher feels there is
need for research in the following areas:

The sustainability of non-collateralized methods of financing to small businesses.

Inquiry into ways of formalizing the informal sector.

62

My name is Ronald Nhende a Master of Science in Strategic Management student at

Chinhoyi University of Technologys Graduate Business School. As part of my program I
have undertaken to carry out a survey on the above mentioned topic. You are kindly
requested to answer all questions honestly. Your co-operation is greatly appreciated. You are
assured that any information provided would be used for academic purposes only and will be
held strictly confidential.
Please tick your response or fill in as appropriate.
1. Gender
2. Age

Male
< 25 years

Female
25-34 years

3. Marital Status

Single

4. Qualifications

O Level and below

Masters Degree

35-44 years

Married

45-54 years

Divorced
A Level

>55 years

Widowed
Diploma

Degree

PHD and above

5. When did you commence operating? ..................................................................................

6. What is your primary business?

Trading

Artisan works

Service

Other: Specify
7. How many people does your business employ?
1- 3 employees

4 6 employees

employees

7 9 employees

10

-12

12 and above

8. Have you ever applied for credit from an MFI?

Yes

No

9. In what ways has microfinance impacted your business operations?

10. Please kindly give suggestions on how MFIs can contribute to the growth of small
businesses
63

Thank you for your cooperation

My name is Ronald Nhende a Master of Science in Strategic Management student at
Chinhoyi University of Technologys Graduate Business School. As part of my program I
have undertaken to carry out a survey on the above mentioned topic. You are kindly
requested to answer all questions honestly. Your co-operation is greatly appreciated. You are
assured that any information provided would be used for academic purposes only and will be
held strictly confidential.
Please tick your response or fill in as appropriate.
1. When did your company commence operations?
2. Do you offer training to ensure effective use of loans?
Yes

No

3. On average how many loan applications you receive from your clients?
Daily..

Weekly.

Monthly

3.1. How many applications are successful?

Daily..

Weekly.

Monthly

4. Do you have sufficient funding to meet loan demand of your clients?

Yes

No

4.1 If not what proportion of applications can you handle? (as a percentage)
.
5.

What

maximum

amount

of

loan

do

you

offer?..............................................................................
6. On average how many clients default their loan obligations on a monthly
basis?......................
7. What do you think are the reasons for default?
64

8. What challenges do you face in doing business with small businesses?

9. Comments on the state of microfinance microfinance industry in Zimbabwe and its

capacity to deal with financing needs of small businesses?

Thank you for your cooperation

65