CHALLENGES OF MICRO-FINANCE LOANS TO

THE FINANCIAL INSTITUTIONS: CASE STUDY

IN MOGADISHU

BY

ZEYNAB MOHAMUD MOHAMED

FARTUN ALI CABDULLAHI
AYAN OSMAN MOHAMED

GRADUATION PROJECT SUBMITTED IN

PARTIAL FULLFILMENT OF THE
REQUIRMENT FOR THE DEGREE
IN BACHELOR OF BANKING
AND FINANCE

FACULTY OF MANAGEMENT SCIENCE

SIMAD UNIVERSITY

MAY, 2018
 ABSTRACT A (ENGLISH)

The purpose of this was to investigate the challenges of microfinance loan to the

Mogadishu Financial Institutions; specifically the aim was to determine the

challenges of individual loans to the banks in Mogadishu and to identify the obstacles of

group loan to the banks. The scholars, to fulfill their objectives set two questions for

their study which are: How challenges of individual loan can effect on banks in

Mogadishu? And How much obstacles from group loan to the bank? To achieve the set

goal a questionnaire was constricted to use as data collection tool. Data were

collected from 50 employees selected from four banks located in Mogadishu. Data

were analyzed using SPSS data analysis software. The researchers employed

correlation research design to test the relationship between microfinance loan and

banks. Descriptive analysis was conducted too for respondent’s response frequency

analysis. The study established and revealed that there are some challenges face

commercial banks when giving credit to small enterprises. The study revealed that

all the measurement of microfinance loan -individual and group have a significant

with negative correlation to the bank loan system. Based on the findings the

researchers suggest that, SMEs need to be more transparent while representing

their businesses and future plans before bankers and financial institutions so they

can gain the trust and confidence of these creditors to extend finance to them. And

also SMEs themselves should be more receptive to new ideas and prepared to

make financial commitments to ensure growth.

ii
 ABSTRACT B (SOOMAALI)

Cilmi baaristaan, kooxda barista waxay daraaseeyeen caqabadaha deynta microfinance

ah ee bangiyada Muqdisho, gaar ahaan ujeedada ay tahay in la go'aamiyo caqabadaha

ka dhex jira shakhsiyaadka bangiyada ee Muqdisho iyo in la ogaado caqabadaha deyn

kooxeedka ee bangiyada. Culimada, si ay u fuliyaan ujeedooyinkooda waxay u

sameeyaan laba su'aalood oo ku saabsan daraasaddooda kuwaas oo ah: Sida

caqabadaha deynta shaqsiyadeed ay u saameyn karto bangiyada Muqdisho? Iyo intee in

le'eg caqabado ayaa ka timi deyn kooxeedka bangiga? Si loo gaaro yoolka loo dejiyey

su'aal-waydiinta ayaa loo xaddiday in loo isticmaalo sida xog ururinta xogta.

Macluumaad ayaa laga soo ururiyay 50 shaqaale oo laga soo xulay afar bangi oo ku

yaala Muqdisho. Xogta ayaa lagu falanqeeyay iyadoo la adeegsanayo falanqaynta

macluumaadka xogta SPSS. Cilmi-baadhayaashu waxay u adeegsadeen naqshadaynta

cilmi-baarista si ay u tijaabiyaan xiriirka ka dhexeeya amaahda iyo deynta. Daraasadda

ayaa la sameeyay oo shaaca ka qaaday in ay jiraan caqabado hortaagan bangiyada

ganacsiga marka la siinayo deymaha ganacsiyada yaryar. Daraasadu waxay shaacisay

in dhammaan qiyaasta deynta microfinancega qof waliba iyo koox ahaanba ay si weyn

ugu tiirsan yihiin nidaamka amaahda bangiga. Iyadoo ku saleysan natiijooyinka cilmi-

baarayaashu waxay soo jeedinayaan, ganacsiyada yaryar waxay u baahanyihiin in ay

noqdaan kuwo hufan iyada oo wakiil ka ah ganacsigooda iyo qorshooyinka mustaqbalka

ka hor bankiga iyo hay'adaha maaliyadeed si ay u helaan kalsooni, iyo kalsoonida

deymiyeyaasha, si ay u balaariyaan maaliyadooda. Sidoo kale, ganacsiyada yaryar

waxay unaqaneysaa fursado ay ku helikaraan fikrado cusub iyo inay sameeyaan ballan-

qaad dhaqaale si loo xaqiijiyo koritaanka.

iii
iv
v
vi
 ACKNOWLEDGMENTS

First and foremost, we would like to thank “Allah” for giving us good health, talented

blessing and patient, which have enabled us to pursue this bachelor thesis. Second, we

would like to thank our research supervisor, who spared his precious time to give

wonderful and professional service, rightful guidance and encouragement, which enabled

us carry out this study successfully. Mr. Hussein Abdi Mohamud for his help and

guidance throughout the research process, without his careful supervision and expertise,

would not have been completed; he has been a valuable guide and has helped us to mature

this study Thank you, Mr. Hussein for your positive attitude. Thirdly, we are fully

indebted to our friends for their moral, spiritual and financial support during our period of

study. Without their continued support, this may have not been achieved. Our love for

them endures for a life time. Fourthly we would like to thank all our lecturers and friends

in SIMAD University; we could not have made it to this achievement without the love

and support for them. last but not least we would like to thank our parents, sisters and

brothers who assisted us morally through our studies without their lovely and support,

none of this would have been sufficient. May the Almighty Allah, the Most High and

merciful Allah bless them All.

vii
 TABLE OF CONTENTS
ABSTRACT A (ENGLISH)............................................................................................................ii
ABSTRACT B (SOOMAALI).......................................................................................................iii
DECLARATION A.......................................................................Error! Bookmark not defined.
DECLARATION B.......................................................................Error! Bookmark not defined.
APPROVAL SHEET.......................................................................................................................v
ACKNOWLEDGMENTS.............................................................................................................vii
CHAPTER ONE: INTRODUCTION..............................................................................................1
1.1. BACKGROUND OF THE STUDY.........................................................................................1
1.2. STATEMENT OF THE PROBLEM........................................................................................4
1.3.OBJECTIVES OF THE STUDY...............................................................................................6
1.3.1. General Objectives.................................................................................................................6
1.3.2. Specific Objectives................................................................................................................6
1.4. RESEARCH QUESTIONS......................................................................................................6
1.5. SCOPE OF THE STUDY.........................................................................................................6
1.6. SIGNIFICANCE OF THE STUDY.........................................................................................6
1.7. OPERATIONAL DEFINITION...............................................................................................7
CHAPTER TWO: LITERATURE REVIEW..................................................................................9
2.0 INTRODUCTION.....................................................................................................................9
2.1. DEFINITION AND CONCEPT OF MICROFINANCE INSTITUTION...............................9
2.2. CHALLENGE OF MICRO-FINANCE FACED BY COMMERCIALS..............................10
2.3. THE RELATIONSHIP BETWEEN O MICROFINANCE INSTITUTION AND MICRO BUSINESS
.......................................................................................................................................................10
2.4. CONCEPTUAL FRAME WORK:.........................................................................................20
2.5. LITERATURE SUMMARY AND CONCLUSION..............................................................20
2.6. LIMITATIONS.......................................................................................................................20
CHAPTER THREE: METHODOLOGY......................................................................................22
3.0 INTRODUCTION...................................................................................................................22
3.1 RESEARCH DESIGN.............................................................................................................22
3.2 RESEARCH POPULATION..................................................................................................23

viii
3.2.1. Sample size..........................................................................................................................23
3.2.2. SAMPLING PROCEDURE................................................................................................24
3.3. DATA COLLECTION...........................................................................................................24
3.3.1. RESEARCH INSTRUMENT..............................................................................................24
3.3.2 REALIBILITY AND VALIDITY OF THE INSTRUMENT..............................................24
3.4. DATA ANALYSIS................................................................................................................25
3.5. DATA GETHERING PROCEDURE.....................................................................................25
3.6. ETHICAL CONSIDERATION..............................................................................................26
3.7. LIMITATIONS OF THE STUDY.........................................................................................26
CHAPTER FOUR: FINDINGS AND DISCUSIONS..................................................................28
FINDINGS AND DISCUSIONS..................................................................................................28
4.0 INTRODUCTION...................................................................................................................28
4.1 DEMOGRAPHIC DATA........................................................................................................28
4.2 DATA PRESENTATION AND ANALYSIS.........................................................................30
4.3. MAJOR FINDINGS...............................................................................................................41
4.4. DISCCUSSION......................................................................................................................42
CHAPTER Five: CONCLUSION AND RECOMMENDATIONS..............................................44
5.0 INTRODUCTION...................................................................................................................44
5.1 CONCLUSION........................................................................................................................44
5.2 RECOMMENDATIONS.........................................................................................................45
REFERENCES..............................................................................................................................46

ix
 CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

The history of micro-financing can be traced back as long to the middle of the 1800s

when the theorist Lysander Spooner was writing over the benefits from small credits to

entrepreneurs and farmers as a way of getting the people out of poverty. But it was at the

end of World War II with the Marshall plan and the concept had a big impact. The

concept of microfinance is not new. Savings and credit groups that have operated for

centuries include the "Susus" of Ghana, "Chit funds" in India, "Tandas" in Mexico,

"Arisan" in Indonesia, "Cheetu" in Sri Lanka, "tontines" in West Africa, and "Pasanaku"

in Bolivia, as well as numerous savings clubs and burial societies found all over the

world. Formal credit and savings institutions for the poor have also been around for

decades, providing customers who were traditionally neglected by commercial banks a

way to obtain financial services through cooperatives and development finance

institutions. One of the earlier and longer-lived micro credit organizations providing small

loans to rural poor with no collateral was the Irish Loan Fund system, initiated in the

early 1700s by the author and nationalist Jonathan Swift. Swift's idea began slowly but by

the 1840s had become a widespread institution of about 300 funds all over Ireland. Their

principal purpose was making small loans with interest for short periods. At their peak

they were making loans to 20% of all Irish households annually [ CITATION MOK13 \l

1033 ].

In the 1800s, various types of larger and more formal savings and credit institutions

began to emerge in Europe, organized primarily among the rural and urban poor. These

1
institutions were known as People's Banks, Credit Unions, and Savings and Credit Co-

operatives. Formal credit and savings institutions for the poor have been around for

decades, providing customers who were traditionally neglected by commercial banks a

way to obtain financial services through cooperatives and development finance

institutions [ CITATION Iga08 \l 1033 ].

Between 1950s and 1970s, governments and donors focused on providing agricultural

credit to small and marginal farmers, in hopes of raising productivity and incomes. These

efforts to expand access to agricultural credit emphasized supply-led government

interventions in the form of targeted credit through state-owned development finance

institutions, or farmers' cooperatives in some cases, that received concessional loans and

on-lent to customers at below market interest rates. These subsidized schemes were rarely

successful. Rural development banks suffered massive erosion of their capital base due to

subsidized lending rates and poor repayment discipline and the funds did not always

reach the poor, often ending up concentrated in the hands of better-off farmers [ CITATION

Iga08 \l 1033 ].

Meanwhile, starting in the 1970s, experimental programs in Bangladesh, Brazil, and a

few other countries extended tiny loans to groups of poor women to invest in micro-

businesses. This type of microenterprise credit was based on solidarity group lending in

which every member of a group guaranteed the repayment of all members. These

"microenterprise lending" programs had an almost exclusive focus on credit for income

generating activities (in some cases accompanied by forced savings schemes) targeting

very poor (often women) borrowers [ CITATION Vin06 \l 1033 ].

2
The provision of financial services to low-income, poor and very poor self-employed

people. So, it concerns providing financial services to micro enterprises. These financial

services generally include savings and credit but can also include other financial services

such as insurance and payment services. Therefore, microfinance involves the provision

of financial services such as savings, loans and insurance to poor people living in both

urban and rural settings who are unable to obtain such services from the formal financial

sector [ CITATION DrA13 \l 1033 ].

The beginnings of the microfinance movement are most closely associated with the

economist Muhammed Yunus, who in the early 1980's was a professor in Bangladesh. In

the midst of a country-wide famine, he began making small loans to poor families in

neighboring villages in an effort to break their cycle of poverty. Financial services that

allow poor people to save in times of prosperity and borrow or collect insurance when

necessary allow them to maintain a consistent level of consumption without selling off

income-producing assets. Microfinance can also provide an opportunity for expanding or

pursuing new business opportunities that allow poor people to increase or diversify the

sources of their income[ CITATION Abu09 \l 1033 ].

Microfinance is not new in Africa, other societies and history we come across schemes

and social arrangements which enable people to pull their resources for onward

distribution to cooperatives and needy individuals. Ready examples include Adashe and

variants of Esusu. Nigerian microfinance institutions have also integrated the best

practices of traditional scheme into operational procedures (Ehigiamusoe, 2006).

In Africa, the microfinance industry is as diverse as the continent itself and

geographically dispersed. An array of approaches has been used ranging from traditional

3
group based- systems to specialized lending by banks, non-governmental organizations

(NGOs), non-bank financial institutions, cooperatives, rural banks, savings and postal

financial institutions and increasing number of banks. In Somalia, Sa’id foundation began

micro-credit programs in 1993.Said received its capital injection from Oxfam America

(Sa’id foundation report, 2005). Salam Somali bank launched microfinance program to

help the poor and small business in 2010 (Salam Somali Bank, 2011).

The terms microcredit and microfinance are often used interchangeably, but it is

important to highlight the difference between them because both terms are often confused

“microcredit refers to small loans, whereas microfinance is appropriate where NGOs and

MFIs1 supplement the loans with other financial services (savings, insurance, etc)” said

by ( Sinha 1998, p.2). Therefore microcredit is a component of microfinance in that it

involves providing credit to the poor, but microfinance also involves additional non-credit

financial services such as savings, insurance, pensions and payment services [ CITATION

Abu09 \l 1033 ].

1.2. STATEMENT OF THE PROBLEM

Microfinance is the provision that provides access to various financial services such as

credit, savings, micro insurance, remittances, leasing to low-income clients including

consumers and the self-employed, who traditionally lack access to banking and related

services. Its main objective is to provide a permanent access to appropriate financial

services including insurance, savings, and fund transfer. It is rather an important tool for

the eradication of poverty. As microfinance becomes more widely accepted and moves

into main stream, the supply of services to poor may also increase, improving the

efficiency and outreach while lowering the costs. A study of MFIs in seven countries

4
carried out by Mosley and Hulme (1998), concludes that household income tends to

increase at a decreasing rate as the income and asset position of the debtors is improved.

Buckley (1997), did a study on the effect of MFI lending to the growth of SMEs and

found that, the indicators of success of microcredit programs namely high repayment rate,

outreach and financial sustainability does not take into consideration what impact it has

on micro enterprise operations and only focusing on “microfinance evangelism”.

Carrying out research in three countries; Kenya, Malawi and Ghana, Buckley (1997)

came to the conclusion that there was little evidence to suggest that any significant and

sustained impact of microfinance services on clients in terms of SME development,

increased income flows or level of employment [ CITATION col16 \l 1033 ].

Diagne and Zeller (2001) in their study in Malawi suggest that microfinance do not have

any significant effect in household income meaning no effect on SME development.

Investing in SME activities will have no effect in raising household income because the

infrastructure and market is not developed [ CITATION col16 \l 1033 ].

Yasin, (2013), adapted a study of Microfinance lending relevance to the SMEs growth in

Mogadishu, Somalia. The study identified that Small businesses in Mogadishu are facing

challenges to access loan from MFIs and this results many small businesses to demise

soon or may not be started due to lack of ability to overcome the challenges. The finding

showed how SMEs in Mogadishu face some requirements to have an access to borrow

money from Microfinance institutions. Also, the findings revealed that the requirements

hinder the possibility of borrowing money from microfinance institutions so as to start,

run or expand small businesses. It is because of the fact that the SMEs owners cannot

meet the requirements set by the Microfinance institutions. [ CITATION Vin06 \l 1033 ]. The

5
previous studies made on microfinance lending relevance to the SMEs, unfortunately it

was not including the challenges faced by of microfinance providers. Therefore, the

challenges faced by of microfinance providers seemed that has not received adequate

attention in the previous studies. Enhance, the researchers will attempt to explore the

current challenges faced by microfinance institutions in Mogadishu, Somalia [ CITATION

Ali13 \l 1033 ].

1.3. OBJECTIVES OF THE STUDY

1.3.1. General Objectives

The main aim of this study is to identify the challenges face by microfinance institutions

from micro business and tries to understand the cause of those challenges.

1.3.2. Specific Objectives

1. To determine the challenges of individual loans to the banks in Mogadishu.

2. To identify the obstacles of group loan to the bank.

1.4. RESEARCH QUESTIONS

 How challenges of individual loan can effect on banks in Mogadishu?

 How much obstacles from group loan to the bank?

1.5. SCOPE OF THE STUDY

This section was organized to deliberate on the impact of microfinance institutions from

micro business focusing on time bad depts. The data will be collected using questionnaire

as a research instrument. The study was conduct African continent especially east Africa,

Mogadishu- Somalia with the concentration on some financial institutions in Bandar

region. The study covered a period often months starting a period of October 2017 to

January 2018.

6
1.6. SIGNIFICANCE OF THE STUDY

The findings of the study will provide research-based information to the government,

civil society and the international community operating in Somalia about the effect of

MFIs on micro business. The findings of the study will provide up to date information to

future researchers and academicians about the effect of MFIs on micro business; thus,

contributing to the body of knowledge about the subject under investigation.

1.7. OPERATIONAL DEFINITION

Microfinance: The word microfinance helps poor community and also is a financial

service especially in the form of microloans provides to impoverished individuals and

groups in poor and developing regions.

Microfinance also know as microcredit is a financial service that offer loans, savings and

insurance to entrepreneurs and small business owners who do not have access to

traditional sources of capital like banks or investors.

A loan: Is the act of giving money, property or other material goods to another party in

exchange for future repayment of the principal amount along with interest or

other finance charges. A loan may be for a specific, one-time amount or can be available

as an open-ended line of credit up to a specified limit or ceiling amount.

Group loan: Is a lending mechanism which allows a group of individuals - often called a

solidarity group to provide collateral or loan guarantee through a group repayment

pledge. The incentive to repay the loan is based on peer pressure, if one group member

defaults, the other group members make up the payment amount.

Individual loan: Consumer loan granted for personal (medical), family (education,

vacation), or household (extension, repairs, purchase of air conditioner, computer,

7
refrigerator, etc.) use, as opposed to business or commercial use. Such loans are either

unsecured or secured by the asset purchased or by a co-signor (guarantor).

Bank: an establishment authorized by a government to accept deposits by interest clear

checks makes loans act as an intermediary in financial transactions and provide other

financial service to its customers.

8
 CHAPTER TWO

LITERATURE REVIEW

2.0 INTRODUCTION

This chapter focuses on analyzing the outreach performance of Microfinance institutions

(MFIs) in providing critical services for the poor using innovative lending techniques

within constrained environments.

Hence the research shows the relationship between microfinance institution to micro

business in Mogadishu, the hypothesis and the conceptual framework research

hypothesis, the summary and conclusion.

2.1. DEFINITION AND CONCEPT OF MICROFINANCE INSTITUTION

According to the Asian Development Bank (ADB), “Microfinance is the provision of a

broad range of financial services such as deposits, loans, payment services, money

transfers, and insurance to poor and low-income households and their microenterprises”.

The meaning of ‘microfinance institution’ is ambiguous; the study begins by clarifying

the term and linking that to three specific roles in the value chain. The first role, funding

related, is concerned with the raising and channeling of capital by microfinance

investment intermediaries (MIIs) and microfinance investment vehicles (MIVs), where

the letter, a type of special purpose entity consisting of private investment funds managed

by specialized investment managers also The exponential growth of the industry has

contributed significantly to improved social welfare, job creation, enterprise development

and the general financial health of most economies. Improvements in service delivery

through the adoption of easy banking practices, for example, ATMs, Internet banking and

mobile banking have made MFIs more efficient and sustainable[CITATION Her11 \l 1033 ].

9
Microfinance aims to reduce poverty in developing countries; grassroots development

(GRD) through microfinance programs has long been n seen as a way of involving

unemployed stakeholders to effect sustainable rural development[ CITATION Ste01 \l 1033 ].

2.2. CHALLENGE OF MICRO-FINANCE FACED BY COMMERCIALS

Markowski (2002), conducted a study on the contribution of MFIs to the enterprise, in

their project designs are failing to meet the needs of the very poor and destitute, who do

have a demand for microfinance services, especially for savings (Littlefield and

Rosenberg, 2004 and Ditcher, 1999). They are ignored, yet an objective of the

Microcredit Summit is to reach 175 million poor people by 2015 but MFIs do not seem to

be on target for meeting this objective. Therefore, the effect of microfinance on small and

medium business has not received adequate research attention in Mogadishu.

Study made in Mogadishu about the Accessibility of Microfinance for Small Businesses

in Mogadishu, Somalia, Small business have challenges facing in fulfillment of

requirement and difficult to loan from financial institutions, accessing microfinance

services small and medium sized enterprises in Mogadishu and The results obtained for

this study showed that the requirements for small business to access loan MFIs are

Individual collateral, Repayment capacity, Security deposit or guarantor[ CITATION

DrA13 \l 1033 ].

2.3. THE RELATIONSHIP BETWEEN O MICROFINANCE INSTITUTION AND MICRO

BUSINESS

There is a study made about microfinance and is the first dedicated to this topic using a

hand-collected dataset of 112 institutions from 34 countries covering the period from

2008 to 2012. Based on institutional theory and resource-based argument, we empirically

10
assess the effects of institutional environment factors, including regulative, normative,

and cognitive elements, as well as resource-based factors, including practice model and

multinational diversity, on the intensity of engagements. To do so, we define the roles as

capital related, product-related, and service delivery, and calculate engagement intensity

using a scoring method which reflects an organization’s extent of presence in the

microfinance value chain. The analysis takes the engaging location (domestic or overseas)

and engaging model (connected or unconnected to core business) into account.

We find that the two logics together can explain such involvement. Legal compliance is

identified as most relevant for domestic players, while resource-based factors are more

relevant for overseas players. In addition to regression analysis, many cases are identified

to support the arguments [ CITATION Tzu15 \l 1033 ].

Development and the associated culture, of the banking system underpin the problem of

the emphasis on the provision of collateral as a primary condition in lending. Banks have

always adopted a risk adverse stance towards small firms, with an accompanying inability

to focus on the income generating potential of the venture, when analyzing the likelihood

of loan repayment (Beaver, 2002).

Credit constraints can occur when banks increase collaterals for loans. As a result, low

interest borrowers (including MSEs) may be removed from the list of potential customers

and banks may skip these customers (Stieglitz& Weiss, 1981). Gangata & Matavire,

(2013) in their study on challenges facing MSEs in accessing finance from financial

institutions, found out that very few MSEs succeed in accessing funding from financial

institutions, the main reason being failure to meet lending requirements, chief among

them being provision of collateral security.

11
A study was done on challenges faced by Small & Medium Enterprises (SMEs) in

obtaining credit in Ghana. Based on the responses received through the questionnaires

circulated, it became evident that SMEs in Ghana like most SMEs in other countries are

faced with major challenges in accessing credit. These challenges were revealed by the

study to include, the inability of SMEs to provide collateral and other information needed

by banks such as audited financial statement couple with the high cost of loan in terms of

high interest rates make it extremely difficult to access bank loans (Vuvor & Ackah,

2011).

Cressy and Toivanen (2001) say that, “better borrowers get larger loans and lower interest

rates; collateral provision and loan size reduce the interest rate paid. The bank is shown to

use qualitative as well as quantitative information in the structuring of loan contracts to

small businesses.” In effect, it may therefore be that simple because banks approach the

lending process in a risk-averse way (in order to protect the funds of savers), and thus

turn down a number of propositions perceived to be ‘riskier’, that there is an apparent

‘discrimination’ against for example women and ethnic minorities.

Risk factor is another aspect that explains the access to credit facilities by MSEs. Total

risk (both business and financial risk) may be a dimension across which a financing gap

might exist. A firm’s business risk (which focuses on a firm’s operations), represents the

uncertainty of the firm’s return on its assets (Correia, Flynn &Wormald, 2008). Whereas,

financial risks occur when a firm makes use of debt (that is, financial leverage). In such

instances, the firm takes on additional responsibility of financing the debt which is paying

interest payments on time. The inability of the firm to pay the interest payments or repay

the principal will result in a default that might lead to bankruptcy. As the amount of debt

12
used by the firm increases, the chances of it defaulting will also go up due to constraints

on its cash flows as a result of the interest payments. MSES rely more on external

financing, thus the financial risk in the MSE sector is most likely to be very high.

Green, (2003) argued that commercial banks tend to impute a high risk to small

enterprises and are therefore reluctant to extend credit to them. Due to their small size and

inherent vulnerability to market fluctuations, the mortality rates of small enterprises are

relatively high. These firms sare, by their very nature, often relatively young and

consequently lack a financial history and a track-record of profitable projects. In addition,

organization and administrative deficiencies, lower quality management and a lack of

appropriate accounting systems may compromise the accessibility and reliability of

information from small firms on their repayment capacity.

The difficulties faced by MSEs in accessing credit facilities are attributed to their

perceived higher risk profile. Lending institutions regard MSEs as riskier enterprises for a

number of reasons which include: uncertain competitive environment; inadequate

accounting systems; more unpredictable operating environment in the developing and

emerging markets; assets not properly registered; delayed payments for the products and

services rendered; less equipped in terms of both human and financial resources to

withstand economic resources (Van Aardt &Fatoki, 2012).

This paper examines the contributions of microfinance towards the rural poverty

reduction. To achieve this objective, the study adopted multi-stage random sampling

technique to collect primary data through the structured questionnaire. A total sample of

1,134 microfinance loan beneficiaries and non-beneficiaries were used as respondents

from three (Ogun, Osun and Oyo states) out of six states in South- West Nigeria.

13
Statistical Percentage techniques were used to describe the characteristics of the sample

from the study.

The results revealed that microfinance have marginal effects on the rural poor in

Southwest Nigeria. Policy makers are advised to provide adequate infrastructural

facilities that will encourage MFIs to establish branches in the rural areas. MFIs should

endeavor to create more awareness to the rural poor with realistic loan procedure that will

encourage the poor to access microcredit loan [CITATION Tao10 \l 1033 ].

Also, another study of micro finance was made in India; it has played a significant role in

the progress of the Indian rural as well as urban economy. A large number of Micro

Finance Institutions (MFIs) in India are serving to the financing needs of rural and semi-

urban Indian population [ CITATION ayy11 \l 1033 ].

For achieving the target of financial inclusion in India this sector cannot be ignored.

Generally daily wage earners, marginal farmers, women working from homes are the

clients of MFIs. Such clients work only cash basis. Collection of loan is generally done

by MFIs on weekly or fortnightly basis. The objective of the paper is to analyze the short

and medium term positive and negative effects of many government decisions including

demonetization on MFIs in India. This study will give more insights about the impact of

the demonetization and other government policy framework on MFIs in India [ CITATION

Raj00 \l 1033 ].

The study was told the effects of length of microfinance borrowing, service provider and

other factors on microfinance participation and outcomes in Bangladesh are investigated.

Data were collected from 300 microfinance respondents using face-to-face semi-

14
structured interviews. Descriptive and econometric statistics were used for data analysis.

The financing authorities gave

preference to rural, powerless, illiterate and poor people in all groups of candidates.

Spillover effects were minimized by considering endogeneity, attrition bias and

unobserved bias.

The fixed effect instrumental variable method was used to show that the microfinance

effects changed over time. i.e. were greater in historical borrowing than in more recent

borrowing, the financing authority should prioritize and offer larger loans when recipients

are relatively large-scale farmers with income security and previous experience in the

same field. Financing authorities also need to confirm that the money received is being

used productively to foster sustainable development.

Repayments should be started after a certain period of investment, since clients need time

to start to earn money from their investment[ CITATION Moh15 \l 1033 ].

The theory of outreach posits that the poorer the borrowers served by an MFI, the better

the outreach. In this regard, institutions that provide small loans to client’s augment

outreach (Jegede, Kehinde & Akinlabi 2012; Schreiner 2002) since their primary target

market are those living in poverty. The concept of outreach, though vague (Okumu 2007),

is now being measured using acceptable variables. However, consensus on conceptual

definitions for outreach is far from finalized. In this study, outreach is defined as the

number of poor clients reached by MFI with high-quality financial products and services

in a form that meets their needs this study has highlighted the trade-off between the depth

and breadth of outreach as well as the institutional factors that drive microfinance

outreach with a focus on SSA. The study used correlation and RE regression

15
methodology to show the outreach performance of MFIs. Our results provide supportive

evidence to the higher operating costs proposition for MFIs in the industry[ CITATION

Jeg17 \l 1033 ]. Although most studies indicated that there were problems relating to cost

of credit, availability of information on finance, collateral requirements and business

risks, there have been few studies that have dealt with all in combination. For instance,

Gitari, (2012) found in her study on factors affecting women entrepreneurs’ financial

performance in Kenya: a case of Ngara Market that lack of information on who is

offering what and the cost of obtaining such services limit them and that high inventory

costing are some of the major drawbacks for success in women entrepreneurship. She

however did not study the effect of cost of credit and collateral provision on accessibility

of credit facilities.

Mira and Ogollah, (2013) in their study on challenges facing accessibility of credit

facilities among women owned enterprises in Nairobi Central Business in Kenya

concluded that lack of information accessibility, insufficient skill and knowledge level,

lack of collaterals required and socio-cultural roles had a strong and negative influence

towards the accessibility of finance. However, they did not look at the effect of cost of

credit on accessibility of credit facilities. This study therefore sought to find out how

collateral requirements, cost of credit, availability of information on finance and business

risks affect accessibility of credit facilities by MSEs in Kangemi Harambee Market in

Nairobi City County, Kenya.

This paper is a modest effort to understand the unique role of MFIs in social development

especially in Indian context. Although providing financial services is the primary goal of

MFIs, these small institutions have tried to make a big difference in the lives of the poor

16
by various interventions revolving around social development of marginalized sections.

MFIs in India have been involved in capacity building, financial literacy, livelihood

promotion, preventive healthcare, education and training, water and sanitation, etc. The

paper provides a comprehensive review of some of the interventions triggered by MFIs in

India so as to empower the people living on the fringes without any hope of redemption.

Besides, the paper also emphasizes the need for providing financial incentives to the

MFIs engaged in social development of the poor by the state agencies as well as large

banks which are supporting these institutions. Financial inclusion alone cannot empower

the poor. It is important that the MFIs expand their social

Development interventions in terms of reach, quality, and overall impact on the people

who are living on the margins widely acceptable objective measures and standards to

assess social

Development interventions are essential for taking forward the social agenda of the MFIs

and

Consolidate their position as key player in social sector[ CITATION Sri16 \l 1033 ].

This article is organized as follows. First, it briefly touches upon developments in the

microfinance sector; particularly the crisis in the state of Andhra Pradesh The

microfinance sector has passed a crest, an extended through, and is riding a wave of

resurgence in India. The cause of its debacle and subsequent government action is now

firmly in the past, and the sector is on an upward trajectory (Crisil, 2014; Sa‐Dhan, 2014).

The Fulfilling economic responsibility will remain at the core of all businesses, including

those of the MFIs. Social and philanthropic responsibilities may be taken up as

discretionary activities by smaller MFIs, while larger ones should have a continuous

17
engagement in such activities for societal betterment. Legal responsibilities have to be

strictly adhered to by all, so as not to get into trouble with the regulator. Knowledge

sharing and management may be practiced among microfinance practitioners operating in

an area as part of an ethical code of conduct. This does not mean that all client

information should be shared, but cases of nonpayment of loans by individual as well as

group borrowers could be shared in a regional or local area repository managed by all

MFIs operating in that area. Such a repository can help prevent over borrowing by poor

clients who,

Without such knowledge sharing, may borrow from one MFI to service the loan from

another, thereby falling into a deeper debt trap. Even then there is no method to ensure

that clients will not borrow from informal sources like money lenders [CITATION Dim16 \l

1033 ].

Myers &Majluf, (1984) developed the Pecking Order Theory (POT) based on the premise

that ‘inside’ management are better informed of the true value of the firm than the

‘outside’ investors. These information asymmetries result in varying costs of additional

external finance, as potential investors perceive equity to be riskier than debt. They

propose that firms seek to overcome problems of undervaluation arising from information

asymmetries, preferring to finance investment projects with internal funds in the first

instance. When internal equity is exhausted, firms use debt financing before resulting to

external equity. Authors state that the POT is even more relevant for the SME sector

because the relatively greater information asymmetries and the higher cost of external

equity for SMEs (Ibbotson, Sindelar& Ritter, 2001). Additionally, a common

18
phenomenon in the sector is the desire of the firm owners to retain control of the firm and

maintain managerial independence (Jordan, Lowe& Taylor, 1998).

These factors suggest that MSE owners source their capital from a pecking order of, first,

their “own” money (personal savings and retained earnings); second, short-term

borrowings; third, longer term debt; and, least preferred of all, from the introduction of

new equity investors, which represents the maximum intrusion. Empirical evidence

supports applicability of the POT in explaining the finance of MSEs (Ou& Haynes,

2006). These studies emphasize that small firms rely on internal sources of finance and

external borrowing to finance operations and growth, and only a very small number of

firms use external equity. A number of studies report that firms operate under a

constrained pecking order, and do not even consider raising external equity (Howorth,

2001).

Adherence to the POT is dependent not only on demand-side preferences, but also on the

availability of the preferred source of financing. The supply of finance depends on many

factors, particularly the stage of development of the firm. The most important source of

funding for start-up and nascent firms are the personal funds of the firm owner, and

funding from friends and family. Howorth (2001) investigated the pecking order,

although the theory emerged in other literature: entrepreneurs tend to seek finance first

from their own resources, and then friends and families, and then from other sources

such as banks. Indeed, the money from family and friends is often essential (and often

regarded as quasi-equity by the banks) to unlock support from commercial institutions.

2.4. CONCEPTUAL FRAMEWORK

Individual loan

Group loan
19
Bank
  Product Diversification
 Outreach
 Loan Repayment

Figure2.1. Conceptual frame work. Sources Authors, (2018)

2.5. CONCLUSION

All Various literatures showed that the term micro business involve to the Microfinance

institutions. The main finding indicated that the individual collateral, repayment capacity

and guarantor plays an important role in fulfillment of loan from banks to small business

enterprise challenges for microfinance loan in the bank has not yet received adequate

research. Researchers need further research in our country in order to fill this gap and to

get the highest possibility for removing challenges in the microfinance that allow the

banks to achieve their goals for supporting small-business enterprise and the lead for

economic growth of the country.

2.6. LIMITATIONS

This research which is a comparative study between two countries made the analysis

based on only two banks one from each country respectively. There could be limitation

on the reliability of the generalization of the results since two banks are not representative

of the number of banks in these countries. Other banks were not consulted due to time

and financial constraints even though the banks consulted are specialized in SME loan

20
financing. Also, SMEs were not consulted to understand from their own perspective, the

challenges they face in accessing loans from banks in the different economies.

Further studies are therefore recommended to involve more banks and SMEs in the two

countries on similar topic to compare the results and to make the generalization of the

results and the recommendations suggested more reliable.

21
 CHAPTER THREE

METHODOLOGY

3.0 INTRODUCTION

This chapter focused on research methodology including research design, research

population including sample size and sampling procedure, research instrument, reliability

and validity, data gathering procedure, data analysis, ethical consideration and limitation

of the study.

3.1 RESEARCH DESIGN

The present study focused on challenges of micro-finance loans to the bank therefore the

investigators adopted explanatory and descriptive research design, because of

Explanatory studies look for explanations of the nature of certain relationships. Schindler

and Cooper (2003) observed that descriptive studies are structured with clearly stated

questions to be investigated. The descriptive design was selected in this study because it

would allow the researcher to gather numerical and descriptive data to assess the

relationship between the variables. the mean index we used ,1-1.8 are disagree and 1.8-5

are agree , to strength on studying a situation or a problem in order to explain the

relationships between micro-finance institutions and small business enterprise . Survey

research design is adopted for the purpose of this study together with cross-sectional.

Because the cross-sectional is cost and time effective and also data can be gathered just

once perhaps over a period of days, weeks or months, in order to answer research

questions (Sekarana, 2003).

22
3.2 RESEARCH POPULATION

Target population refers to the total number of subject or the total environment of interest

to the researchers. Hence, this study was conducted in some financial institutions run in

Mogadishu; these institutions had been chosen because of they are the only four

institutions provide microfinance loans. The Institutions consisted of Dahabshiil Bank

International, Amal Bank, International Bank of Somalia and Kaah Islamic Microfinance.

The accessible populations are 57 Micro-Finance Employees [ CITATION Iss18 \l 1033 ].

3.2.1. Sample size

The researchers used Solvent’s formula to calculate the sample size, with maximum

N
acceptable error 5 %. n¿
1+ N e 2

N: Stands the population

n. Stands the sample

a. Stands acceptable error

57 = 50 Employee

1+ 57(0.05) ^2

Therefore, the samples that will distribute are 50 questionnaires

Table 1:3.1: Respondents of the study

Financial Institutions Sample size

Dahabshil Bank 20

International Bank of Somalia 10

Amal Bank 11

Kaah Islamic Micro-finance Service 9

TOTAL 50

23
3.2.2. SAMPLING PROCEDURE

The study conducted probability sampling particularly stratified random sampling. It

refers probability sampling procedure in which the population is divided into two or more

relevant strata, so this survey distributes four financial Institutions both officers and

micro-finance related employees.

3.3. DATA COLLECTION

3.3.1. RESEARCH INSTRUMENT

This study uses a questionnaire as a tool of data collection from every respondent. The

main purpose of the questionnaire is to collect a lot of information short period of time.

Because they are suitable if a population is large and time is limited. Therefore, this study

used structured questionnaire which developed by the researchers.

3.3.2 REALIBILITY AND VALIDITY OF THE INSTRUMENT

Researchers engaged to maintain the reliability of the study by testing the reliability.

Reliability refers to the extent to which data collection technique yield consistent

findings, similar observation is made or conclusion reached by other researchers or there

is transparency in how sense was made from the raw data [ CITATION Sau09 \l 1033 ]

Thereby the research team used pilot testing 10 questionnaire in one bank before

distribution the main sample, then the collection of data is run (Cronabach Alpha) to test

the internal consistence of questionnaire items.

While Validity can be stated that a research has highly validity if the study only contains

what one wants to study and nothing else. Validity refers to how well the data collection

and data analysis of the research captures the reality being studied. In other words, the

24
researchers must obtain the reality of responses of those people who are under the test

through comparing their responses with such truth that in deed is truth. [ CITATION Kot04 \l

1033 ]

3.4. DATA ANALYSIS

The data was analyzed using explanatory methods for analyzing; While correlation

coefficient were used to investigate the relationship of micro-finance institutions and

small scale business in Mogadishu Somalia. This study used quantitative approach a nd

data was analyzed by using statistical package for the social science (SPSS) version 20.0.

To examine the stated objective, Descriptive statistics was used of measure of central

tendency such as percentages, mean and standard deviation and measures of description

such as range 1-1.8 are disagree and 1.8-5 agree , quartile deviation, standard deviation

and variance to describe a group of subjects (Oso et al., 2005).

3.5. DATA GETHERING PROCEDURE

The following data collection procedure was implemented.

A. Before the administration of the questionnaire

Data collected from both primary and secondary sources, primary data was obtained from

key directors and staff, secondary data is obtained through reviewing related literature

such as published books, magazines, journals and internet sources.

B. During the administration of the questionnaire

Specifically, the researchers were seriously particularly requesting the respondents of the

following (1) to sign the informed consent (2) to answer all questions hence should not

leave any item UN answered (3) to avoid biases and to be objective in answering the

25
questionnaires. The researchers were tried retrieving the questionnaires within three

weeks from the data of distribution.

C. After the administration of the questionnaire

The data collected is organized, summarized, statistically treated and drafted in Statistical

Package for Social Sciences (SPSS).

3.6. ETHICAL CONSIDERATION

In this study the researchers consider the ethical issues throughout the research project,

and keep the openness, privacy and confidentiality of the respondent, to keep the ethical

issues data given by the respondent was used only for academic purpose, this research is

conducted ethically, all copyright is observed and permission is required to reproduce

materials are sought.

3.7. LIMITATIONS OF THE STUDY

Although the researchers promised to keep the obtained information as confidential, some

respondents might not give all the required information, because of fear to expose it to the

competitors. The researchers solved this by spending time with the respondents explain to

them that the study was basically for academic purposes. Researchers had the following

potential limitations, such limitation was regarded the small sample size of the study,

arising from the small population of Financial Institutions in Mogadishu and study

focused on a Mogadishu only which means the results were biased and only applicable to

that place. Thus, the extent to which the results of this study can be generalized is

questionable. Finally, researchers used judgmental sampling method which may lead to

favor some participants from others, which in turn affects the generalize ability of the

results.

26
27
 CHAPTER FOUR

FINDINGS AND DISCUSIONS

4.0 INTRODUCTION

This study investigated the challenges of microfinance loans to the commercial banks in

Mogadishu-Somalia. In this chapter, the researchers present and cover the research

findings, analysis and interpretation of the data, in order to achieve the objectives of the

study; the data collected through questionnaire was analyzed by descriptive statistics and

correlations. This chapter introduces these sections, 4.0 Introduction, 4.1 Demographic

data, 4.2 Data presentation and analysis, 4.3 Major findings, 4.4 Discussions.

4.1. RELIABILITY ANALAYSIS

Objectives Cronbach's Alpha Comments

Aver all objectives reliability of data 0.765 Accepted

SOURCE: Primary Data, (2018)

4.1 DEMOGRAPHIC DATA

This section presents the demographic characteristics of the respondents of the study; the

sample size of the study was 50 respondents. The demographic characteristics of the

respondents in the study were Age, Gender, Education, and Marital status. After the

questionnaire distributed and collected and analyzed, the researchers found the following

characteristics of the respondents.

28
Table 4.1.1 Demographic Analysis

SOURCE: Primary Data, (2018)

Table 4.1.1 displays demographic characteristics of respondents.

Total of respondents of this study was 50 workers in the banks Mogadishu-Somalia. In

terms of gender 41 were male and 9 were female this means that 82% were male and 18

% were female thus male dominated than female.

According to the marital status of respondents 15 were single and the remaining out of 35

was married. On average was 30% and 70 % single and married respectively.

29
 In the age group of this study was categorized into five groups such: 3 of the respondents

their age between18-21 which means 6%. Also, the age 22 of respondents lies 21-25 of

the total of respondents on average is 44%. The age 15 of the respondents was between

26-30, in percentage is equivalent 30%. Also, 9 of respondents were at age 31-35 which

means 18%. And lastly remaining respondent’s age 36-45 was only one person

According the age groups of employees in banks mostly their age lies 21-25 years. This

result shows majority of employees are youth. In terms of qualification 14 % are diploma

level and 56 % are bachelor degree, also 30% are master level.

4.2 DATA PRESENTATION AND ANALYSIS

4.2.1. Frequency analyzes

This section presents the analysis of the data that collected from asked questions related

to the information of the respondents were analysed and described using frequency tool

4.2.1.1. Institutions operate the respondents

Institutions Frequency Percent
IBS Bank 10 20.0
Amal bank 11 22.0
Dahabshiil bank 20 40.0
Kaah Islamic microfinance 9 18.0
Total 50 100.0
4.2.1.1. Table shows the institution which respondents of the survey operate, IBS bank

was 10 employees which means 20%, Amal bank was 11 employees which means 22%,

also Dahabshil were 20 which the largest employees who responses the study which

represents 40% while Kaah Islamic microfinance was 9 employees which means that 18%

of whole respondents.

4.2.1.2 Allowance for the institutions to pay loan

Could your bank pay loan for the customer? Responses Frequency Percent
Yes 50 100.0

30
4.2.1.2 Allowance for the institutions to pay loan
Could your bank pay loan for the customer? Responses Frequency Percent
No 0 0
SOURCE: primary data 2018

4.2.1.2: the below table explains if the bank pays loan to the customer, the whole 50

employees respondents of the four-institution agreed yes that these institutions pay loan

4.2.1.3. What type of loan challenges face your bank

Variables Frequency Percent
Credit finance 42 84.0
Liquidity finance 4 8.0
Market finance 4 8.0
Total 50 100.0
SOURCE: primary data 2018.

4.2.1.3 the table shows type of loan challenges face the microfinance institutions, the

most one was credit finance 42 employees agreed which means 84 %, while liquidity

finance and market finance was same only four employees agreed which represents 8%

for each one

4.2.1.4level of money loan bank pays to the customer

Loan ranges Frequency Percent
500-1500 15 30.0
1500-2500 19 38.0
2500-3000 13 26.0
above 3000 3 6.0
Total 50 100.0
SOURCE: primary data (2018)

4.2.1.4: the below table portrays level of money loan to the customer, 500-1500 was

agreed 15 employees which means that 30% institutions pay, also 19 employees agreed

that 1500-2500 pay the institutions which mean 38%, while 13 and 3 employees agreed

31
that 2500-3000 and above 3000 give the employees which represents 26% & 6%

respectively.

4.2.1.5 Type of loan bank lend to the customers

Type of loan Frequency Percent
Individual loan 8 16.0
Group loan 10 20.0
Both 32 64.0
Total 50 100.0
SOURCE: primary data 2018

4.2.1.5.the table below shows, type loan which banks allow to lend the customer,

individual loan was 8 which means 16% of the institutions pay personal loan, also group

loan was 10 which represents 20% of the institutions pay group lending while the

remaining 32 which means 64% was used both individual and group loan

4.2.2. DESCRIPTIVE ANALYSIS

This section presents the analysis of the data that collected in questionnaires in relation to

the research objectives. The respondents were asked question related the objectives and

their respondents were analysed and described using Mean and standard Deviations.

32
Table 4.2.2.1. Examine individual loan to the bank

The first objective of the study was to examine the role of individual loan to the banks. In order

to attain the objective of the study the researchers developed series statements about the

objective.

Factors Responses
Mean Std. Deviation
Individual repayment loan delay

brings less payment of microfinance 2.18 .958 Agree

loan
Limited knowledge of client effect
2.38 .925
portfolio repayment Agree
city security has influence individual
2.90 1.676
repayment loan Agree
Lack of credit decision effect
3.07 1.289
repayment of customer Agree
Geographic settlement of clients have
3.18 1.781
challenge for early repayment of loan Agree
Individual source of fund has
2.50 1.198
influence loan repayment Agree
Individual damage death has more

challenges for repayment of loan 1.70 1.224 Agree

Average 2.55 1.293 Agree

SOURCE: Primary Data (2018)

The table 4.2.2.1displays the mean index, Standard deviation, and interpretation of the

result for the all questions asked for the respondents with the first dimension of

33
independent variable, researcher was analysis here the interpretation of the respondent’s

answers .so that the first question has mean index of 2.18 and standard deviation of

0.958 which shows that the respondents denoted that they are Agree in this question.

The second question has mean index 2.38 and standard deviation of 0.925 which shows

that the respondents denoted that they are Agree in this question, the third question

founded mean index 2.9 and standard deviation 1.676 which shows that the respondents

denoted that they are Agree in this question, the fourth question obtained mean index

3.07and standard deviation 1.289 which shows that the respondents indicates that they are

Agreein this question.

The fifth question founded that mean index 3.18 and standard deviation 1.781 which

shows that the respondents indicates that they are Agreein this question, the sixth question

mean index of respondent was 2.50 and 1.198 which displays that respondents shows that

they agree in this question, the seventh question means index was 1.70and standard

deviation were1.224, the respondents were agree for their answers.

Average mean index was 2.55 and standard deviation were 1.293therespondents were

Agree for their average answers

4.2.2.2. Investigate the role of group loan to the bank

The second objective of the study was to examine the role of group loan to the banks. In

order to attain the objective of the study the researchers developed series statements about

the objective.

34
4.2.2.2. Descriptive for group loan
Factors Mea Std. Response

n Deviation
Group loan repayment effect burned markets 2.10 1.358 Agree
repayment loan influence bankrupt of individuals 2.79 1.260 Agree
the business product of the clients operates directly affect their Agree
2.43 1.252
loan repayment
some members of the group behavior influence institution Agree
2.67 1.243
payment regulations
group lending contract has impact to the repayment of loan 2.62 1.209 Agree
conflict of group members brings low repayment loan 2.95 1.513 Agree
the source of fund for the group members and period of Agree

repayment loan have positive relationship

2.36 1.543
Average
2.56 1.34
Agre

e
SOURCE: Primary Data (2018)

Thetable4.2.2.2portrays the mean index, Standard deviation, and interpretation of the

result for the all questions asked for the respondents with the second dimension of

independent variables, also we analyze here and interpret the respondent’s answers. First

question the mean index is 2.10 and standard deviation is 1.358 these results displays

that the respondents denoted that they are Agree in this question, The second question the

mean index is 2.79 and standard deviation is 1.260these results portrays that the

respondents signified that they are Agree in this question, The third question the mean

index is 2.43 and standard deviation 1.252 these results shows that the respondents

represented that they are Agree in this question., The fourth question mean index is 2.67

35
and standard deviation is 1.243these results displays that the respondents represented that

they are Agree in this question.

The fifth question the mean index is 2.62 and standard deviation is 1.209these results

displays that the respondents shows that they are Agree in this question, the sixth question

the mean index is 2.95 and standard deviation is 1.513these results displays that the

respondents signified that they are Agree in this question, the last question their mean

index is 2.36and standard deviation is1.543these results expressed that the respondents

showed that they are Agree in this question

Average means index of the all questions was2.56and standard deviation were1.34, the

respondents were Agree for their average answers

4.2.2.3. Describe for bank

Factors Std. Responses

Mean Deviation
bank have adequate credit facilities to
1.92 1.426
meet their demands Agree
does your bank have a technique to
2.08 1.536
prevent recession of money Agree
the microfinance bank have an contribute
1.54 1.073
poverty reduction Agree
the delay of loan effects bank performance
1.78 1.345
Agree
microfinance loan payment promote

economic growth special small women 1.78 1.404 Agree

business enterprise
Average 1.82 1.356 Agr

8 ee

36
SOURCE: Primary Data (2018)

The table4.2.2.3 shows the mean index, Standard deviation, and interpretation of the

result for the all questions asked for the respondents with the dependent variable, also we

analyze here and interpret the respondent’s answers. First question the mean index is

1.92and standard deviation is 1.426 these results displays that the respondents denoted

that they are Agree in this question, second question the mean index is 2.08 and standard

deviation is 1.536 these results portrays that the respondents signified that they are Agree

in this question, third question the mean index is 1.54 and standard deviation is

1.073these results displays that the respondents shows that they are Agree in this

question, fourth question the mean index is 1.78 and standard deviation is 1.345these

results displays that the respondents signified that they are Agree in this question ,the last

question their mean index is 1.78 and standard deviation is 1.404these results expressed

that the respondents showed that they are Agree in this question ,The final Average

means index of the all questions was1.82and standard deviation were1.3568 , the

respondents were Agree for their average answers.

37
 4.2.3. CORRELATION BETWEEN VARIABLES

4.2.3.1. Relationship between individual loan and bank

Correlations
Variables
Individual loan Group loan Bank
Individual loan 1 .699** -.7162

**. Correlation is significant at the 0.01 level (2-tailed).

Source: Primary Data (2018)

The first objective of this study was to examine the relationship between individual loan

and microfinance banks in Mogadishu-Somalia. The correlation between individual loan

and banks is -.716 Which means one level of individual loan may cause risk on average

of 71.6 % for the micro-finance institutions, thereby there is a strong negative

relationship between individual loan and banks (r= -.71.6, p<0.000).

4.2.3.2. Relationship between group loan and bank

Group loan .699** 1 -.587

**. Correlation is significant at the 0.01 level (2-tailed).

Source: Primary Data (2018)

The second objective is To examine the relationship between Group loan and banks, The

correlation between group loan and microfinance institutions is -.587Which means one

level of group loan may cause problem for the bank an average of 58.7% and increase

challenge of loan system for the banks, thereby there is a moderate negative relationship

between group loan and banks, (r: -.587 p<0.000)

38
4.3. MAJOR FINDINGS

This study was intended to investigate the challenges for the microfinance loan to the

banks Mogadishu-Somalia. The objective of this study was to know the relationship

between individual and group loan challenges to the banks.

The questionnaire consisting twenty-eight statements was used for collection of data and

was distributed among 50 employees. SPSS was used for analysis. An empirical

investigation was also undertaken, using the simple correlation analytical technique,

especially the Pearson product movement correlation coefficient (PPMC).

This study reveals that all the dimensions of loan –both individual and group have a

negative correlation with cause risk to the microfinance institutions.

The correlation between individual loan and bank is .716 Which means one level of

individual loan may cause a average of 71.6 % for damaging the banks, thereby there is a

strong negative relationship between individual loan and banks (r=.71.6, p<0.000).

The second objective is to examine the relationship between group loan and banks, the

correlation between group loan and banks is.-.587which means increase one level of

group loan may cause decrease of performance of bank loan system 58.7%, thereby

there is a moderate negative relationship between group loan and success of bank loan

system, (r:-.587 p<0.000)

Based on the findings of the objectives of the study which were role, challenges and

problems perceived value, the analyzed data indicated that the overall relationship was

negative both moderate and strong negative relationship.

4.4. DISCCUSSION

The purpose of this study was to identity the challenges of microfinance (individual and

39
group loan) to commercial banks. Researchers found that both challenges individual loan

and group loan was negatively affect microfinance system of the banks. Same articles

suggested, according to study made in Nigeria that examines the relationship between

microfinance Banks and the financing of Small Scale Enterprises in the Lokongoma

District of Kogi State using descriptive research design. The aim is to ascertain the extent

to which microfinance banks have discharged their responsibilities of financing small

scale enterprises in Nigeria. The instrument for data collection is structured questionnaire.

Twenty Small Scale Enterprises and five Microfinance Institutions were randomly and

purposively selected for the study. The study reveals among others that the beneficiaries

from the products of microfinance banks enjoyed increase in income, equipment, creation

of employment, and improvement in standard of living. However, it is also revealed that

the major problem confronting Microfinance Institutions is default in payment of

loans[ CITATION IUD13 \l 1033 ]

Another paper attempts to determine the factors affecting repayment performance in

microfinance programs in Malaysia by using a multinomial legit regression model. The

data used in this study is gathered through a survey on 309 respondents of TEKUN

Nasional clients in Peninsular Malaysia. Results of the study indicate that gender, formal

religious education, distance to the lender office, business formality, total sales per

month, total loan received, loan monitoring and loan disbursement lag have significantly

affected borrower's repayment performance. The result also shows that no pressure from

Microfinance Institutions to pay the loan may cause the clients delayed their payment or

just pay at a minimum amount. Besides, 11 percent of respondents also admitted that they

not fully utilized the loan given for business that makes them finally default. The study

40
suggests rebate should be given to the good borrowers to encourage them to repay their

loan on schedule without delay and the establishment of a formal specialized

microfinance banking institution to cater for the financial needs of micro and small

entrepreneurs, especially in Malaysia[CITATION Nor12 \l 1033 ].

41
 CHAPTER FIVE

CONCLUSION AND RECOMMENDATIONS

5.0 INTRODUCTION

This chapter emphasis on the summary of the study findings on the challenges of

microfinance loans to the bank in Mogadishu. This chapter consists of four sections,

introduction is provided the first section, conclusion is presented in the second section,

recommendation is provided in the third section.

5.1 CONCLUSION

The aim of this study was to investigate the relationship between loan challenges and banks

loan performance in Mogadishu-Somalia. An empirical investigation was undertaken, using

the simple correlation analytical technique, specially the Pearson product movement

correlation coefficient (PPMC).

The first objective of this study was to know the relationship between individual loan and

loan performance for the banks, the study found a strong negative (.716) relationship

between individual loan and bank loan system in Mogadishu-Somalia.

If the payment of individual loan in Mogadishu- Somalia increases then the repayment for

the loan decreases; this can cause problem for bank loan payment system Mogadishu-

Somalia.

The second objective of this study was to describe the effect of group loan to bank loan

system in Mogadishu-Somalia. The study discover that a moderate negative (-.587)

correlation between group loan and success of loan payment system for the banks in

Mogadishu-Somalia, If the customers get access group loan, group conflict can make that

cause bad repayment for the loan which damage the loan banks system. The findings showed

42
that there were challenges face commercial banks in Somalia when providing credit to small

scale enterprises.

5.2 RECOMMENDATIONS

We recommend the following point in order to reduce challenges from microfinance loan

to the bank:

 The researchers suggest that, SMEs need to be more transparent while

representing their businesses and future plans before bankers and financial

institutions so they can gain the trust and confidence of these creditors to extend

finance to them. And also SMEs themselves should be more receptive to new

ideas and prepared to make financial commitments to ensure growth.

 To persuade the customer the loan payment procedure for the institutions in order

to eliminate dissatisfaction.

 To make self-selection choice for group formation that increase satisfaction of the

group members and lesser the repayment problem.

 Microfinance loan policies for bank should promote product diversification

 The individual or group must have legal location to operate. i.e. (Not to provide

loan individual or group which have no legal location)

 The borrower must have other source of fund to repay if default occurs.

 To make screen process that certify innocence people and replace criminals.

43
 REFERENCES

Abul Bashar Bhuiyan,Chamhuri Siwar,Abdul Ghafar Ismail. (2009). THE ISLAMIC

MICROFINANCING CONTRIBUTIONS ON SUSTAINABLE LIVELIHOOD

OF THE BORROWERS IN BANGLADESH. International Journal of Business

and Society, Vol.2017, 79-96.

Ali yasin. (2013). the challenges faced by microfinance institutions.

ayyagari. (2011). small and medium enterprises across the global, small buseness

economics,. 29(4) 415-434.

Chiu, T.-K. (2015). Factors Influencing Microfinance Engagements by Formal Financial

Institutions.

Chopra, R. (2000). Financial Inclusion or Financial Destruction: A Case Study of

Microfinance Institutions. Global Journal of Enterprise Information System.

Dimple Abraham,. ((2016)). Microfinance Institutions, Responsibility, and Strategic

Direction1. Published online in Wiley Online Library.

Dr. Abdel Hafiez ,. (2013). The Accessibility of Microfinance for Small Businesses in

Mogadishu, Somalia. International Journal of Humanities and Social Science.

Hermes, . (2011). Determinants of microfinance outreach in Sub-Saharan Africa: A panel

approach.

Igania. (2008). Much Ado About Nothing: The Case Study of the Nigerian Microfinance

Policy Measures, Institution and Operations. Deportment of Economies, Ambrose

Alli University Nigeria. Much Ado About Nothing: The Case Study of the

Nigerian Microfinance Policy Measures,. Institution and Operations. Deportment

of Economies, Ambrose Alli University, Nigeria.

44
Isse A.shakur,Abdirahin Abukar,Abdiwali Elmi & Hassan Habeb. (2018). General And

Specific Information About Micro-finance. Mogadishu: Micro-dahab officer,

Investment officer, Micro-Finance Manager ,Micro-finance service.

(Jegede, Kehinde & Akinlabi Schreiner . (2017). Independent Research Journal in the

Management Sciences.

Jha, S. (2016). Role of Microfinance Institutions in Social Development. Associate

Professor & Convener, Centre for Public Policy & Governance, Apeejay School.

Khanvilkar, A. S. (2016). Challenges faced by Microfinance Institutions.

Lan. (2004). Microfinance report(electronic).

Mazumder, M. S. (Received 11 February 2015; revised 13 May 2015; accepted 18 May

2015). Role of Microfinance in Sustainable Development in Rural Bangladesh.

MOK, Y. U. (2013). THE ROLE OF MICROFINANCE INSTITUTIONS IN

FINANCING SMALL SCALE BUSINESSES (A STUDY OF KADUNA

METROPOLIS). Journal of Political and Military Sociology.

peprah, c. (April, 2016). challenges small medium enterbrises face in acquiring loans

from banks .

Saunders, e. (2009). On the attributes of a critical literature review. 5.

Stevens and Morris. (2001). Role of Microfinance in Sustainable Development in Rural

Bangladesh.

Taofeek . (2010). MICROFINANCE AND RURAL POVERTY ALLEVIATION: A

REALITY? International Journal of Business and Society, Vol. 17 No. 3, 2016,

497-510.

45
Vincent, G. (2006). Sustainable Microentrepreneuership: The role of Microfinance,

Entrepreneurship and Sustainability in Reducing Poverty in Development

Countries. Bullion, 30(3): 23-41.

46
 APPENDIX A
QUESTIONAIRE
Dear respondent,

We are graduated at SIMAD University. We are conducting this study in fulfillments of

the requirements for the award of Bachelor degree of bank and finance. The aim is to

gain an understanding of the challenges microfinance loan to the bank: case study four

banks in Mogadishu responding the questionnaire is a valuable contribution to our task.

This questionnaire is intended to share with your opinion . It is not a test, so there are no

right or wrong answers. Please answer each item as carefully and accurately as you can

by placing (√) the appropriate option.

We assure that the data you provide only wanted for academic purpose and the

information you offer will be treated with utmost confidentiality

47
SECTION A: Demographic characteristics

Select Appropriate response

1: Gender

1: Male 2: Female

2: Marital Status

1: Single 2: Married

3: Age

1: 18-21 years 2: 21 -25 3:26-30 4:31-35 5:36-45

4: Level of Education

1: Diploma level 2: Degree level 3: Post graduate level

5. Which of the following Institutions your Operate?

1: IBS Bank 2: Amal Bank 3: Dahabshil Bank 4: Kaah Islamic Micro-

finance

6: Could your bank pay loan for the customer?

1: Yes 2: No

7: What type of loan challenge face your Bank?

1: Credit finance 2: Liquidity Finance 3: Market finance

8: How much money loan your bank pays?

1:500-1500 2:1500-2500 3:2500-3000 4: Above 3000

9: Which type of loan your bank lend the Customer?

1: Individual Loan 2: Group Loan

48
  Section B

 If your bank pay individual loan please answers the following questions

N Items SA A SLA N D SD

o
1 Individual repayment loan delay brings less
payment of micro-finance loan

2 Limited knowledge of client affects portfolio

repayment
3 City security has influence individual
repayment loan
4 Lack of credit decision effect repayment of
customer
5 Geographic settlement of clients has
challenge for early repayment of loan
6 Individual source of fund has influence loan
repayment
7 Individual damage, death has more
challenges for repayment of loan

 If your Institution pay group loan please kindly answer the following
question
No Items SA A SLA N D SD
1 Group loan repayment effect burned
markets
2 Repayment loan influence bankrupt of
individuals
3 The business product of the clients operates
directly affect their loan repayment
4 Some members of the group behavior
influence institution payment regulations
5 Group lending contract has impact to the
repayment of loan
6 Conflict of group members brings low
repayment loan
7 The source of fund for the group members
and period of repayment loan have positive
relationship

49
Dependent variable: Bank
No Items SA A SLA N D SD
1 bank have adequate credit facilities to meet
their demands
2 does your bank have a technique to prevent
recession of money
3 the microfinance bank has an contribute
poverty reduction
4 the delay of loan effects bank performance
5 microfinance loan payment promotes
economic growth special small women
business enterprise

Thanks for your participation

50