MICROFINANCE INSTITUTIONS AND ECONOMIC GROWTH OF SMALL & MICRO-ENTERPRISES (SMES)

ACASE STUDY OF (UWMFO) MICRO FINANCE INSTITUTION

BY
HENRY EGYEYU

DEDICATION

To the memory of my grand father
Daniel Egeyu
Whose love & enthusiasm for academia first kindled mine?

ABSTRACT

This research study investigates the impact of microfinance institutions on entrepreneurial development of Small & Micro-enterprises (SMEs) that are craving for growth and development in a war revived district called Gulu. The researcher used questionnaire as an instrument of primary data collection. Tables and simple percentages were used in data presentation. For clear analysis, the study centers on two broad variables; the dependent variable which is entrepreneurial development and the independent variable which is microfinance institutions. Three different hypotheses were formulated and tested using various statistical tools such as chi-square test, analysis of variance and simple regression analysis. The study reveals that (i) there is a significant difference in the number of entrepreneurs who used microfinance institutions and those who do not use them; (ii) there is a significant effect of microfinance institutions activities in predicting entrepreneurial productivity; and (iii) that there is no significant effect of microfinance institutions activities in predicting entrepreneurial development. The researcher concludes that microfinance institutions world over and especially in Gulu are identified to be one of the key players in the financial industry that have positively affected individuals, business organizations, other financial institutions, the local government and the economy at large through the services they offer and the functions they perform in the economy.

CHAPTER ONE

INTRODUCTION AND BACKGROUND

1.1 Introduction

In this chapter, several sub themes have been covered and it basically lays down the draft to guide this study which is designed to establish the relationship between micro finance institutions and the economic growth of Small & Micro-enterprises (SMEs) in Gulu taking UWMFO as a case study. This particular theme covers; the Background to the study, Problem statement; the Research objectives, research questions, scope of the study and significant of the study. 1.2 Background of the study

According to the Savings Promotion and Enhancement of Enterprise Development (2006), it is noted that by providing small loans and savings facilities to people who are excluded from commercial financial services, microfinance institutions has become a strategy for reducing poverty in virtually all communities in the world. Access to credit and deposit services is a way to provide poor women and men with opportunities to take an active role in their respective economies through entrepreneurs and building income, bargaining power, and social growth.
The early years of the 1970s and 1980s witnessed the rapid search for ways by the International Development Organizations on how the poorer members of the Community who have been under looked by the commercial institutions could get access to credit facilities. The result of this was the emergence of Micro finance Institutions (MFIs) Microfinance institutions Competence Centre, (2001).
A Micro finance Institution is an organization that offers financial services to low income populations. Almost all of these other micro credit institutions can only take small amounts of savings from their own borrowers not from the general public, Microfinance institutions Forum, and (2001).
Microfinance institutions refers to all types of financial intermediation services (savings, credit funds transfer, insurance, pension remittances, etc.) provided to low-income households and entrepreneurs in both urban and rural areas, including residents in the public and private sectors and the self-employed. Robinson M, (2003). Effective, long-term provision of these services occurs through microfinance institutions that adhere to the key principles endorsed by the Consultative Group to Assist the Poorest (CGAP) and its 28 member donors, which were further endorsed by the Group of Eight leaders at a Summit on June 10, 2004. The fourth key microfinance institutions principle states that “Microfinance institutions can pay for its self, and must do so if it is to reach very large numbers of poor people (www.cgap.org).
The rhetoric surrounding Microfinance institutions remains extraordinary and almost shameless. For years (and indeed, in many cases, until now) programmes blithely asserted that they were serving “the poorest of the poor” and has empowered the local community more especially the local women entrepreneurs whom in most cases are taken to fall in the lower precedents when it comes to financial issues. But evidence indicates that this is not the case. In Uganda for example, while the PEAP policy document assumes that the poor who do not have access to formal financial services was targeted by the microfinance institutions MFPED, (2001).
In Uganda today, practitioners and donors are increasingly focusing on extending financial services to the poor in frontier markets and on the integration of microfinance institutions in financial systems development. The recent introduction by some donors of financial system approach in microfinance institutions which emphasizes favorable policy environment and institution - building has improved the overall effectiveness of microfinance institutions and other frontier markets, PEAP (2001).
Microfinance institutions (MFIs) are considered crucial in serving the rural markets which formal financial institutions may not find commercially viable to serve. This is because of their simple and cost effective organizational structures and ability to respond to clients’ needs since they are member owned, governed, and used. However, MFIs in Uganda are faced with a number of constraints that make them risky providers of financial services. They have weak governance structures, lack of capacity to effectively manage the institutions, lack of regulation, and inadequate supervision. This has led to the problem of loss to both members and non-member deposits and share contributions in MFIs, and some MFIs are operating outside the Cooperative Act and bylaws. Since 2005, the Government of Uganda has focused its support on the microfinance institutions sector in a bid to increase outreach to rural areas.
As an effective financial tool for socio-economic development, today microfinance institutions has gained enormous success in tackling poverty on a global scale and helping various governmental and non-governmental actors to achieve their Millennium Development Goals (MDGs 2005 Report). Given the positive impact of microfinance institutions on small business, agriculture, education, health, and other indicators of development, the practice of micro-credit is crucial to poverty alleviation, which is a key feature of many African government agenda and Micro credit Association/groups’ aspirations.
UWMFO is a micro finance service company incorporated in March 2002.With the aim of providing micro credit services to the poor communities at a favorable interest rate, the organization is currently operating in war affected, high-density urban areas of Gulu district located in Northern Uganda. The business is operated under the name UWMFO. The micro Finance institution is dedicated to providing financial services to low-income people and medium business entrepreneurs hence helping them to obtain business products and services they need. UWMFO offers financial assistance to small and medium size businesses in a way that adds value to all stakeholders by delighting its customers, improving on their know-how and network of business contacts, hence saving the clients’ money and time by allowing money lending professional to handle their business needs. It should be noted that Very few money-lending institutions possess all the services and products that most businesses require for all of their businesses. They rely on the moneylenders that can provide one-stop financing for all business services, at a reasonable interest rate, while overseeing the loan process to ensure the highest benefit possible.
UWMFO is such a money lender whose core goal is to give its clients the financial support they need, with maximum efficiency and reliability and this is enhanced By providing fast response, expertise, and high-quality solutions to their businesses, UWMFO generates satisfied repeated customers services and This provides a stable retainer base that creates consistent profits and guaranteed poverty reduction amongst the local population.
Today, the micro industry and the greater development community share the view that permanent poverty reduction in various parts of the country and Gulu inclusive requires addressing the multiple dimensions of poverty within an individual scope to the wider spectrum of both the informal and formal women and men association or groups involved in micro, small and medium scale business entrepreneurs by empowering them financially through the provisions of the diverse services being offered by the various micro finance institutions. It’s therefore upon such a background that the researcher would like to assess the contribution of Microfinance institutions in empowering women entrepreneurs in Gulu taking a case study of UWMFO. 1.3 Problem Statement

According to (FinScope2007), in Uganda, lack of access to financial services is one of the biggest obstacles to development. This is especially true for the rural and peri-urban population, particularly women and small scale farmers, as growth in the financial sector has tended to concentrate on the densely populated urban areas. Only 38% of Ugandans have access to financial services; people living in rural and peri-urban areas are more likely not to be served (65%) than those living in urban areas (52%); and women (66%) are more likely not to be served than men (58%).
Association of Microfinance institutions of Uganda (AMFIU) (2002); Reports shows that though several attempts have been put in place to increase the accessibility of the micro finance institutions’ services to empower the local population, significant challenges still impedes the efforts as has been observed in the low turn up ratio of the institution to the demand of the local poor for the various services offered by the institution due to the numerous obstacles both within and outside the micro finance industry and its upon such a back ground that this research is designed to establish the relationship between micro finance institutions and the economic growth of Small & Micro-enterprises(SMEs) in Gulu taking UWMFO as a case study.

1.4 Purpose of the study

The overall objective of the study is to establish the relationship between microfinance institutions and Economic Growth of Small & Micro-enterprises (SMEs) in Gulu taking UWMFO as a case study. 1.5 Objectives of the study

i. To find out the challenges faced by microfinance institutions in Gulu.

ii. To find out the level of economic growth of Small & Micro-enterprises (SMEs) in Gulu.

iii. To establish the relationship between microfinance institutions and Economic Growth of Small & Micro-enterprises (SMEs) in Gulu?

1.6 The Research Questions

i. What are the challenges faced by Microfinance institutions in Gulu?

ii. What is the impact of microfinance institutions on Economic Growth of Small & Micro-enterprises (SMEs) in Gulu?

iii. What is the relationship between Microfinance institutions institution and Economic Growth of Small & Micro-enterprises (SMEs) in Gulu?

1.7.0 The Scope of the study

For purposes of clarity the scope of the study has been broken in to three which includes; 1.7.1 Content scope

Here, the study will focus contextually on establishing the relationship between microfinance institutions and the economic growth of Small & Micro-enterprises (SMEs) in Gulu taking UWMFO as a case study. 1.7.2 Geographical scope

This particular research was conducted in the geographical area of Gulu that is, the four divisions of Pece, Layibi, Laroo, and Bardege with critical focus on a selective parishes to gain a representative sample area. 1.7.3 Time scope

The researcher will take seven months while conducting the study and it’s believed to commence from January 2012 and ended in July 2012. 1.8 Significance of the Study

The research will enable the researcher to acquire a bachelor’s degree in business administration of Gulu University.

The study findings will enable the community to use the information so as to have positive feelings towards MFIs and make proper use of the services offered by MFIs so as to reduce poverty.

The research Report that was written could benefit a number of stakeholders especially the community, the local leaders, MFIs and the government in including those that make a collective attempt to bring about changes in certain social Institutions or create an entirely new order for the better merit of the rural population.

The study findings could be useful to the MFIs since it formed baseline recommendations, their planning and setting up policy measures upon the likely problems/challenges that were realized through this study.

The study was of paramount importance to the government whose ultimate goal is poverty eradication through the establishment and concerted contributions of MFIs in the socio-economic arena and to tackle poverty using a bottom-up approach.

CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This section of the study seeks to find out what others have written about the subject matter. The section primarily deals with what other authors have done in regard to this subject matter.

2.2Microfinance Services

2.2.1 Definitions

Microfinance today can be defined as the range of ‘small-scale’ financial services that are provided to disadvantaged persons with the aim to improve their capacity to take their development in their own hands. The microfinance industry can be characterized by its clients, their specific needs and the alternatives they have in access to financial services.
Microfinance clients are typically low-income persons, who are self-employed or salaried, such as factory workers. In rural areas they may generate some income from farming, food processing or trading at the local markets, whereas in urban areas they tend to be shop keepers, street vendors, entrepreneurs, service providers, craftsmen, etc. They generally have numerous income generating activities that are somewhat unpredictable and may be seasonal but appear more or less stable. It has increasingly been recognized that not all people may be helped with micro-credit but that all are deposit worthy and need to make payments.
Microfinance services are characterized by the fact that they are tailor made for this target group and that the financial services take into account the needs and restrictions of these people. The perception of these needs within the microfinance business has evolved over time. Whereas in the beginning microfinance was considered as micro-credit, in recent years microfinance providers have come to appreciate the needs of poorer households to have access to other financial services, such as savings, insurance and payments. The financial services provided to low-income households need to take into account some basic aspects that characterize these people such as irregular income flows from numerous activities in some cases seasonal, activities of an informal nature, a lack of collateral and low basic reading and writing skills.
Partly due to these reasons, in emerging and developing economies there is a tendency not to cater for such disadvantaged persons in the formal financial sector. That is to say, where conventional financial institutions impose conditions on the provision of their services that are unlikely to be met by poorer households, financial exclusion arises. The consequence is that most low-income people therefore obtain financial services through informal arrangements in the market that are generally expensive, not so safe or unsustainable in the long run.

Recognizing the evolution of financial exclusion, many institutions have started to provide microfinance services, be it out of a development consideration or a business opportunity or a combination of both. It is difficult to classify microfinance providers. Operating in the domain of microfinance are grass root organizations, financial NGOs, non-bank financial institutions, credit unions, co-operatives, private commercial banks and state-owned banks. And among these, are the savings and retail banks that are affiliated to the World Saving Banks Institute. Each institution may differ in objectives, focus on financial services, business orientation, target group within the microfinance segment, ownership structure, capacity to mobilize savings, or regulation etc, but all share the same commitment to providing services to an otherwise ‘unbanked’ population.
In fact in recent years, we have witnessed a broadening and deepening of the microfinance industry deepened, because several traditional and commercial banks, recognizing the market opportunities have started to downscale their operations to target low-income customers broadened, because several institutions that formally only offered a limited range of financial services, mainly credit, are expanding their operations by providing other banking services such as the collection of savings. Parallel to this some typical deposit-taking institutions such as postal savings banks are experiencing a similar trend in the other direction. Some of them are diversifying into micro-credit and other financial services.

2.2.2 Savings banks providing microfinance services

What distinguishes savings banks from other microfinance providers in developing and emerging economies is that they are all formal financial institutions that are in the first instance committed to the mobilization of savings. Typically, clients of savings and retail banks are households, microenterprises and Small & Micro-enterprises (SMEs).
As demonstrated by the cases studies in this paper, the ownership structure of these savings and retail banks varies. Some are privately owned, others state-owned. There are postal savings banks, savings banks owned by municipalities, and financial institutions with a more co- operative ownership structure. As with other formal financial institutions, they are regulated as opposed to most microfinance providers that operate as informal institutions. This informal character does provide a sense of security for low-income clients. The fact that banks are regulated and supervised by Government agencies and have to comply with financial prudential rules, increases the stability of the financial sector. As with other banks savings and retail banks contribute when it exists, to a deposit guarantee scheme that protects the small savings.

In most countries savings and retail banks have built up a reputation as solid institutions that have also proven effective in times of crisis. Confidence in well-established savings and retail banks is therefore relatively high in many economies. Savings banks are characterized by large distribution networks to reach out to the clients nationwide. They are often known as ‘proximity banks’ a concept that was further developed in the following chapter. Thanks to their decentralized nature they can address the needs of the local people and use mobilized resources to invest in the local economy. Savings banks are committed to regional economic development and often have a social mandate within their charter.

2.2.3. Financial services provided to those with low-incomes

In a broad spectrum, we can reasonably identify four pillars in microfinance. Within this view, microfinance means the provision of financial services; mainly savings, credit, insurance and payments services to individuals as well as micro and small enterprises. Savings mobilization is often referred to as “the forgotten half of rural finance”, but the microfinance community has become increasingly aware of the importance to mobilize small savings. Learning from field experiences, academics and practitioners are now going beyond savings and credit services to recommend an extension of micro-insurance services to the most vulnerable groups. Indeed, the poor are more exposed to risky situations (droughts, floods, etc.) that can severely affect their livelihoods. Seibel (1997) even claimed that micro-insurance has been “the forgotten third” of microfinance. Finally, those with low incomes also need to have access to convenient payment services. They might have to issue money orders or money transfers for business purposes. They also receive money from relatives living in urban centers or abroad.
2.2.3.1. Savings mobilization

The lack of savings has usually been raised to explain weak economic growth in developing countries. Savings is low said the ‘vicious cycle theory’ because personal incomes are too low and because of that investment levels are also too low, leading to low production level and low incomes. This is what is often called the poverty trap. The lack of savings also explains and justifies why external funds are needed and helpful for poor economies to trigger economic growth and achieve poverty reduction. The lack of savings in poor countries has become a controversial assumption since various studies indicate that savings exist but are rather held outside the banking system.
2.2.3.2. Lending services

Access to finance and in particular, credit is one of the most often quoted constraints to business development by the self-employed and micro-entrepreneurs. The definition of micro-credit has evolved over the years and its interpretation is still wide ranging across countries and institutions. In some countries, where the microfinance industry has grown into a competitive business, central banks have established a definition of what can be considered as a micro-credit taking into account the borrower (e.g. size of enterprise in terms of turnover, assets, employees, etc.) and characteristics of the debt (size of loan, number of loans, etc.).
Some definitions are rather narrow and strict and only consider a micro-credit when it is a loan invested in an entrepreneurial activity. In other circumstances and more often it is accepted that the money lent is fungible and that it can be invested to respond to any need the household might have. In this case the level of income of the borrower or average loan size is more determining for whether a loan is a micro-loan or rather a typical retail loan. Considering the different interpretations of micro-credit that exist, we have relied on the definitions as used by each savings bank when presenting figures and analysis.
Although some postal savings banks are prohibited from lending, in general savings banks are characterized by the fact that they offer a whole range of lending products and that these products are segmented depending on the customer group and the investment purpose. The exception to this may be the postal savings banks that are often restricted by law in their lending operations. In general, micro lending programmes are included within regular retail banking operations, but may operate as separate programmes, cost centers or even subsidiaries such as is the case for UWMFO, with specific methodologies adapted to the micro-credit operations.
Savings banks apply diverse methodologies for administering their micro lending programmes. Most apply individual lending methodology as an extension of their mainstream retail lending business. Evidence from the case studies indicates that only Tanzania Postal Bank applies a pure group lending methodology. In the case of the People bank project of Government Savings Bank (GSB), the loans are extended to individuals who are required to be in a group of three (3) members with two of them guaranteeing the borrower. No methodology is by itself a guarantee for success and can therefore preferable. Each institution has to design and administer its programme according to their domestic economic, social and cultural context.
2.2.3.3. Insurance services

Micro insurance has emerged as the third pillar in the range of microfinance services and relevant tools to address the vulnerability of less affluent people. It can be defined as “the protection of low-income people against specific perils in exchange for premium payments proportionate to the likelihood and cost of the risk involved” Access to small credits does not significantly reduce the vulnerability of micro entrepreneurs and low-income. Micro insurance may help soften the adverse impact of various risks, which can jeopardize their income streams.

In practice, micro insurance products take different forms. Here we will divide them in 3 groups:

- Insurance policies linked to credit products

- Insurance policies linked to savings products including life insurances

- Insurance policies covering risks other than death and permanent invalidity, but people and their properties in general

For banks or microfinance providers in general, micro insurance schemes can help mitigate the negative effects of bad debts on the quality of the loan portfolio since death and illness generally result in outstanding payments. A step further is offering insurance to low-income people to protect them from risks and vulnerabilities other than death and invalidity, such as health, education or fire with no specific link to a credit or savings product.

2.2.3.4. Payments facilities for less affluent people

Payment services are increasingly recognized as an essential component of the whole package of financial services that are required by those on a low-income. Like all customers, they need to pay bills and transfer money. These interests are principle no different from those of the typical retail client apart from the fact that their accessibility needs to take into account issues such as standards of education and client location. Low-income customers generally require payment services that are low cost, secure and fast, convenient and easy to use.

2.3 Economic Growth of Small & Micro-enterprises (SMEs)

In recent years interest in the linkages between small and medium sized enterprises (SMEs)) and economic growth has been attracting increasing attention. However, there is a paucity of studies examining the importance of Small & Micro-enterprises (SMEs) for economic growth in developing countries.
This is surprising given that the SME sector is the target of international and national aid agencies. Indeed, in 2003 the World Bank approved US$ 1.3 billion in SME support programs (Beck et al. 2005).
Studies that have examined the impact of Small & Micro-enterprises (SMEs) on economic growth include the seminal study by Beck et al. 2005 who estimate an amended standard growth regression that includes the relative size of SME sector for a cross-section of countries. A similar approach is also employed in Audretsch and Keilback (2004) and Muller (2007) to evaluate the impact of entrepreneurship on economic growth in developed countries. Whilst studies that focus on a cross-section of countries suggest a negative or neutral impact of Small & Micro-enterprises (SMEs) and entrepreneurship on economic growth, those studies examining developed countries suggest a positive impact. Summarizing the results of empirical studies, Van Stel et al. (2005) and Wennekers et al. (2005) provide evidence that suggests a positive impact of entrepreneurship on growth for developed countries and the converse result for developing countries. Acs et al. (2008) has attributed these differences in empirical results to different entrepreneurship responses to institutional arrangements. Moreover, heterogeneity in institutional arrangements and human capital levels across countries and regions are likely to provide deferent incentives to rent-seeking activities (see, for example, Dias and McDermott 2006; Baumol 1990).
A limitation of the empirical literature to date is the relatively little attention devoted to study Small & Micro-enterprises(SMEs) and entrepreneurship in the developing countries relative to developed countries. The aim of this paper is to address this gap in the literature by providing an analysis of the importance of Small & Micro-enterprises (SMEs) for regional economic growth in Uganda for an annual panel of states from 1985 to 2004. Uganda provides an interesting case study because the Ugandan SME support service (SEBRAE) provided US$ 1.1 billion financial support for Small & Micro-enterprises (SMEs) in 2007 and the SME sector employs the majority of the labor force in Uganda.
This paper draws on Beck et al. (2005) and uses growth regressions to encompass the importance of the relative size of the SME sector into the growth analysis. Secondly, it provides an extended analysis of the relationship between SME and growth by focusing on the stock of Small & Micro-enterprises (SMEs) human capital, measured by a newly constructed variable for the average years of schooling in Small & Micro-enterprises (SMEs). The relative employment size of the SME sector alone might not be informative about its interaction with growth and so the inclusion of the level of Small & Micro-enterprises (SMEs) human capital can add another dimension of SME activity to the analysis. The remainder of the paper is as follows. Section 2 discusses the importance of Small & Micro-enterprises (SMEs) as a determinant to economic growth. Section 3 presents the growth framework and the model speciation. Section 4 presents the data and methods of estimation. Section 5 presents and discusses the results and Section 6 concludes.

2.3.1 Small & Micro-enterprises (SMEs) as Determinants to Economic Growth

Audretsch and Keilbach (2004) and Audretsch (2007) have argued that entrepreneurship and small firms are an important determinant of economic growth, but note that they have been omitted in the neoclassical growth framework. Moreover, Solow (2007) recognizes entrepreneurship as an important activity that drives a wedge between knowledge and total factor productivity by bridging the gap between specific pieces of technological knowledge and innovations through the creation of new firms. Therefore, explaining how Small & Micro-enterprises (SMEs) impact on growth can add to the explanatory power of traditional growth theory.
According to Beck et al. (2005), the pro-SME policy view as embraced by the World
Bank, for example, is based on the argument that the SME sector brings social benefits that stem from greater competition and are therefore (potentially) more productive than large firms, however, financial markets and other institutional failures impede the development and growth of SME activity. The argument that institutional arrangements are important for entrepreneurship and growth is put forward in Baumol (1990). Baumol argues that while the total supply of entrepreneurs differs across economies, the productive contribution of the society’s entrepreneurial activities varies much more due to their allocation between productive and unproductive activities. Therefore, policy makers should be concerned about the allocation of entrepreneurship by providing an institutional arrangement that promotes productive entrepreneurship at the expense of rent seeking2.
Similarly, Baumol (2008) argues that institutions are important to entice entrepreneurs away from their previous unproductive activities and lead them into innovative productive undertakings. Institutions are also important to stimulate human capital formation for productive entrepreneurs. Dias and McDermott (2006) develop a model where structural changes towards a modern economy depend on the role of entrepreneurs, human capital and institutions. In this setting, entrepreneurs come from a pool of individuals that belong to the managerial class, which is specialized in two activities: rent-seeking and entrepreneurship. Importantly, more (productive) entrepreneurs lead to more human capital formation. Workers will seek education in order to need a more productive job (i.e. that requires a higher level of human capital) covered by the entrepreneurs. Therefore, a policy response is to remove barriers that prevent productive entrepreneurship to develop and better institutions are required to create more productive entrepreneurs and entice human capital formation. If unproductive entrepreneurship dominates, educational improvement was neutralized and will have little long-run effect.
The importance of institutions for entrepreneurship is assessed by Nystrom (2008) for a panel of 23 OECD countries over the period 1972-2002. Nystrom uses self-employment as a proxy for entrepreneurship and includes measures of economic freedom (size of the government, legal structure, access for money, freedom to trade and regulation of credit) to account for the institutional quality in the growth regressions. Nystrom results support the argument that institutional quality is important for the entrepreneurial activity.
Therefore, if institutions fail, it is likely the performance of Small & Micro-enterprises (SMEs) will also fail. Further- more, Beck et al. (2005) argue that institutional failure in the form of financial constraints prevents Small & Micro-enterprises (SMEs) to fully develop and can be a burden to their capacity of generating economic growth. Similarly, Michelacci and Silva (2007) provide evidence that financial markets are a constraint to local entrepreneurship.
In the context of developed countries, Audretsch and Thurik (2001) argue that an entrepreneurial economy based on small rams has emerged as a result of the telecommunication, microprocessor revolution, and of the advent of low-cost but highly skilled competition (mainly) in Eastern Europe and Asia. As a result the comparative advantage of high-wage economies is no longer compatible with routine economic activity. Maintenance of high wages requires a knowledge-based economic activity that cannot be costless disused across geographic space and the shift towards small .rams is fundamental in this process. In developed countries, Small & Micro-enterprises (SMEs) could be a sign of a dynamic economy that sustains economic growth based on new technologies. For example, Audretsch and Keilbach (2004) and Muller (2007) measure entrepreneurship using start-up rates and need a positive effect of entrepreneurship capital on growth in Germany.

Nevertheless, due to differences in institutions, human capital and rent-seeking levels, the presence of Small & Micro-enterprises (SMEs) in a developing economy probably does not have the same implications as it has in a knowledge-based economy3. In a cross-country analysis, Van Stel et al. (2005) found a negative effect of entrepreneurship on growth for developing countries and the opposite result to developed ones. As entrepreneurship seems to have a different impact on economic performance according to the level of economic and institutional development (ACS Et Al. 2008), the presence of Small & Micro-enterprises (SMEs) alone is problematic to interpret.
Differences in the level of economic and institutional development provide diverse incentives to productive entrepreneurship and consequently we do not know whether the effect of Small & Micro-enterprises (SMEs) on growth comes from the structure itself or from another factor related to Small & Micro-enterprises (SMEs), such as the level of human capital.
Importantly, the size of the SME sector does not take into account the level of Small & Micro-enterprises (SMEs) human capital. In Nelson and Phelps (1966), the rate of increase in technology level is an increasing function of educational attainment; education speeds up the adoption and discussion on product and process innovations. Similarly, Barro (2001) argues that human capital facilitates the absorption of superior technologies and generates growth.
Complementary, human capital can also encourage growth by stimulating the process of innovation. Gri¢th et al. (2004) argue that R&D has two faces and stimulates growth directly through innovation and indirectly through facilitating the imitation process. They found evidence that educational attainment have an important role in stimulating both, the absorption of superior technologies (absorptive capacity) and innovation. We apply these arguments to the SME sector and argue that the absorptive capacity of the SME sector is an important factor to be considered when studying the relationship between
Small & Micro-enterprises (SMEs) and growth Therefore, a SME proxy that encompasses human capital can shed additional light on the relationship between Small & Micro-enterprises (SMEs) and growth once it can encompass the ability of the SME to appropriate knowledge from more productive firms If the SME sector improves its productivity, through innovation or imitation, a positive effect on growth is expected from the Small & Micro-enterprises (SMEs) human capital level.

2.4 Relationship between microfinance services and economic growth of Small & Micro-enterprises (SMEs)

An important research development of the last decade has been the affirmation of a strong link between the financial system of a nation and the performance of that nation’s economy. Starting with King and Levine (1993), the research has generally found that countries with “better” financial systems tend to have faster economic growth. However, this research has not come to consensus regarding exactly which dimensions of the financial system matter most – the size, efficiency, competitiveness, and regulation of banks; the roles of nonbank financial institutions, such as finance companies, buyout funds, venture capital funds, and insurance companies; the scale and liquidity of public debt and equity markets; the legal rights of shareholders and creditors; and so forth. As well, the exact transmission mechanism from the financial system to real activity is less than perfectly transparent from the research results. It is not completely clear the extent to which a better financial system improves economic growth primarily through higher levels of investment, or primarily through targeting investments to more productive uses.

Focusing on one dimension of the financial system and how its effects may be transmitted into economic growth. Specifically, we test hypotheses about how the health of community banks relative to other banks affects a nation’s economy. We hypothesize that relatively large market shares and relatively high efficiency for community banks may promote economic growth. One transmission mechanism may be through improved financing opportunities for small and medium enterprises (Small & Micro-enterprises (SMEs)). Community banks may provide more credit to Small & Micro-enterprises (SMEs) and may target their credit toward more productive Small & Micro-enterprises (SMEs), given the advantages that community banks may have in this type of lending. A stronger SME sector may, in turn, be an engine of economic growth through enhanced entrepreneurship and risk-taking, increased private ownership of businesses, potentially high productivity of these firms, and/or increased competition that reduces the market power of entrenched large firms and stimulates their productivity. A second mode of transmission may be through greater overall flows of bank credit. Healthier community banks may not only provide greater credit flows from their own portfolios, but might also compete more effectively with the rest of the banking industry and reduce the market power of other banks, encouraging them to reduce prices and expand lending.

The hypotheses using data on 49 nations from 1993-2000, representing a rich mixture of economic conditions, market structures, and degrees of development. Our key exogenous variables measuring the relative health of community banks are the total market shares of community banks (defined in various ways), and their weighted-average efficiency ranks estimated using cost and profit functions for the banks in each nation in each year. Importantly, these variables measure the health of community banks relative to other banks within the same nation, rather than comparisons of individual banks across nations that operate under very different conditions. As a consequence, these relative health variables are reasonably comparable across nations. We run three sets of tests separately for 21 developed nations and for the 28 developing nations. First, the reduced-form regressions of gross domestic product (GDP) growth on the relative health of community banks, controlling for other dimensions of the financial system (public debt and equity markets, regulation, legal rights, bank competition) identified in the finance-growth literature. This allows us to test whether the relative health of community banks affects economic growth.
Second, try adding measures of the SME employment share and the ratio of overall bank lending to GDP as additional repressors to these GDP growth equations to test the transmission mechanisms. In a recursive model of the transmission mechanisms, community bank health would directly affect one or both of these intermediate variables and then these variables would directly affect economic growth. Thus, to the extent that improved SME financing is an important mechanism through which relatively strong community banks improve economic growth, then we may expect a positive measured effect of the SME employment share on GDP growth, and a substantial diminishment of the measured effects of community bank health on GDP growth when the SME employment share is controlled for in the regressions. Similarly, if greater overall flows of bank credit are a key transmission mechanism, then we may expect a positive measured effect of the overall-bank-lending-to-GDP ratio and substantial diminishment of the measured effects of the relative health of community banks on GDP growth when the overall bank lending variable is included in the regressions. Third, regression analysis ran on SME employment share and bank lending to GDP ratio on the relative health of community banks and the control variables. We test whether community bank health has positive effects on the SME sector and on overall bank lending, as predicted by the two transmission mechanisms.

In addition to trying to contribute to the finance-growth literature, we try to add to the community banking literature in several ways. First, we examine the effects of community banks on overall economic performance. Community banking studies often focus on flows of credit to Small & Micro-enterprises(SMEs), but generally do not examine the consequences of this flow for the national economy.2 Even if healthy community banks tend to channel more credit to Small & Micro-enterprises(SMEs), this may not translate into higher economic growth if the credit flows to Small & Micro-enterprises(SMEs) are ineffective, or if there are significant adverse consequences of the relatively poor health of other (non-community) banks. Second, our international orientation and application too many developed and developing nations differs from the traditional focus of community banking studies on a single developed nation. We acknowledge that as in any study involving international comparisons, some rather heroic assumptions are needed, because one cannot control for the many differences in culture, markets, regulatory structures, and data collection standards across nations. We try to mitigate these problems through the means noted above – 1) analyzing developed and developing nations separately, 2) using measures of community banking health relative to other banks within the same nation, and 3) including controls for other important national differences. Third, we allow for different potential definitions of community banks in our empirical analysis, rather than defining them one way. For developed nations, we use the conventional definition – small, private, domestically-owned institutions – based on the research that suggests that these banks have comparative advantages in lending to Small & Micro-enterprises (SMEs), a core function of community banks. For developing nations, we allow for the possibility that state-owned banks and foreign-owned banks may also function as community banks when small, private, domestically-owned banks have difficulty providing sufficient credit. The market penetrations of state owned and foreign-owned banks are substantial in many countries around the world, and there are often large differences in the shares of these banks across countries within the same region. For example, assets at state owned banks are 52% of the total in Uganda versus 12% in Chile, whereas foreign-owned banking assets are only 17% of the total in Uganda versus 32% in Chile (Barth, Caprio, and Levine 2001). As discussed below, state owned and foreign-owned institutions may be able to overcome some of their disadvantages in SME lending by using government subsidies, by organizing in a decentralized fashion, or by using superior technologies. Finally, we include the average efficiency ranks of community banks as well as the market shares of these institutions. Community banking research often focuses on the share or quantity effect of these banks without considering their efficiency or quality. A relatively high share for community banks may not have favorable economic effects if these banks are poorly managed. It seems more likely that community banks were effective if these institutions are also relatively efficient. We also include the interaction between market shares and efficiency ranks, with the expectation of a positive interaction effect. That is, we expect the marginal benefit of an increase in market share for community banks to be greater; the more efficient are these banks.

By way of preview, the data from both developed and developing nations are consistent with the hypotheses that greater market shares and higher weighted-average efficiency ranks of small, private, domestically-owned banks are associated with faster GDP growth. The coefficients on the interaction terms between market shares and efficiency ranks are also positive, consistent with the hypothesis that the marginal benefits of higher shares for community banks are greater when these banks are more efficient. The data provide only mixed support for the two hypothesized transmission mechanisms from the relative health of community banks to economic growth through improved financing opportunities for Small & Micro-enterprises (SMEs) or through greater overall flows of bank credit. For developing nations, the data are also consistent with favorable economic effects from larger market shares for foreign-owned banks, but the converse holds for larger shares for state-owned banks.

2.5 conclusions

The literature reviewed in this section provided supplementary information regarding microfinance institutions and Economic Growth of Small & Micro-enterprises (SMEs) trends in Gulu and around the world. Additionally, it provided commentary on the findings of other related microfinance institutions studies and how these surveys reflected the institutional inputs associated with enterprise growth in Gulu.
The findings of this literature research were used to guide the selection of the most significant variables for determining entrepreneurial spirit in a predictive context. The review also provided an understanding of the definitions of microfinance institutions.
The relevance of the review of the empirical studies was twofold: first it provided a brief summary of the understanding of Micro and small businesses and second by reporting the institutional ideology used in these models (where available), it provided a guide on the significance of the Institutional framework for the promotion of Micro and small businesses

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter presents the methods and ways through which the study was carried out. It clearly shows the different types of research design used, study population, sample size, sampling design and procedures, source of data, data collection, instruments that were used and ways of data analysis. Finally, the chapter highlights the limitations that the researcher encountered during the study.
3.2 Research design

The researcher used descriptive research, case study analysis and analytical tools to assess the record management system of the organization and to establish the quality of financial Reports. Statistical methods of frequencies, percentages and correlation coefficient were used to establish the relationship between Microfinance institutions and Economic Growth of Small & Micro-enterprises (SMEs)
3.3 Study population

The population included residents of Gulu which comprised of 55 residents

Table 1: Sample Elements in Each Department
|Department |Population |Sample Targeted |
|Accounts |9 |6 |
|Administration |15 |12 |
|Internal Audit |12 |8 |
|Security |7 |5 |
|Front office |4 |3 |
|Maintenance |8 |6 |
|TOTAL |55 |40 |

Source: Primary Data
3.4- Sampling Technique and Procedures

A sample random design was used to select respondents so as to minimize bias. Purposive sampling methods were used to enable the researcher achieve his purpose. The methods manifested a great ease in terms of access, speed and less time being consumed.
3.5- Sample size and selection

From a population of 55 residents of Gulu district local government, samples of 40 respondents were selected from all departments as summarized in the table below:

|Department |Population |Sample Targeted |
|Accounts |9 |6 |
|Administration |15 |12 |
|Internal Audit |12 |8 |
|Security |7 |5 |
|Front office |4 |3 |
|Maintenance |8 |6 |
|TOTAL |55 |40 |

Table 2: Sample Element in Each Department
Source: Primary Data
3.6- Data collection instrument

The researcher used questionnaires, case study analysis, observation and interview schedule to collect the data from target staff. These questionnaires and interview schedule were close-ended.
3.6.1- Questionnaires

Under this, different categories of people were used in the research. They include human resource manager, account Clark and some staffs. Written down questions were distributed to the manager, the selected service providers and some beneficiaries where the respondents gave their answers by filling in the boxes corresponding to a given question and there after questionnaire were returned to the researcher. Questionnaire method was used to only the selected persons above simply because they were educated. In other words, they could read and write hence saving time.
3.6.2- Interview Guides

The researcher looked for the staff one by one where she would freely interact with the respondents in both local language (Acholi) and English during data collection. The researcher would ask them questions and answers would be recorded down by the researcher.
With the above method, the researcher used interview guides designed for the purpose of data collection, this method of data collection was used simply because a few of the respondents were not able to read and write therefore it became the appropriate way of data collection.
3.6.3- Observation

This involved viewing directly using the researchers own eyes and senses to obtain the data, it produced on the impact of bias and the researcher was able to obtain the first hand information for example looking at the performance appraisal, vouchers, receipt and final accounts.
3.6.4- Case Study Analysis

The case study methodology of data gathering was also used by the researcher in obtaining relevant information pertaining the study. This prove the researcher with an easy way of analyzing, sorting and interpreting the data that was obtain without any tedious processes involved.
3.7- Source of Data

The basic source of data for the exercise was mainly primary and secondary data, though conclusions were drawn based on primary data.
3.7.1- Primary Data

Here the researcher went directly to the field to obtain data from the respondents by using methods like questionnaire, observation and interviews that enabled him to get reliable data (1st hand information).
3.7.2- Secondary Data

This was source from approved literature in journals, manuals, business publication, newspaper and other sources, this is expected to give reliable information about the research topic and survey was done to source for secondary data related to the topic.
3.8- Data Presentation and Analysis

After collecting data from different sources, editing, sorting and summering was done to process the data. Editing will improve on the accuracy, relevance and coding was done to match the data according to the themes. Analysis will specially focus on the role of Training towards sale performance.
3.9- Anticipated limitations to the study

i. Reluctance of respondents; this was mitigated by assuring respondents of confidentiality and that the research is only for academic purpose. ii. Financial constraints; this was mitigated by drawing up a budget and working within the budget to ensure success of the research. iii. Time Constraint; this was mitigated by setting a strict deadline and working within the deadline to ensure the success of the research.

CHAPTER FOUR

PRESENTATION, INTERPRETATION AND ANALYSIS OF DATA

4.1- Introduction

This chapter deals with the analysis of the primary data obtained from the field using interview questionnaires & Case study analysis in an attempt to find out the relationship between Microfinance institutions and Economic Growth of Small & Micro-enterprises (SMEs) in Gulu
The findings in this chapter are consistent with the research objectives and research questions. Basically, the data contained in the chapter consists of the demographic characteristics of the respondents, and the analysis of the relationship between Microfinance institutions and Economic Growth of Small & Micro-enterprises (SMEs)
The findings were as below;
4.2- Demographic data.

4.2.1- Respondent’s gender

This comprised both male and female respondents. Thus out of 40 respondents who attempted the questionnaires, 30(95%) were female and 2(05%) were male as indicated in table 1 and figure 1 below.
Table 1: showing the gender of the respondents
|Gender |Frequency |Percentage (%) |
|Male |02 |05% |
|Female |38 |95% |
|Total |40 |100% |

Source: primary data.

[pic]
Figure 1: gender of the respondents
From table 1 and figure 1 above, findings reveal that, the number of females who participated in the survey were more than the males. The researcher found out that of the overall clients of UWMFO Micro Finance, the females were more than the males; this was due to easy co-operation of women as opposed to their counterparts the male when it came especially, to supervision at the work place. One of the male respondents stated that men were few due to the fact that UWMFO Micro Finance Limited Uganda is an NGO established specifically to promote and encourage women to involve in micro saving in order to reduce their dependence on their husbands. This finding is in line with that of the researcher who observed planning, directing, controlling, organizing as roles that can be performed by women.
4.2.2- Respondents’ marital status

The data collected from all the 40 respondents showed that 11(28%) were not married, 20(50%) were married, 5(13%) had divorced and finally 4(09%) were widows/widowers as shown in table 2 and figure 2 below;

Table 2: showing respondents’ marital status
|Marital Status |Frequency |Percentage (%) |
|Never married |11 |28% |
|Married |20 |50% |
|Separated |5 |13% |
|Widow/Widower |4 |09% |
|Total |40 |100% |

Source: primary data.

[pic] Marital status
Figure 3: showing marital status
From table 3 and figure above, findings reveal that the highest numbers of respondents were married followed by single, separated and lastly the widowed. According to the interview carried out by the researcher, the highest numbers of respondents were married because they were ready to get themselves involved in marital obligations as a result of the age racket which they are currently in.
This finding is in line with that of the researcher through the study that was carried out at the head offices of UWMFO Micro Finance Limited Uganda located in Gulu.
4.2.3 –Level of education of respondents

The researcher categorized this under certificate, diploma, Degree and others, as illustrated in table 3 and figure 3
Table 3: showing respondents education levels
|Response |Frequency |Percentage (%) |
|certificate |5 |12% |
|Diploma |9 |23% |
|Degree |10 |25% |
|Others |16 |40% |
|Total |40 |100% |

Source; primary data

[pic]
Figure 3 showing respondents educational level
In the above table and figure, 5(12%) of the respondents had at least attained certificate, 09(23%) were diploma holders, 10(25%) of the respondents had degrees, and (16)40% respondents had equivalent of certificates. This implies that most of the respondents were educated and were able to give the required information sought by the researcher. Therefore, the finding in the table agrees with that of the researcher according to the study carried out.

4.2.4- Time taken in present position

Table 4: Showing time taken by the respondents in their present positions

|Response |Frequency |Percentages (%) |
|Less than one year |06 |15% |
|1-2 years |25 |63% |
|2-3 years |4 |10% |
|More than 3 years |5 |12% |
|Total |40 |100% |

[pic]

Figure 4: showing time taken by respondents on their present positions

In the above table and figure, 6(15%) of the respondents had been in the organization for less than one year, 25(63%) for one to two years, 4(10%) of the respondents had been in the organization for two to three years, and 5(12%) respondents had been in the organization for more than three years. This implies that most of the respondents were long time clients and servants of the organization and were able to give the required information sought by the researcher. Therefore, the finding in the table agrees with that of the researcher according to the study carried out

4.3- Findings relating to objectives.

The findings of the study were analyzed based on the specific objectives. These findings are presented in the tables as below.

Table 5: Is the perception of the people of Laroo towards UWMFO micro finance positive?

|Response |frequency |Percentages (%) |
|Agree |10 |25% |
|Strongly Agree |30 |75% |
|Disagree |- |- |
|Strongly Disagree |- |- |
|Total |40 |100% |

Source: primary data

From the above table, findings show that the highest number 30(75%) strongly agreed that the perception of the people towards micro finance savings and credit facilities was positive. This was because of the rapid growth in demand for loans by the beneficiaries and 10(25%) strongly agreed to the same, this was because of the increasing demand by the beneficiaries in the need for services provided by these financial institutions such as UWMFO Uganda.

This finding is in line with that of the global summit on microfinance institutions held in Washington where a global target was set of covering over 100 million poor families with credit. They further stated that poor families were ready to adopt micro finance as a method of poverty eradication.

Table 6: Are the benefits of micro finance loans to the community being witnessed?

|Response |Frequency |Percentage (%) |
| Agree |25 |63% |
|Strongly Agree |10 |25% |
|Disagree |5 |12% |
|Strongly Disagree |- |- |
|Total |40 |100% |

Source: primary data

[pic] Figure 5: Showing benefits of micro finance loans to the different women groups in Laroo division
In table 6 and figure 5 above, findings reveal that, 25(63%) of the respondents agreed that the benefits of micro finance loans to the community were being witnessed. These was because of the reduction in inequalities in income between the two gender based groups that was being witnessed and 10(25%) strongly agreed to the same idea this was because of the increase in savings by the local people who benefited from the loans that they borrowed. whereas 5(12%) disagreed basing their opinion on the fact that, the beneficiaries were usually deprived off their properties in case of default when the loan is not repaid by a member of the group.

This finding is in line with that of the researcher who observed that, there existed tight conditions on the part of the beneficiary in order to access the loan from the institution. The researcher further observed that micro finance loans had benefited this category of beneficiaries because there was increase in their savings and thus investments were being observed to be rising.

Table 7: Are collateral securities required from the beneficiaries before accessing UWMFO micro finance loans?

|Reponses |Frequency |Percentage (%) |
|Agree |15 |37% |
|Strongly Agree |25 |63% |
|Disagree |- |- |
|Strongly Disagree |- |- |
|Total |40 |100% |

Source: primary data
[pic] Figure 6: showing whether collateral securities are required
From table7 and figure 6 above, 15(37%) of the respondents agreed that collateral securities was usually required from the beneficiaries before accessing micro finance loans and 25(63%) strongly agreed to the same. These was because of the audit trail which was created as a spirit in the minds of the staff that because of the efficiency and effectiveness in micro finance management there was subsequent reaction on the other side which led to poverty reduction and thus improvement in the standards of living of the beneficiaries.

The finding above is in line with that of the researcher. Where the researcher as a result of the sensitivity analysis which was a part of a technique of linear programming found out that the institution loans were being utilized at their optimal level despite the collateral securities that was required by management.

Table 8: Are problems being experienced by both the beneficiaries and the institutions in providing and accessing micro finance loans?

|Response |Frequency |Percentages (%) |
|Agree |10 |25% |
|Strongly Agree |22 |55% |
|Disagree |8 |20% |
|Strongly Disagree |- |- |
|Total |40 |100% |

Source: primary data

In the above table, 10(25%) agreed and 22(55%) strongly agreed to the same idea that, there were problems being experienced by both the beneficiaries and the institutions in providing and accessing UWMFO micro finance loans. This was because of lack of understanding of the collateral requirements by the beneficiaries and bureaucracy on the part of the institution in giving out the loans. Whereas, 8(20%) disagreed that no problems were being encountered by both the beneficiaries and the institutions in providing and accessing micro finance loans arguing that the loans were easily accessible by the clients provided the that all that is required of them is fulfilled.

This finding is in line with that of the new vision September 2005, where it was observed that the micro finance institutions were expanding rapidly with the government, donors and the private sector through the implementation of the tripartite arrangements to develop sustainable micro finance institutions to deliver the much needed financial services to the nee

Table 9: Are recommendations being sought by the institution towards policy change to improve accessibility by the beneficiaries?

|Response |Frequency |Percentage (%) |
|Agree |25 |63% |
|Strongly Agree |10 |25% |
|Disagree |5 |12% |
|Strongly Disagree |- |- |
|Total |40 |100% |

Source: primary data

[pic] Figure 7:showing recommendations being sought by the institution
From table 9 and figure 7 above, 25(63%) of the respondents agreed that recommendations were being sought by the institution towards policy change to improve accessibility by the beneficiaries and 10(25%) strongly agreed to the idea. This was because of the setting of the repayment period by the staff/management according to the amount of money borrowed by the clients. While, 5(12%) disagreed. This was because they had no idea whatsoever on the type of recommendations that was sought by the management. This view point contends with that of the researcher through the study that was conducted at the head offices of UWMFO

Table 10: Does your organization segregate beneficiaries when giving out loans?

|Responses |Frequency |Percentages (%) |
|Agree |- |- |
|Strongly Agree |- |- |
|Disagree |25 |63% |
|Strongly Disagree |15 |37% |
|Total |40 |100% |

Source: primary data

Table 10 above shows that, the highest numbers of respondents 25(63%) disagreed that UWMFO Gulu does not segregated beneficiaries when it came to giving out loans and 15(37%) strongly disagreed to the same idea. This was because; the organization was giving out loans to all categories of individual who are believed to be in groups

Table 11: Is transparency being observed by your institution?
|Responses |Frequency |Percentages (%) |
|Agree |22 |55% |
|Strongly Agree |18 |45% |
|Disagree |- |- |
|Strongly Disagree |- |- |
|Total |40 |100% |

Source: primary data

[pic]
Figure 8: showing level of transparency
From table11 and figure 8 above, 22(55%) of the respondents agreed that transparency was being observed in the organization and18 (45%) strongly agreed to the same. This was because of the openness to both the staff and the clienteles on what was required of them in order to access the loans.

This finding was in line with that of the auditor which indicated that the organizations books of accounts gave and reflects a true and fair view of state of affairs as at 31st December, 2009

Table 12: Does UWMFO Gulu give enough training to their clients before giving them the loans?
|Responses |Frequency |Percentage (%) |
|Agree |24 |60% |
|Strongly Agree |16 |40% |
|Disagree |- |- |
|Strongly Disagree |- |- |
|Total |40 |100% |

Source: Primary Data
From the table above, 24(60%) of the respondents agreed that UWMFO Gulu normally gives enough training to their clients before giving them the loans and 16(40%) strongly agreed. This was because of the existence of an independent training committee whose work was to educate the clients before they could grant them the loan

This finding is in line with that of the researcher who observed that, there existed an independent committee which was appointed in conformity with the requirements prescribed in the human resource manual and with the requirements of employment laws or regulations in force in the country.

Table 13: Is loan recovery mode of UWMFO Gulu friendly in case of default?
|Response |Frequency |Percentage (%) |
|Agree |22 |55% |
|Strongly Agree |8 |20% |
|Disagree |10 |25% |
|Strongly Disagree |- |- |
|Total |40 |100% |

Source: primary data

[pic]
Figure 9: showing situation of loan recovery
From the table above, 22(55%) of the respondent agreed that loan recovery mode of UWMFO Gulu is friendly in case of default and 8(20%) strongly agreed to the same idea. This was because the clients were usually informed in advance when they are required to pay their installments which could either be on monthly basis or weekly basis. While, 10(25%) disagreed that UWMFO loan recovery mode is not friendly in case of default. This was because the clients were usually deprived of their assets in case of default by a group member.

This finding is in line with that of the researcher through the study that was conducted by the researcher at the head offices of UWMFO micro finance institution limited.

Table 14: Are responses by UWMFO Gulu to the clients request timely?
|Response |Frequency |Percentage (%) |
|Agree |9 |23% |
|Strongly Agree |11 |27% |
|Disagree |20 |50% |
|Strongly Disagree |- |- |
|Total |40 |100% |

Source: primary data.
From the table above, 20(50%) of the respondents disagreed that responses by the UWMFO Gulu to their clients request was not timely. This was because of the bureaucratic abnormalities within the organization which does not warrant loan requests by the clients to be processed on time this in turn was a very clear indication as to why there was no transparency in the organization in as far as the issuing of loans to the clients was concerned. On the other hand, 11(27%) strongly agreed, this was because of the quick process of issuing loans to the clients which could take only few days. This in turn speeded the progress of the beneficiaries as was suggested by one respondent by the title of being finance assistant and 9(23%) also agreed to the same idea basing their view on quick access of the loans regardless of tribe, religion and race.

This finding is in line with that of the researcher where he observed that there was a lot of bureaucracy in as far as granting of loans and other services was concerned and thus conclusions were based on fair judgment by the researcher in the process of data collection.

Table 15: Does your institution offer a range of services to its clients?
|Response |Frequency |Percentage (%) |
|Agree |14 |35% |
|Strongly Agree |20 |50% |
|Disagree |6 |15% |
|Strongly Disagree |- |- |
|Total |40 |100% |

Source: primary data

[pic]
Figure 10: showingresponse on range of services offered by the firm
From table 15 and figure 10 above, findings reveal that 20(50%) of the respondents strongly agreed that the institution offers a range of services to its clients and 14(35%) of the respondents also agreed to the same idea. this was because there was training that was given to the clients before and after they have received the loans and also advice that was given in form of consultations which was sought by the clients in case there is need .While, 6(15%) disagreed to the reason developed forward, this was because the training and the consultations given to the clients were very limited and negligible.

This finding is in line with that of the researcher through the study that was conducted at the head office of the UWMFO Gulu

CHAPTER FIVE

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.1-Introduction

This chapter discusses the conclusions of the study, results on the findings in chapter four. It gives a summary of findings, conclusions and recommendations made on the study in order to establish the relationship between microfinance institutions and Economic Growth of Small & Micro-enterprises (SMEs) in Gulu.

5.2-Summary of research findings

This research work has been able to identify the impact of microfinance institutions on entrepreneurial development in Gulu. The analysis of data indicates that financial institutions are not adequately financing small and medium entrepreneurs. The findings are as follows:

• There is a significant difference in the number of entrepreneurs who used Microfinance institutions and those who do not. • There is a significant effect of microfinance institutions activities in predicting entrepreneurial productivity. • There is no significant effect of microfinance institutions activities in predicting entrepreneurial development. • Microfinance institutions are sustainable to the development of entrepreneurship activities in Gulu. • People have access to capital for entrepreneurship development in Gulu through microfinance institutions. Microfinance institutions have affected entrepreneurship in the country positively.
Entrepreneurship development is vital to the industrialization process of the country.
The major contribution of microfinance institutions to the developing economy like that of Gulu is its role in promoting entrepreneurship development in the nation. One of the goals of entrepreneurship routed by successful Gulu government has been the reduction of unemployment and poverty alleviation. A cordial thrust in public policy for the achievement of indigenous entrepreneurship through the provision of long term loans and equity capital by banks for enterprise. Given the gap between savings and invertible funds, the short fall is provided by credit delivery. Many newly developed and developing countries have therefore made credit delivery an endurable strategy in the development of entrepreneurship in both industry and agriculture

5.3- Conclusions and implications

The review of several literature shows that the microfinance institutions are evident tools for entrepreneurship development due to the various services they offer and the role they performs towards the development of the economy. Not overlooking the various challenges that affects microfinance institutions operations, the current institutional reforms introduced by the Bank of Uganda governor is a welcome development as its employment is meaningfully to entrepreneurship development in the country. Microfinance institutions world over and especially in Gulu are identified to be one of the key players in the financial industry that have positively affected individuals, business organizations, other financial institutions, the government and the economy at large through the services they offer and the functions they perform in the economy. It is expected that with the current reforms put in place by the Federal Government through its regulatory authorities, microfinance institutions in Gulu was able to compete favorably in the global market and gainfully increase entrepreneurship development in Gulu. Microfinance institutions have positive relationship with the Gulu economy represented by expanded GDP. Although, interest rate is not significantly influential, the results of findings of this study can still be summarized that the microfinance institutions and their activities go a long way in the determination of the pattern and level of economic activities and development in the Gulu economy.

5.4-Recommendations

The financial institution need to put more effort in financing Small and medium entrepreneurs, their role need to be felt by the Small and medium entrepreneurs in teams of growth and development.
The financial institution whose role needs to be visible in promoting Small and medium entrepreneur’s growth and development is microfinance institutions. Small and medium entrepreneurs themselves should be more receptive to new ideas and prepared to make financial commitments to ensure growth.
This study recommends that guidelines by microfinance institutions to finance Small and medium entrepreneurs need to be flexible to accommodate the Small and medium entrepreneurs only when financial institutions appreciates and give technical assistant to the SME would be contributing to the SMEEIS to ensure success in the SME sector.
It is the researcher hope that microfinance institutions in Gulu will develop more interest in supporting the growth of Small and medium entrepreneurs.

5.6-Suggestions for Future Researches

This present study have assessed the impact of microfinance institutions on entrepreneurial development and suggests that microfinance institutions can be a beneficial strategy especially as regards its potential to contribute to entrepreneurial development, there are many acclaimed benefits of microfinance institutions that are yet to be examined empirically. • One of such areas which require empirical investigation is the relationship between the level of microfinance institutions commitment and the level of entrepreneurs’ satisfaction. • Second, this study focuses exclusively on industrial sector. There is a need to carry out empirical studies to determine the extent to which microfinance institutions contributes to other sectors of Gulu district. Thus, there is compelling need for future research efforts to focus on these sectors in order to determine the attitude of the operators of these sectors to microfinance institutions as well as its efficacy in the management of organizations that are prevalent in our society.

REFERENCES

Misgana Amelga, (1998), Systematic Client Consultation guide for Microfinance institutions Projects/Programs.
Ministry of Finance Planning and Economic Development (MFPED) (2001), Kampala, Uganda
Poverty Eradication Action Plan (PEAP) 2001-2003, Vol. 1.
Microfinance institutions Competent Centre, (2001) The Microfinance institutioner, Vol. 1 Issue 3
Microfinance institutions Forum, (2001), expanding the Outreach of Sustainable Microfinance institutions in Uganda Amin, S., Rai, A. S., Topa, G., “Does Microcredit Reach the Poor and Vulnerable Evidence from Northern Bangladesh”, Journal of Development Economics, 70(1), 59-82, 2003
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APPENDIX III (QUESTIONNAIRES)

The questionnaires of the research
DEPARTMENT OF FINANCE AND ACCOUNTING, GULU UNIVERSITY
Research instrument (Questionnaire) for the Respondents
This research instrument is designed to study the Impact of Microfinance institutions on Economic Growth of Small & Micro-enterprises (SMEs). This is just a study for academic purposes. It has no bearing on anyone or company. Confidentiality of respondents is assured.
Please tick and fill in the blank spaces appropriately.
1. Where do you live? ……………………………………………………………………………………
2. Age? 18-25( ) 26-33( ) 34-41( ) 42-49( ) 50-57( ) 58-65( ) 66 and above ( )
3. Sex? Male ( ) female ( )
4. Level of education? Primary ( ) S.S.S ( ) Tertiary ( ) other specify………………………………
5. Marital status? Single ( ) Married ( ) Divorced ( ) Widowed ( )
6. Are you a farmer? Yes ( ) No ( )
7. Is farming your only occupation? Yes ( ) No ( )
8. Do you save money at the UWMFO? Yes□ No□
9. What account do you normally open? ………………………………………………………………….
10. Have you ever applied for a loan? Yes□ No□
11. If yes, what do you require in order to access a loan from an institution? ……………………………………………………………………………………………………………..
12. What do you think about the interest rates being charged by the institution? ……………………………………………………………………………………………………………….
13. Do the interest rates scare you from borrowing from the institution? Yes□ No□
14. Do you find it tough paying the loans? Yes□ No□
15. Does the high interest rate affect your farming? Yes□ No□
16. What are some of the effects of the high interest rates on your farming? ……………………………………………………………………………………………………………………………………………………………………………………………………………………………….
17. Have you been assisted by any of the institutions before? Yes ( ) No ( )
18. If yes, what type of benefit or assistance did you get? ………………………………………………………………………………………………………………………………………………………………………………………………………………………………..
19. Did the institution follow up to have a look at the activity you took the facility for? Yes ( ) No ( )
20. Was the loan facility used for its intended purpose? Yes ( ) No ( )
21. What role do you think UWMFO play in your community? ………………………………………………………………………………………………………………. …………………………………………………………………………………………….………………….
22. Do all kinds of people get loan from the UWMFO? Yes ( ) No ( )
23. Does it take several days or weeks for Clients to process or access a loan from the UWMFO? Yes ( ) No ( )
24. On the average how many days does it take to secure a loan? ……………………….……………….
25. Generally, what impact does rural institution have on you? ……………………………………………
26. Generally, what impact does rural institution have on your community? ……………………………………………………………………………………………..……………….
27. What other strategies do you think should be implemented by UWMFO to help Gulu Clients? ……………………………………………………………………………………..……………………..
28. Any other remarks? …………………………………………………………..……………………….

Thank you.

DEPARTMENT OF FINANCE AND ACCOUNTING, GULU UNIVERSITY
Research instrument (Questionnaire) for the UWMFO
This research instrument is designed to study the Impact of Microfinance institutions on Economic Growth of Small & Micro-enterprises (SMEs). This is just a study for academic purposes. It has no bearing on anyone or company. Confidentiality of respondents is assured.
Please tick and fill in the blank spaces appropriately.
29. Name of the financial institution? ………………………………………………………………………
30. Year of establishment? ………………………………………………………….…………………….
31. District? ………………………………………………………………………………….……………
32. What account do your customers normally open? ………………………………………..…………
33. Do you grant them loans if they apply? Yes□ No□
34. What do you require in order to access a loan from an institution? ……………………………….……………………………………………………………………….…..
35. Give reasons for your answer in 6 above ………………………………………………………….….
36. What is the minimum interest rate you charge per loan? ………………………………………………
37. Do your customers complain about the interest rates? Yes□ No□
38. What factors do you think regulates the interest rates? ………………………………………………………………………………………………………………. ……………………………………………………………………………………………………………… …………………..…………………………………………………………………………………………..
39. Please list in the table below the interest rates and the number of Clients who borrowed money from your financial institution every year.

|Year |Number |Interest Rate |
|2006 | | |
|2007 | | |
|2008 | | |
|2009 | | |
|2010 | | |
|2011 | | |
|2012 | | |

40. What type of Clients do you normally deal with? ………………………………………………………
41. What other functions do you play apart from savings and granting of loans to Clients? ……………………………………………………………………………………………………………….. ……………………………………………………………………………………………………………….
42. What do you think should be done to help Clients do business with the financial institutions? …………………………………………………………………………………………………………… ……………………………………………………………………………………………………………
43. Any other remarks? ………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..

Thank you.

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