ROLE OF MICROFINANCE INSTITUTION ON THE

GROWTH OF SMALL AND MEDIUM ENTERPRISES:-

THE CASE IN HARAR TOWN HARARI REGION,
ETHIOPIA

A RESEARCH PROPOSAL SUBMITTED TO THE SCHOOL OF BUSINESS AND ECONOMICS IN PARTIAL

FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF B.A. MANAGEMENT AT HARAMAYA
UNIVERSITY

By: SHERAF HUSSEN

ID NO: CEP;383/12

March 13/ 2023

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 Table of Contents

ACKNOWLEDGMENT............................................................................................................................. 4
ABSTRACT..........................................................................................................................................4
CHAPTER ONE...................................................................................................................................5
1.1 Background of the study.................................................................................................................5
1.2 Statement of the problem................................................................................................................6
1.3 Purpose of the study........................................................................................................................8
1.4 Objectives of the study....................................................................................................................8
1.5 Research questions / Hypothesis.....................................................................................................8
1.6 Scope of the study............................................................................................................................9
1.6.1Geographical Scope.......................................................................................................................9
1.6.2 Time Scope...................................................................................................................................9
1.7 Significance of the Study.................................................................................................................9
1.8 Conceptual frame work.................................................................................................................10
CHAPTER TWO: LITERATURE REVIEW.....................................................................................11
2.0 Introduction..................................................................................................................................11
2.1 Theoretical Review........................................................................................................................11
2.2. Microfinance................................................................................................................................12
2.3 FactorsaffectSMEsto access loan or credit ………………………………………………………………….…………13
2.4 Small Enterprises Development ...................................................................................................14
CHAPTER THREE............................................................................................................................16
METHODOLOGY.............................................................................................................................16
3.0 Introduction..................................................................................................................................16
3.1 Research design.............................................................................................................................16
3.2 Research Population......................................................................................................................16
3.3 Sampling technique.......................................................................................................................16
3.4 Research Inustrument...................................................................................................................17
3.4.1 Questionnaires............................................................................................................................17
3.5 Validity And Relibility Of Instrument…………………………………………………………………………..………………17
3.5.1 Validity…………………………………………………………………………………………………………………………........………17
3.5.2 Reliability…………………………………………………………………………………………………………………………..........….17
3.6 Model Specification……………………………………………………………………………………………………………………….18
3.7 Method Of Data Analysis………………………………………………………………………………………………………………..18
3.5 Ethical considerations...................................................................................................................18
Chapter Four.......................................................................................................................................
Time
frame…………………………………………………………………………………………................................
.............…..19
Proposed Budget..................................................................................................................................20
References................................................................................................................................................ 21

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3
Abstract: The objective of this study will be to investigate the role of financial institutions on the growth
of small and medium enterprises and to give recommendations based on the problems. Despite the
tremendous increase in number of SMEs, little research exists that examines role of financial institutions;
banks and microfinance institutions; on the growth of small and medium enterprises in developing
countries, especially in Ethiopia specifically in Harar Town. SMEs occupy a prominent position in the
development agenda of many developing countries like us. Primary data will be collected from a number
SMEs and microfinance institution in Harar Town. Data from the respondents will be tabulated for
descriptive purpose and analyzed and translated into useful information using the statistical package for
social sciences (SPSS).

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CHAPTER ONE

1.0 Introduction

This chapter presents the background of the study; statement of the problem; purpose of the study,
specific objectives, research questions, research hypotheses, scope of the study, significance of the
study, and conceptual framework of the study.

1.1- Background of the study

Throughout the world, the poor are excluded from the formal financial system. This is because this
system encompasses a network of institutions offering their services to high income earners which
they consider credit worthy. In addition, even when the services are available to the poor or low
income earners, they are usually not affordable due to the high cost associated. This problem was
relevant during the 1970’s economic crisis, which saw the collapse of many commercial banks
around the globe. In response to this, Professor Mohamed Yunus head of the Rural Economics
program at the Chittagong University in Bangladesh, launched the Grameen Bank project in 1976
within rural regions offering small loans mostly for agricultural purposes. It was only in 1983 that
the Grameen Bank project due to its overwhelming success was transformed into an independent
bank, targeting mostly the rural population. These loans unlike most rural credit programmes
subsidized by the government were self-financing, insisted on repayment and was offered to
clients, which mostly relied on the informal sector for financing. The idea of microcredit was borne,
which later evolved to microfinance. Microfinance is defined as the provision of financial and non-
financial services such as saving, loan and insurance, to the poor or low-income earners, as well as
to those excluded from the formal financial system.

Small and Medium Enterprises (SMEs), and financial institutions are very critical to the
development of an economy. SMEs provide the vast majority of employment in developing
countries and are keystones in the productive structures of emerging economies, such as;
improvement of local technology, output diversification, development of indigenous
entrepreneurship & forward integration with large scale industries. Similarly in addition to
providing substantial employment financial institutions play very prominent roles in firm’s growth
and industry productivity and economic growth. They conducts financing the small scale sector,
development and support service in the form of loans & grants to different agencies, availability of
financial services to households &individuals, insurance and financial services, managing risks by a
diversity of financial instruments. Furthermore, financial institutions create financial assets for
their customers and sell those assets to other market participants for a definite emolument. In
addition to all these functions, financial institutions are also involved in providing investment
advice to market participants and managing the portfolios of market participants [Mehreen Mishah;
2014]. Financial institutions play an extremely important role in economic development. Financial
institutions cater to important needs of society such as taking care of small savings at reasonable
rates. Everyday working men and women have the option of putting their savings into a number of
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alternatives such as Government small saving schemes, deposits into a saving account provided by
their bank, recurring, deposits, time deposits and also the alternative option of investing in mutual
funds or stocks.

In Ethiopia, the Ministry of Trade and Industry defined micro enterprises as business enterprises
found in all sectors of the Ethiopian economy with a paid-up capital of not more than Birr 20,000
but excluding high-tech consultancy firms and other high-tech establishment while Small
Enterprises are defined as business enterprises with a paid-up capital of more than Birr 20,000 but
not more than Birr 500,000 but excluding high-tech consultancy firms and other high-tech
establishments

The role that finance has as a lubricant for the real economy thus likewise exacerbates the effect of
financial fragility on the real economy. The evidence has shown that finance has a more important
impact on growth through fostering productivity growth and resource allocation than through pure
capital accumulation [Beck; 2006]. Specifically, the availability of external finance is positively
associated with entrepreneurship and higher firm entry as well as with firm dynamism and
innovation. Finance is the life wire of any economy, whether developed or developing countries.
Because of this financial institutions are one important drive for the growth of SMEs. Though
human resources are the tool that propels any economic endeavor, but finance is very prominent
after human resources. Finance is also known as capital, credit and so forth. Finance is to
commercial pursuit as blood is to the human body. Finance is important to the survival and growth
of SME's [ Robinson O. Owenvbiugie; [2014]]. On the other hand, there is limited evidence that
confirms the role of financial institutions for the growth of SMEs. There for this research will
significantly examine the role of financial institutions for the growth of SMEs in north shewa zone.

1.2. Statement of the Problem

Noticeably, SMEs are one of the leading forces of economic development particularly in the
developing economies. This is because an energetic SMEs sector is vital to stimulate growth and job
creation. SMEs are also flexible and can more easily be adapted to the demands of the market. They
further generate jobs more rapidly than any other businesses, are highly diversified and contribute
to exports and trade [ World Bank Report [2005, 2014].].

Long time in history development and expansion of SMEs was widely considered as sign of
backwardness and lack of another alternative in all segments of the society. However; it is resulted
from misunderstanding that SMEs are basis for a number of developments in technology sector of
these days. With in this context SMEs is one of the institutions given recognition in the country’s
industry development plan and is the fact that it serves as vehicles for employment opportunities at
urban center and as it emphasize the economic development. SMEs serve as sources for sustainable
job opportunities not only for developing countries like ours, but also for developed countries like
USA. Thus the development of SMEs is the key component of Ethiopia’s industrial policy direction
that will contribute to the industrial development and transformation in Ethiopia. The
development goal is specially secured on stimulating the rapid growth and structural
transformation of the SMEs in ways that advance wealth creation and expansion of employment
opportunity [UNDP, June [2012]].
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A crucial element in the development of the SME sector is access to finance, particularly to bank
financing, given the relative importance of the banking sector in serving this segment. Firm-level
data collected by the World Bank show that access to finance is perceived as one of the main
obstacles to doing business [pieto calic etl; [2012]]. A number of studies have shown that financing
is a greater obstacle for SMEs than it is for large firms, particularly in the developing world, and that
access to finance adversely affect the growth of the SME sector more than that of large companies [
Shiffer & Wede, [2001] ]

There are several factors that hinder potential growth of SMEs. Such factors are titled as growth
barriers. It is argued that SMEs are more likely to face entry barriers and growth barriers compared
to their large counterparts. Commonly addressed barriers for small businesses include institutional
barriers and financial barriers. Institutional barriers are mainly discussed with the focus on firms’
interaction with government, including legalization, taxation, and government support amongst
others. Based on consistent results from both theoretical and empirical data, certain institutions
intentionally discriminate against the growth of SMEs which in turn act as a growth barrier. It is not
difficult to imagine that SMEs would have a tough period when they face unfavorable tax system,
discriminatory regulations and complicated laws. Financial barriers represent lack of financial
resources. It has been argued that credit constraints, lack of external debt, and equity capital are the
main obstacles

to the growth of SMEs. Evidence suggests that banks are more conservative when they provide
loans to SMEs. Due to the information asymmetries, SMEs are more likely to be charged relatively
high interest rates and asked for high collateral and loan guarantees. Furthermore, SMEs could also
face external barriers, internal organizational barriers and social barriers which cover aspects of
market position of a firm, access to qualifier human capital, and access to network. Availability of
financial capital is found to be crucial to firm growth [Haibo Zhouh, Gerrit de Wit, February [2009]
].

It is possible that firm growth is also affected by different types of barriers. These barriers can be
divided into internal barriers, such as the motivation to grow, and external barriers. The most
important external barriers for UK firms are the availability and cost of funding [Storey, D., [1994] ].
Many commentators have postulated a “financing gap” for SMEs, meaning that there are significant
numbers of SMEs that could use funds productively if they were available, but cannot obtain finance
from the formal financial system. This study analyses the “financing gap” concept, seeks to
determine how prevalent such a gap may be — both in organization for economic cooperation &
development [OECD] countries and non-OECD economies, and recommends measures to foster an
improved flow of financing to SMEs. While some surveys show that growth is not an objective for all
small and medium sized firms, the ability of firms to grow is important, because it has been
suggested that firms with low or negative growth rates are more likely to fail [Phillips, B., and B.
Kirchhoff, [1989] ].

This study differs from previous literature because of the variety of independent variables
represented in the database. The growth rate with this paper is defined as growth of annual sales
volume. A similar approach has previously been adopted. But that author used limited independent
variables; provision of credit, training of the entrepreneur, and savings account, in addition that
7
study excludes the role of banks [ Kepha Momany, Osoro Jomo, [2013]]. However in this study
includes the role of banks, because mostly accessibility of loan from MFIs benefited the MSEs and
banks loan access for medium and large firms. Firm size, age of the firm and loan from banks are
also used in the previous empirical studies as the measure of independent variables with panel data
[ Dereje Workie Nigussie, February, [2012] ]

While most studies in the field investigate growth in employment. The researcher chooses the
measure sales volume, because firms rarely select employment growth as their goal per se. It could
also be argued that the sample of SMEs justifies this choice even more due to the excessively high
labor cost imposed on local employers, these costs are often stated to be a major barrier for small
firms to increase the number of their employees. SMEs provide the vast majority of employment
and key stone in the productive structure of emerging economies in developing countries, but the
growth of such firms is being hindered by scarce financing.

SMEs to be the major pivot of economic growth and development of the country must be
adequately financed. In order to provide consumers and commercial clients with a wide range of
services and different types of banking, especially to small business, the Ethiopian government has
evolved a wide variety of financial institutions both at the national and regional level as an effective
means of fighting unemployment and income inequality. Based on this the purpose of this study is
to determine and identify the role the financial institutions have in the growth of SMEs and how
provision of credit, training, simplicity of criteria, follow up and supervision, borrowing cost, size of
loan, duration of loan and savings account influences the growth of Small and medium enterprises.

1.3 Objectives of the Study

1.3.1 General Objective

Going in the same light as the problem mentioned above, the general objective of the study is to find
out the role of Microfinance institutions on the growth of small and medium enterprises in Harar
town.

1.3.2 Specific Objectives

-To investigate the extent to which cost of borrowing affects the growth of SMEs
-To analyse the role of management efficiency in the long-term growth of SMEs
- To determine how the size and duration of loan affects the growth prospects of SMEs
- To identify the factors that affect SMEs to access Loan or Credit in Harar town .
-To make necessary recommendations.

1.4 Research questions / Hypothesis

1.4.1 Research Questions

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The study will seek to answer the following questions

- To what extent cost of borrowing affect growth of SMEs?

- Do management efficiency affect the growth of SMEs?
- Do the size and duration of loan affect the growth of SMEs?
- What are the factors that affect SMEs to access Loan or Credit Harar town?
1.4.1 Research hypothesis

- To achieve the above objectives, the following hypothesis shall be formulated;

H0: cost of financing does not affect the growth of SMEs.

H0: Management efficiency does not influence the long-term growth of SMEs
H0: The tax level does not influence the growth of SMEs.
H0: eases of access to finance doesn't affect the growth of SMEs.
1.5 Significance of the study

Most researchers over the past years acknowledge the importance of the issue under study. Since
SMEs are viewed as the engine that boost any emerging economy, the soundness and efficiency of
this sectors have to be a matter of concern for each and every one.

This study will be centered on the activities of microfinance institutions and how they attempt to
alleviate extreme poverty in the economy. The findings of this research will be useful to the
government, in designing a policy that favors economic development via the SME and Microfinance
sectors.

In addition, our economic environment is characterized by a public who lost confidence in a

microfinance sector, which is mean to help them. For this reason, the study is intended to educate
the public on the utmost importance of microfinance institutions in promoting microbusiness
ventures, thus increasing overall public confidence in the sector and mobilizing savings.

Findings of the research will be useful to SMEs entrepreneurs and other MFIs, as it will highlight
possible reasons for their failures. Lastly, the research will serve as a source of reference to other
researchers wishing to look deeper in the area under study

1.6 Scope of the study

1.6.1Geographical Scope

The proposed study area is Harar town, Ethiopi. The area is located at 526 km East of Addis Ababa
the capital city of Ethiopia, with high population and with a lot of easily accessibile small scale
enterprises and microfinance.

1.6.2 Time Scope

The proposed study will be conducted with a period of four months (4) to effectively gather the
information that efficiently meets the study objectives. The study will be based on the data from
2010 to date as the most relevant data for better analysis and comparison purposes.

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1.7 Conceptual frame work

Figure 1: Conceptual Framework

Independent Variable Dependent Variable

Microfinance institutions SMI's Enterprises
Loans provision. expansion of operations
Interest rates Increased productivity
Advisory services. Increased profits
Training. Increased decision making
efficiency

Intervening factors
Economic factiors.
Government intervention.

The above conceptual frame work describes the relationship between the independent variable and
the dependent variable. The frame work further presents the intervening factors that can also
impact or determine the dependent variable.

The performance of microfinance institutions is the independent variable and this involves factors
such as provision of loans, the interests rates, advisory services and training to people to enable to
effectively use these funds. The services provided by the microfinance institutions determine the
growth and development of small enterprises. This therefore means that the growth of the small
enterprises depend on the services delivered by microfinance institutions and the growth is
expressed in terms of size of the enterprise, level of profits, efficiency and increase in the level of
productivity.

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CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.0 Introduction

These chapter elaborates the theoretical review of the research and reviews literature on the
study. The presents concepts, opinions and ideas on microfinance and performance of small scale
enterprises and the second part reviews related studies

2.1 Theoretical Review

This study is based on Theory of Change (TOC)-based approach to M&E, impact assessment by
Weiss, C.H. (1995). The classic microfinance theory of change is simple: poor person goes to a
microfinance provider and takes a loan (or saves the same amount) to start or expand a micro
enterprise which yields enough net revenue to repay the loan with major interest and still have
sufficient profit to increase personal or house hold income enough to raise the person’s standard of
living.

The theory of change provides a model of how a program or business can be supported and led to
growth through proper financial support that increases performance of small business. In other
words it provides a road map of the development of a small business to a large productive business.

According to Weiss, C.H. (1995), the idea of the ToC approach seems to have first emerged in the
United States in the 1990s, in the context of improving evaluation theory and practice in the field of
community initiatives. Yet the “current evolution draws on two streams of development and social
program practice: evaluation and informed social practice (Vogel, I.2012). From the evaluation
perspective, ToC is part of broader program analysis or program theory.

In the development field, it also grew out of the tradition of logic planning models such as the
logical framework approach developed from the 1970s onwards. The notion of developing
informed social practice has a long history; practitioners have often sought (and used) tools to
attempt to consciously reflect on the underlying theories for development practice (James, Cathy.
2011).

11
The study will also be guided by the principal agent / cooperate social responsible theory( P/A
Theory & CSR) in global value chains. In this theory, practitioners and are increasingly aware that
doing the right things is not just a matter of being profitable. The ethics of business activities are
becoming increasingly important, and more and more companies are evaluated on their ability to
meet – not only the customers’ needs but also the various needs of employees, NGOs,
representatives of the local community and other interest groups. The globalization of economic
activities has un doubtly affected this development. When part of the value chain is in different
geographic, cultural and institutional settings, differences in social and environmental standards
are uncovered.

2.2 Microfinance

Microfinance institution is an institution that provides financial service to low income clients who
would traditionally lack access to banks and related services, (Georgia, 2001). A bank on the other
hand is an organization usually a corporation/ chartered by a state or federal government which
does most deposits and time deposits and honors’ instruments drawn on them, and pays interest on
them; discounts notes, makes loans and invests in securities; collects checks, drafts and notes;
certificates depositors checks; and issues, drafts and cashier’s checks, (Rukol, 2005).

Microfinance is often defined as financial services for poor and low-income clients. In practice, the
term is often used more narrowly to refer to loans and other services from providers that identify
themselves as \microfinance institutions. (MFIs). These institutions commonly tend to use new
methods developed over the last 30 years to deliver very small loans to unsalaried borrowers,
taking little or no collateral. These methods include group lending and liability, pre-loan savings
requirements, gradually increasing loan sizes, and an implicit guarantee of ready access to future
loans if present loans are repaid fully and promptly.

In addition to the definition above, Azevedo‘s (2007) adds another dimension: the rationale for the
provision of microfinance services. ‗The term microfinance refers to the provision of financial
services for low-income households and micro entrepreneurs (both urban and rural) for productive
purposes‘ (ibid: 301). However whether microfinance is always provided for productive purposes
is debatable

According to Garner(1996) the object of microfinance institutions is a world in which as many poor
and near poor households as possible have permanent access to an appropriate rate of high quality
services, including not just credit but also savings, insurance and fund transfers, those who
promote microfinance institutions have believed that such access of poor or near poor people to an
appropriate rate of high quality financial services of credit and savings will help poor people out of
poverty and lead to rural development ( Agarwal, 1990). Through micro finance, many businesses
have now tried to stabiles in all parts of Kampala and towns have also grown which has boosted
trade in areas like Makindye, kansanga in Kampala. The growth of the country in terms of
production has also increased and today the county has joined international trade with other
countries as well as joining other international integrations.

12
Microfinance has gained global acclaim as an important poverty reduction tool in many developing
countries (Johnson and Rogaly, 1997; Gibbons and Meehan, 2002; Armendariz de Aghion and
Morduch, 2005; Copestake, Greeley, Johnson, Kabeer and Simanowitz 2005; Bakhtiari, 2006).
According to Morduch (2000), few recent innovations have held much hope for reducing poverty in
developing countries as microfinance. Indeed microfinance is perceived as a crucial driving
mechanism towards achieving the millennium development target of halving extreme poverty and
hunger by 2015 (Simanowitz, 2002; Fernando, 2004; Arun, Imai and Sinha, 2006). Mohammed
Yunus1 even described microfinance as a human right. According to leading advocates in the field,
microfinance has the capacity to efficiently and effectively provide sustainable financial services to
poor households who are otherwise excluded from the conventional financial systems for lack of
collateral. Casting aside the euphoria on microfinance, a sober question can be asked does
microfinance really reduce poverty through enhancing investment in small enterprise?

They portray the common conception of microfinance: financial services that formal institutions
provide for the poor. Seibel (1999) and Wright and Rippey, (1999) challenge these definitions and
argue for a more inclusive view of microfinance. They contend that microfinance should be more
inclusive and should take into consideration informal financial arrangements such as moneylenders
and financial support from relatives which constitute an important source of financial assistance for
the poor. Although informal financial services are technically part of microfinance, the term is
generally known and used to refer to the provision of financial services to the poor by formal
institutions such as the Grameen Bank, BRAC and FINCA. Some scholars prefer to use the term
‗institutional microfinance‘ to refer to microfinance excluding informal financial services. For
instance, when Robinson (1995) advocates the movement of microfinance away from subsidised
credit to financial intermediation on commercial basis, it is with reference to financial services
provided by formal institutions.

The Consultative Group to Assist the Poorest (the apex association of international donors who
support microfinance) regards microfinance as ―a powerful tool to fight poverty‖ that can help
poor people to raise income, build their assets and cushion themselves against external shocks.
(CGAP, 2004a:1). Microfinance is defined here in relation to its users - rather than in relation to
other forms of finance - as the supply of savings, credit, insurance and payment services to
relatively poor people.

2.3 Factors that affect Small scale Enterprises to access loan or Credit

Microfinance institution is an institution that provides financial service to low income clients
who would traditionally lack access to banks and related services, (Georgia, 2001). A bank on
the other hand is an organization usually a corporation/ chartered by a state or federal
government which does most deposits and time deposits and honors’ instruments drawn on them,
and pays interest on them; discounts notes, makes loans and invests in securities; collects checks,
drafts and notes; certificates depositors checks; and issues, drafts and cashier’s checks, (Rukol,
2005).
13
Start-up business: Most entrepreneurs are faced with challenges of how to be funded. Some
Micro finances weigh options on whether to consider existing entrepreneurs or the starters in the
business. Businesses financed from scratch by Micro finance support centres are considered to
create an impact to the society by alleviating poverty in increasing their level of income. The
startup business also needs other services like skills training to equip them in their operations.
Level of employment Small scale Enterprises development: Micro finances provide services and
products to Small Scale Enterprises depending on the stage of the business is at. The levels in this
case include; unstable survivors, stable and growth enterprises (Steel, 2003).
Unstable survivors: These are the kind of businesses considered not to be credit worthy due to
lack of stability. The chances for its survival are limited and it therefore consideration of Micro
Finances to revert the situation remains wastage of time and costs increase with time. Growth
enterprise: The business shows high possibility to grow and microfinance institutions are
interested in the objective of the Small Scale Eneterprises to create jobs and move from the
informal sector to formal. Micro Finances help provide services that lead to Small Scale
Enterprises gaining economic independence to meet their needs. Stable survivors: This kind of
business rarely grows due to low profit margins which inhibit them to reinvest and unstable
environment. Basically Small scale Enterprises at this level need funds from Micro Finance
Services to meet their production and consumption needs (Yaron, 1997).

2.4. Small enterprise development

Small enterprise Development according to Henkin (1997) is a progress of positive change

quantitatively and qualitatively of a business.

According to Henkin (1997) many people define it in their own context according to thin
surroundings and immediate needs; the definition in Africa may not be the same as in Europe but
there are key components of the definitions that are similar everywhere. According to Dee (2002),
small enterprise development is a process by which a business owner is inspired through their
institutions in ways that enhance their ability to mobilize and manage resource sustainability to
produce sustainable and justify distributed in procumbent in their quality of life consistent with
their aims and aspirations.

Small enterprises in Makindye are in rural poor areas comprised of farmers, farmers groups and
enterprises have very little collateral (Johns tone, 2002) and no formal credit history ( Black, 2001)
and are thus considered risky investments by traditional banking institutions, ( Malindini, 2004).
Microfinance institutions help family farms for rural poor farmers and farmer groups as well as
14
rural enterprises overcome this challenge to running their operations and building their assets
through a variety of creative financial solutions, (Ongwen, 1994). In Mongolia for example
microfinance institutions have helped fund 460 loans totally more than $1.2. Million; half have been
repaid in fall, (Machili, 2001). In Guatemala 4000 farming households are farming 50 villages, banks
to increase access to credit. (GMFP, 2002).

In Nepal, mercy corps (an NGO) institution expect to read 10,000 clients especially women and the
read 10,000 clients especially women and poorest households by teaming with the country’s largest
microfinance providers to expand financial services in remote area and develop savings and loan
products for agriculture, (mercy Corps, 2004). In Ethiopia the microfinance ministry plans to
expand financial services into never, served areas potentially touching tens of thousands of
farming and related agribusinesses, (EMMF, 2004). However, all these researches did not put any
emphasis on Uganda the country of this study. There could be other ways microfinance institutions
lead to rural development in Uganda thus the need for this proposed research. Weine, (1991) has
also stated that at microfinance institutions provide small scale enterprise loans like agricultural
loans are available for a multitude farming purposes. According to Whyte (1986) farmers may
apply for loans to buy inputs for the cultivation of food grain crop as well as for horticulture,
aquaculture, animal husbandry, and floriculture and sericulture business.

According to Perpin Strup (1960), there are also special loans to finance the purchase of
agricultural machinery such as tractors, harvesters at microfinance institutions. Lwakatare (2004)
has also stated that at microfinance institutions construction of biogas plants and irrigation systems
as well as the purchase of agricultural land may also be financed through special types of
agricultural finance. There is need to find out how rural agricultural farmers in Uganda use the
loans they borrow which is another reason for the proposed research.

According to Smillie, (1995) also there are currently a few social interventions that have been
combined with micro financing including the increase of HIV/AIDS awareness. According to Smillie,
(1995) an example of this is seen in Botswana where there is the intervention of microfinance in
issues like AIDS and equity which is a participatory program that advocates on different gender
roles. Gender based violence (GBV), and HIV/AIDS infections to strengthen the communication
skills and leadership of women.

Also, According to Willets (1996). Microfinance has been combined with other social interventions
of business education and with other packages of health interventions that have led to small
enterprise development. (Retus, (1995) has cited that innovation for poverty action program me of
Peru where borrowers randomly received financial training as part of their borrowing group
meetings such interventions by microfinance institutions leading up to small enterprise
development.

15
CHAPTER THREE

METHODOLOGY

3.0 Introduction

This chapter outlines the methods adopted in order to answer the research questions detailed in
chapter one. It looks at the research design, research population, sampling techniques, data collection
instruments and procedure of data collection, mode of data analysis and presentation as well as ethical
consideration.

3.1 Research design.

The research will be a descriptive cross sectional survey design where data will also be collected
from across the population at one point in time. This design is cheap, less time consuming and easy
data collection and analysis (Amin 2005). Both qualitative and quantitative data collection will be
used during the data collection.

3.2 Research Population.

The target population of this study will consist of 100 respondents having small scale enterprises

and those working in the micro finance enterprises. 60 respondents shall be form the small

enterprises in Harar Town while 40 respondents shall be from the microfinance institutions.

3.3 Sampling technique

Slovene’s formula will be used to compute the sample size. This formula will be employed so as to

sample fairly a large size as representation of the total population such that the research findings

obtained can be considered valid. The details on the determination of sample size using Slovene’s

formula are shown below;

By using Slovene’s formula (=N

1+ (e) 2
n= sample size
N= population size
e =level of significance

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3.4 Research Instruments

This study will use questionnaires, guided interviews, guided observation, and record sheets .This
is because of the nature of data to be collected, the time available, as well as by the objectives of the
study. The overall aim of this study is to evaluate the relationship between microfinance and
growth of small enterprises in Harar town. The researcher will be concerned with views, option,
perception and feelings from the environment. Such information will be corrected through the
questionnaires, and interviews, and because the study will be conversed with variable that cannot
be directly observed.

3.4.1 Questionnaires

Questionnaires will be used to determine: the level on the performance of microfinance institutions
on growth of small enterprises in Makindye Town. The questionnaires will be self- administered
and closed ended so as save time and enable respondents to give relevant choice since different
options will be given. This method of data collection is preferred for this study because it gives
freedom to respondents to give their truthful opinions since there will be no one to challenge their
answers as it is in the case of interviews. This will give a complete confidence to respondents to
effectively answer questions asked without feeling shy or being scared. The scoring system of this
instrument will be based on the five scales or Likert type scale of rating involving: 1=very low, 2=
low, 3= moderate, 4= high, 5= very high.

3.5 Validity and Reliability of the instruments

3.5.1 Validity

To insure the validity of the questionnaire and interview guide; some two experts in research will
be involved. In this regard, after constructing the questionnaires and interview guide, they will be
submitted to two experts to ensure their validity through their duties ‘basis. This will be based on
alpha coefficient value of 0.7 and more. Thus, after the expert judgments, the compilation of the
responses from raters will be computed to determine the content validity index (CVI). If the
coefficient computed is from 0.7 and above, the instruments shall be considered to be valid but if it
is less, the instruments shall be considered to be invalid so new ones shall be made.

3.5.2 Reliability

To ensure the content reliability, the research will use either the test -retest method or cron batch
alpha, method for the two tests, results will be analyzed using peason’s correlation coefficient
(PLCC) and the T-test for PLCC if the significance will be equal or inferior to 0.05 then instrument
will be reliable for T test, if significance will be equal or greater than 0.05, the instrument will not
be reliable.

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3.6- Model Specification

A Linear regression equation is used representing the independent and dependent variables. By so
doing, the model assumes a functional relationship between the growth of SMEs on one side, and
the effects of Microfinance institutions on the other hand. The model also provides the impact of
selected independent variables like; Cost of financing, Management efficiency, Taxation level and
their effect on our dependent variable. This is expressed as follows:

Y=α+β1x1+β2X2+β3X3+ε

Where;

Y= Profitability
X1= Cost of financing
X2=Management efficiency
X3= size of loan
β= coefficient of independent variables
α= Intercept that is the value of Y when all other variables take the value of zero
ε= error term
Test of significance was established and the coefficient of determination (R 2) was used to found the
predictive effect of the independent variable (the strength of the model) to the dependent variables.

3.7 Data Analysis

During this process of data analysis, the researcher will use frequencies and percentage
distribution to analyze data on profile of respondent .Mean and standard deviation will be used to
determine the level of performance of small enterprises Harar town. Items/respondents answer
analysis will help to demonstrate strength and weakness of respondents on the microfinance and
growth of small enterprises in Harar tow.

Numerical values and the interpretation will be used to interpret the response based on the mean
score, for each item question both microfinance and growth of small enterprises in Harar tow.

3.8 Ethical considerations

The researcher will seek for authorization from potential respondents. The researcher will ensure
free will consent from participants. The names or identifications of the respondents will be
anonymous and information collected from them treated with utmost confidentiality.

CHAPTER FOUR

TIME AND COST BUDGET SCHEDULE

4.1 Time Plan

18
Time will be allocated to different faces of the research projection of its requirements. The
table below specifies the time period that will be covered until the completion of the study.
In general total time period available are allocated among these major activities on the
basic importance of those activities for successfulness of the study and the presentation as
follows. Duration of month

Numb Activities February March April May May May June

1 Specifying study Xx
area

2 Topic selection Xx

3 Advisor Xx
consultation

4 Proposal Xx
development

5 Data Collection Xx

6 Data processing Xx
and analysis

7 Conclusions and Xx
recommendation

8 Paper Xx
submission

4.2 Budget Schedule

The study will contain the following different types of expenditures that will incur in the whole
course of research.

19
 Items Measuremen unit Quantity Per unit Total
(birr) cost(birr)

Equipment Paper Packet 1 450 450

and
Pen Packet 1 150 150
stationery
Pencil

Binder Unit 1 25 25

Flesh Unit 1 200 200

Miscellaneous ---- - 100

Total 925

Personal Transportation Km 15 20 300

costs
Internet Minutes 100 1 200

Printer Pages 35 3 105

Typist Pages 25 5 125

Contingency - 150

Total cost 880

Overall total cost 1805

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