Topic: MFIs AND THE GROWTH OF SMEs IN HARARE.

THE MODERATE ROLE

OF CHANGES IN MONETARY POLICY.

CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction

The aim of this chapter is to review the literature. This literature was put forward by several
researchers relating to the contribution of microfinance institutions to the growth of small and
medium enterprises presenting various studies on SMEs and MFIs. Ideas and thoughts discussed
in this research are supported by various literatures which are available from reports, journals,
books, different academic researches and other researchers. The literature reviewed was chosen,
considering that it is the best to suit this research.
2.1Theoretical Framework

There are several main theories that anchor studies on the impact of micro financial institutions
on the growth of SMEs in Harare, and this study considered the following:

2.1.1 Financial Inclusion Theory:

This theory suggests that providing access to financial services, such as microloans, savings
accounts, and insurance, to individuals who are traditionally excluded from the formal banking
sector can help alleviate poverty (Tafamel, 2019). The theory is justified in the study to provide
explanations on how access to credit and other financial tools can enable individuals to invest in
income-generating activities (Nguyen, 2021), smooth consumption (Abrar, 2016), and build
assets (Bent, 2019).

2.1.2 Empowerment Theory:

This theory emphasizes the importance of empowering individuals and communities to take
control of their financial lives (Clack, 2021). The theory is therefore justified in this study to
provide insights into an understanding on how individuals with the means to manage their
finances, make informed decisions, and build financial resilience (Abdulrazak, 2020).The theory
provides an explanation on how micro-finance institutions can help break the cycle of poverty
and foster economic empowerment (Chikwira, 2022).
2.1.3 Social Capital Theory:
This theory focuses on the social networks and relationships that individuals have, and how they
can be leveraged to overcome poverty (Wan, 2018). They provide insights on how micro-finance
institutions can help strengthen social capital by facilitating the formation of self-help groups
(Gurley, 2021), promoting community-based lending (Wan, 2018), and fostering trust and
cooperation among borrowers (Addae-Korankye, 2020). This theory is, therefore justified to
provide knowledge on how microfinance institutions may lead to increased access to resources,
knowledge sharing, and mutual support, ultimately contributing to poverty alleviation (Scribbr,
2019).

2.2 Conceptual Framework

2.2.1 Definition of SMEs

The meaning of the term small and medium enterprise, have got different meanings which vary
from country to country. The criterion which is commonly used to define SMEs is the number of
employees, sales, level of investment and other factors. However, the definition which
commonly used is the number of employees but there is controversial in defining the maximum
or minimum number of employees of SMEs (Ayyagari, et al 2003).
Various studies which were carried out in Mozambique, Kenya, Ghana and China has defined
SMEs in different forms because what is small or medium differs in each economy and it
depends on several factors and the nature of the economy, whether it is developed or developing.
Therefore, there is no universal means of defining what an SME is and in developing countries a
small firm employs approximately 5 and 9 workers, whilst medium firms employ the number
between 20 and 90 workers (Quartey, 2001).
According to Cronje et al (2001), an SME is a business which employs less than 200 people,
capital assets less than 2 million dollars, annual turnover of less than 5 million dollars and the
owner of that business is directly involved in the management of business.
Small Enterprise Development Cooperation (SEDCO, 2011) defines a small and medium
business enterprise as a business which employs not more than 100 permanent workers. It further
elaborated that, a small businesses employs less than fifty permanent workers and they are
registered, whilst a medium businesses employs less than 100 permanent workers and also
registered and micro businesses are those which employs less than 5 workers and is not
registered. SEDCO has actually stopped the use of turnover and capital base after the adoption of
a multi-currency system in 2009 due to valuation problems.
Nyamwanza (2014) classified SMEs in three categories which are micro enterprises, small
enterprises and lastly medium enterprises. He further explained that micro enterprises are those
firms which employs from zero to nine (0-9) people, small enterprises are those firms that
employs from ten to ninety-nine (10-99) people and lastly medium enterprises are the firms that
employs from one hundred to four hundred and ninety-nine (100-499) people.
2.2.2The concept of Microfinance
According to Pluskota (2021), microfinance plays a conforming role by prolonging credit to
borrowers who were denied credit by banks due to high risks. Kumari (2020) noted that
microfinance institutions offer loans with low-interest rates, offering credit on a group basis and
loans for SME development. The aim of microfinance is to eradicate the gap created by formal
banks through the provision of external sources of funds by offering loans to those lacking
proper credit history documentation.
The concept of MFIs is often equated to microcredit as they are interchangeably used. Their
significant role is to mitigate the effects of the financial crisis being faced by SMEs. Rajapakshe
(2021) states that Microfinance has been defined as the most relevant tool for contending
poverty by providing poor people with a wide range of financial services. The main agenda is to
assist SMEs with small loans to develop their businesses. According to Hussen et al. (2021),
MFIs provide funding to SMEs through loan recycling through loan recycling, ensuring that
they grow. It is known for providing credit to all people. According to Sultakeev et al. (2018),
most successful small- to medium-sized entrepreneurs depend on the loans that they are being
granted by MFIs.

2.2.3The concept of SME growth

SME growth has been pointed out to be the dependent variable in most research. Similar
research on SME growth has been carried out in countries like Ghana, Zimbabwe and many
others on the continent. SME growth is limited by a number of constraints. Among these
constraints is a lack of financial security resources as they have limited choices to get external
capital. SME growth can be categorised into different categories. Kiyabo and Isaga (2020)
highlighted that there are resources-based categories, strategically based and many others. The
resource-based category measures the firm's financial growth variables such as number of
employees, sales growth and profitability.
2.2.3.1Profitability
Iskandar (2021) identified profitability as a measure of a firm's effectiveness and efficiency as it
indicates SME growth. Efficiency and effectiveness have a positive impact on profitability
generation as it indicates maximisation in revenue generation and minimisation in costs. SMEs
cannot attract capital from outside without profit, as it is used by finance institutions to measure
the probability of future loan repayments. MFIs are interested in SMEs' profitability records as
they give them a guarantee that they can get their funds back. This implies that profitability
growth is an essential indicator that shows the growth of SMEs.
According to Kiyabo and Isaga (2020), SME growth can be indicated by profit before tax and
profit per employee. The labour contribution per employee can be used to measure the
profitability as well as net profit before tax deductions. SMEs are unlikely to grow in business
without earning profits. Profitability is an important variable of SMEs' success. Profits show that
SMEs' costs are less than the revenue they are generating.

2.2.3.2 Sales growth

Sales growth is another variable for measuring growth and the demand for the products offered
by SMEs. According to Kiyabo and Isaga (2020), sales growth means a change in sales in a
particular period of time. For SMEs to measure the growth in sales, they can do a comparison of
the current year's sales to the previous year's sales. An increment in the figures relates to a
positive impact, while a decrease indicates a negative effect on the growth of the SME firm. For
SMEs to improve their growth, they have to push the volume of their sales. Sales growth is a
strategic goal for SME owners (Cesinger et al., 2018). Every SME entrepreneur is interested in
seeing his/ her firm indicating a positive result in business growth, as it is essential for the
company's survival.

2.2.3.3Firm size
Firm size can be measured by a number of things. Among them are total company assets,
number of employees and market value of equity (Cesinger et al. 2018). SMEs are defined as
small businesses which employ a maximum number of 250 employees. He also stated that the
majority of the SMEs have less than 10 employees. To measure firm size, we divide the number
of employees in a firm by the total number of firms in that particular industry. A large number
of employees indicates SME growth since employees are regarded as the central tool for
obtaining and maintaining company growth.
According to Hung et al. (2021), firm size is an indicator of SME growth. He stated certain
variables that affect firm size. Total assets were regarded as the biggest variable of firm size. He
also indicated that a high total labour force shows a positive firm size growth. The total assets
that a firm holds define how big or small the firm is. If the company has many assets, firm size
contributes positively to a firm's growth. A large number of SMEs own a few assets; this implies
that those SME firms are still struggling to improve their firm sizes.
2.2.4 MFIs loans and sales growth
Kumari (2020) noted that MFI loans play a crucial role in promoting sales growth in European
countries. To a greater extent, MFI credit leads to an escalation in the volume of gross sales.
SME entrepreneurs are being granted funds by MFIs to boost sales. The provision of loans to
small to medium enterprises helps them boost their productivity. This has triggered a significant
impact towards broadening SME sales growth. The loans are being used to enhance sales
growth, resulting in a boost in sales revenues.
Salahuddin et al. (2021) assert that MFI loans play a vital role in promoting the sales growth of
SMEs in Pakistan. MFIs are acting as financial intermediaries for the enhancement of business
growth for SMEs in Pakistan. MFI loans are aligned with the definite desires of female
entrepreneurs to expand their sales growth. Financial support is one of the key motives for
successful SMEs in entrepreneurship, as it plays an important role in boosting their sales. SME
growth is being enhanced while the lender gets profit, thus increasing the availability of more
funds to endure sales growth. This illustrates a positive relationship between MFI loans and the
sales growth variable of SMEs. According to Geoffrey and Emenike (2018), there is a positive
relationship between SMEs in Nimule and the loans offered by MFIs. A large number of SMEs
commenced businesses with diminutive capital, resulting in stagnation in sales growth. MFI
loans, therefore, boost sales. The research illustrates that the loans are positively contributing to
the growth in sales. SMEs are being granted MFI loans as a significant financial stretch for their
business activities, thereby resulting in a noticeable and subsequent change in sales growth.
Gyimah (2018), MFI loans have a positive impact on the sales growth of SMEs. The research
illustrates a positive correlation between the loans granted and the sales revenue. However, the
research identified a negative relationship as well between MFI loans and SME sales growth.
Iskandar (2021) states that MFI loans have a positive contribution to the gross sales of SMEs.
This proves that MFI loans are essential for the revenue generation and growth of SMEs. MFI
loans have been revealed to flourish as a resolution to meltdown glitches with working capital.
Without the help of MFI loans, most SME sales growth would remain low. Moussa (2020) says
MFI loans are positively influencing the sales growth of small to medium enterprises. There is a
positive connotation between the amount of loans granted by MFIs and the resulting growth in
sales. MFIs have a great influence in developing small to medium enterprises in Lebanon as
there is a notable relationship between the loans being disbursed and the sales of the commerce,
trade sector and other beneficiaries in the country. A study on the effects of MFI credit on SME
growth in Lagos state by Onyeiwu (2021) showed a positive relationship between MFI loans
and the growth of SMEs. The research showed a significant positive relationship between the
two variables, indicating the relevance of MFI loans on sales growth.
According to Aladejebi (2019), the majority of small to medium enterprises experience positive
sales growth through participation in micro-credit schemes, which results in increased sales
revenue. According to research done by Akinadewo (2020), there is a positive nexus between
microfinance products and SME growth. MFI loans have a positive connection with SME sales
growth. MFI sustenance to SMEs has created the opportunity for SMEs to engage with the loans
which they use to enhance sales growth. This implies that many SME sales are being boosted
positively by MFI loans. This indicates the significant relationship that lies between SME sales
and MFI loans. The studies done so far show that SME sales have greatly improved through
MFI loans. Cesinger et al. (2018) say a lot of SME entrepreneurs have been able to expand
operations due to the positive sales growth they are experiencing. A lot of people who had
access to MFI loans were able to increase their sales. The microfinance sector has contributed
enormously to the growth of small to medium enterprise sales. This indicates a favourable
relationship between the MFI loans and SMEs' sales growth.
2.2.5 SMEs role and importance
Small and medium businesses play an important role both in developed and developing countries
and of these roles include poverty alleviation, unemployment reduction, technological
innovations and other.

2.2.5.1 Economic growth and Poverty reduction

Small and medium enterprises play a crucial role in reviving the economy of the developing
countries (Goriwondo, 2011). It is universally accepted that SMEs serves as an effective tool of
employment creation thereby enhancing economic growth, which will eventually lead to poverty
alleviation to both entrepreneurs themselves and employees also. This is true in developing
economies were the majority of people are employed in small businesses and the informal sector,
and this is because in many developing countries large companies might not operating at full
capacity so they are not able to offer employment to the majority so unemployed people end up
go to start their own businesses. In developing countries usually those economies are mostly
associated with macroeconomic instability which usually force companies to close their
operation and this also give rise to unemployment and many people can respond by going to the
informal sector in order to earn income for survival.

2.2.5.2 Technological Innovations

According to Maunganidze (2013), SMEs are the major source of technological innovations and
new products. SMEs brought new products in market which sometimes might not being offered
by large firms and they also bring technological advances. Ndoro (2012) further suggested that
SMEs contribute to economic growth, but the problem they mostly face is that they lack financial
assistance from banks because previously in several developing economies traditional banks
were not providing loans to small entities including the informal business sector.

2.2.5.3 Promoting favorable BOP as well as creating employment

Chidoko et al (2012), also suggested that the problem of inequality, lack of capital and
technology, and balance of payments can be also solved by promoting SMEs. Furthermore,
SMEs have the capacity of achieving economic growth faster because they have limited financial
requirements and high employment potential, so they help to reduce unemployment problems to
a better extent and also create high employment opportunities as compared to large firms. This is
because varieties of SMEs are labor intensive as compared to large firms meaning to say they
employ more human labor than machinery.

In addition, SMEs enhance people’s living standard and country’s economic output (Dumbu and
Chidamoyo, 2012). So the development of this sector is important especially in developing
countries where there is domination of small firms and plenty of them are in the informal sector.
The lower income earners and the poor can earn a better living from starting their own
businesses and this enhances their living standards.

2.2.4 Factors affecting SMEs growth

There variety of factors which affect the growth of small and medium enterprises operations and
some of those include the following: insufficient market and entrepreneurship skills, inadequate
capitalization, poor infrastructures and other

2.2.4.1 Inadequate financial Assistance from Banks

Small and medium enterprises are facing difficulties in obtaining adequate finance from
traditional financial institutions due to mainly lack of collateral securities (Nyanga, 2013).
Banks’ are reluctant to finance the operations of the SMEs because the cost of financing SMEs is
high in terms of the interest rates they pay at credit institutions. Several SMEs lack marketing
skills and promotional skills, and adequate knowledge of the market, this is adversely affecting
SMEs and they end up failing to retain and attract customers.

2.2.4.2 Insufficient knowledge and lack of entrepreneurship skills

Several SMEs have insufficient knowledge of the market conditions; this is causing them to fail
to efficiently satisfy needs of the customers. Some of the problems which hinder SMEs growth
are the lack of entrepreneurial skills and management skills also (Nyoni, 2002). Several small
enterprises lack managerial resources because they did not have sufficient funds in order to
employ qualified personnel’s, this compromise the quality of their output.

2.2.4.3 Limited financial Access, lack of good infrastructure and hostile regulation
Since more entities in the SME sector have limited financial access, they do not have sufficient
infrastructures such as building, equipment, machinery and land to effectively carry out their
operations (Chipangura and Kaseke, 2013). Also lack of information in the market as well as
changing customer trends negatively affect SMEs activities. In addition, a hostile regulatory
environment and political instabilities can also contribute to the poor performance or even
collapsing of SMEs. This can be accelerated by the dynamic or continuous changing in
government policies and statutes which make it difficult for small enterprises to function
properly (Ngwenya and Ndlovu, 2003).
2.2.4.4 Fluctuation of Economic Activities
The fluctuation of the economy has a strong effect on the growth of SMEs, this makes SMEs
difficult to implement strategies which suit the prevailing economic situation when the economy
is ever changing (Kangasharju, 2000). Continuous changing of the economy increases risk
because people will not be certainly sure about the future.
2.2.4.5 Interest Rates on Borrowing
Besides challenges in obtaining finance by small to medium enterprises, the cost borrowing in
terms of interest rates is high especially in underdeveloped economies, so this also worsened the
situation as they earn little from what they have borrowed and they end up failing to repay the
loans. These challenges also cause SMEs to fail to purchase raw materials such as equipment’s,
machinery or even skilled labour force and at the end compromising growth opportunities
(Ngwenya and Ndlovu, 2003).
2.2.4.6 Growth Barriers
It is common to find large firms growing large than to find new and existing small firms
growing, this is because large firms have got the capacity to grow but small firms are finding it
difficult. Due to these growth barriers, if a firm enters into the SME sector they usually remain
small.

2.2.5 Small and Medium Enterprises growth strategies

There are several growth strategies which can be used and some of those include the following:
diversification of business activities, maintaining loyal customers by providing variety of goods
just tom mention a few.
2.2.5.1 Diversification
Diversification of business activities such as products and markets is an important tool in helping
the revitalization of SMEs under difficult economic conditions (Nyanga, 2013). Diversification
enables small business to venture into markets or services that have least of competition, and
they will end up having greater market share as well as greater sales. Diversification also enables
various enterprises to source foreign currency from other countries which is mostly rarely
available during tough economic situation. In times of recession firms can diversify either by
developing new products or entering into new markets. Diversification move must create
additional benefits that act as cushion against the prevailing recessional difficulties.
2.2.5.2 Maintaining Highly Motivated Workforce
Maintaining of a highly motivated and dedicated workforce also proved to be an effective
method of ensuring the survival of SMEs especially in the economic turmoil (Nyamwanza,
2014). He further argued that by motivating your workers with incentives such as bonuses, a day
off with pay can create an environment of friendly competition. Motivation of employees during
the economic crisis period is crucial because when workers are not motivated they can easily
move to the Diasporas to look for greener pastures which might be sometimes attractive to most
workers, and this is true to many poor developing countries like Malawi, Zambia and Zimbabwe
where workers usually move out to rich countries such as South Africa and some to European
countries to search for greener pastures. In times of recession small enterprises should recognize
and reward achievers, either with gifts that mean something to them, or performance-driven
incentives that are memorable and even in form of financial increment.
2.2.5.3 Psychological strength within Entrepreneurs
Psychological strengths within the entrepreneurs are also techniques of SMEs growth strategies
especially under tough economic times. Optimism is an important tool for the success of every
business especially in times of difficult business circumstances. Small entrepreneurs should
develop visions of the future and a vision of the future helps the entrepreneur in planning how he
wants his business to grow (Nyanga, 2013).
2.2.5.4 Maintaining loyal customers by providing variety of goods
Myles (2010) suggested that, maintaining loyal customers is a crucial factor to help SMEs to
survive over the economic crisis period. It is important for the small businesses to be consistent
in their way of operation and in providing their services so as to maintain customer loyalty and
retain customers. They should always fully stock their shops in order to provide sufficient
products when they are needed so as to retain new and existing customers. He further explained
that small business should improve their product offering if they wish to survive under harsh
economic situations. In order to grow small business should diversify the goods and services
they offer such that they become a one-stop shopping experience. SMEs should aim to offer
good, quality merchandise especially retailers they should stock items which are in demand, not
items that nobody wants. They should also engage in various community activities so that they
will be marketing their names and also ensure that the name of their business remain visible to
that community.
2.2.5.5 Accessing financial assistance from MFIs
Accessing of financial assistance from microfinance institutions is another growth strategy for
small to medium businesses. In the research done by Wang (2013), he clearly brings to the light
the fact that SMEs in China who were participating in micro financing activities had a better
performance in terms of revenue growth and net profit. SMEs retained earnings and personal
funds are not sufficient enough for them to grow, but hence they also need microfinance
services. The analysis by Wang (2013) shows that SMEs with lower retained earnings and lower
productivity are those that usually face problems and they are eager to demand services provided
by microfinances. He further stated that in the long run, there is a greater probability that MFIs
will play a crucial role in the growth of SMEs who are obtaining loans under unhealthy
conditions and he also shows that small enterprises that have received and took part in micro
financing before are more likely to receive microfinance services in the future again. In addition,
the level of productivity and number of employees are also major determinants of SMEs growth
and development in China as they play a crucial role in generating output.
2.2.6 Factors affecting the growth of SMEs in developing countries
Chipangura and Kaseke (2012) stated that, number of small businesses failed because of non-
financial challenges such as inability to forecast or planning skills, a lack of qualified skilled
human resources and poor management skills. It is true that the public sector and private sectors
in both developed and developing countries are contributing effectively to the development of
small enterprises, but there are other factors in the market environment that are not supportive in
the initiatives for the development of small enterprises.
2.2.6.1 Macroeconomic instability
Macroeconomic fundamentals such as inflation, interest and exchange rates also negatively
affect SMEs in the developing economies. In line to the above factors, small businesses face high
interest rates on borrowing and they experience difficulties in raising such loans, and this is
caused by capital market imperfections (Nyamwanza, 2014). High interests’ rates charges
increases the burden to the borrower and this usually end up causing the borrower to default the
instalments payments as agreed. Lypsey and Crystal (2001), also added that high interest rates
would reduce marginal efficiency of capital (MEC) and some called it marginal efficiency of
investments(MEI) making it difficult for the borrower to make profits. Marginal efficiency of
capital is the return which a company earns after employing certain level of capital, so if the
interest’s rates are high on borrowing automatically borrower will earn less from what they had
employed as capital. Taxation as another challenge which discourages the operations of SMEs
more than larger companies unless they are special relief given. Tax is an expense to the business
which reduces income, so they are a negative relationship between tax and profits, an increase in
tax reduces profits. To add more, shortages of raw materials or even excessive prices of inputs
are also problems which are confronting SMEs growth in developing countries.
2.2.6.2 Limited demand of their products and lack of technological innovation
Kimura (2003), also stated that the poor performance of SMEs as compared to large firms has
connected to limited demand of their products, lack of technological innovation and their
inability to access foreign markets. Even though SMEs offer income and employment to the
majority of people in many developing countries but their activities have been characterized by
low contributions to GDP or output the nation, this is because their activities are usually
excluded from the recording of GDP statistics. Some SMEs in developing economies usually
operate as backyard or underground businesses and this causes their activities not to be recorded
in the counting of GDP statistics.
2.2.6.3 Employee literacy level
Employee’s level of literacy has an impact on the performance and success of small business.
Marten (2005) in the study on the success of small businesses in Canada found that, educational
level of the owners of the businesses was positively related to the success of businesses. Small
enterprises owned and managed by people with a minimum of a secondary education had their
revenues increase more than twice as compared to businesses managed by people with less than
a high school education. Driver et al, (2001) also added that in South Africa, individuals with a
tertiary education are significantly more likely to own a small business than those without
tertiary education.
Nahamya et al (2013) added that, SMEs are experiencing challenges such as technical skills,
limited level of education, and lack of collateral securities, poor technology, and long distance to
reach out MFIs or poorly located enterprises, sometimes limited market, high interest rates which
sometimes lead to greater default risk and non-performing loans. In order to overcome these
challenge, the government therefore needs to formulate the necessary regulatory and institutional
framework environment for both MFIs and SMEs so as to overcome access challenges such as
lack of default rate problems, financial records and lack of skills. He further indicated that, the
main problems that affected Ugandan SMEs especially in the manufacturing sector is the
exorbitant interest rates (availability of cost of the loan product), inadequate amount of loan size,
cost of electricity, limited technical skills, lack of collateral security and distance to nearest
financial institutions. These problems are tagged to symptoms or signs of low government
investment over many years and inability to attend to long term planning in crucial development
sectors.
2.2.6.4 Rates charged by other government ministries
The Portfolio Committee on Small and Medium Enterprise Corporative Development Report
(2011) also elaborated that, rates charged by some government ministries on SMEs are too high
which mostly leads to the complaining of SMEs. High rates increases the cost of production and
hence the burden also increases and this automatically hinders the performance of small to
medium businesses. The high cost of capital could also be the one of the reasons why other
SMEs fail to repay the loans and causing them to lose various assets which they would have
pledged as collateral securities. Furthermore, those high rates charged also causes some SMEs to
hesitate to borrow because they fear losing their assets in the event of default, so under such
situation the growth of SMEs becomes affected. Maunganidze (2013) also added that, various
infrastructure used by SMEs are in adequate to supports the population who are using it. SMEs
are also facing the challenges of lack of legal and proper places to conduct their business.
2.2.6.5 Inadequate financial assistance
Wang (2013) stated that, the small and medium enterprises sector in China is gaining increasing
attention globally such that it is accounted for over 60% of the China’s total GDP as of March
2012. However, small enterprises in Taizhou (China), have been facing financial challenges
since their birth because it was difficult for SMEs to obtain loans from commercial banks in
order to start a small or medium business. The main reason why commercial banks were not
giving loans to SMEs was that, they demand collateral securities because small businesses were
considered as high risk business. High risk the business was required to submit more collateral
securities, so small enterprises are subject to higher risk and they could also easily default. In this
case, the high collateral which were demanded by commercial banks greatly affected SMEs
because they could not be able to access loans from such institutions and therefore act as a
setback for entrepreneurial growth.
In addition, other factors which are also connected to the poor performance of small business
enterprises in the developing world are shortage of working capital, institutional and
infrastructural obstacles and their inaccessibility to formal market supporting institutions and
government incentives (Chipangura and Kaseke, 2012).
2.2.7 Effects of microfinance on SMEs
According to Mpofu et al (2013), MFIs largely offer financial services to the poor (lower income
earners). They do usually provide services specifically targeted at micro businesses, Small
businesses and Medium businesses broadly categorised as SMEs. Microfinance institutions play
a crucial role in national economies by providing financial services to poor and informal sector
which were not previously served by traditional banks. In many developed countries like the
United States, SMEs are widely recognised as the contributors to innovation, productivity,
employment and economic growth and they account for over half of gross domestic product
(GDP) and over 57% of employment.
2.2.7.1 Promoting growth and development of SMEs
The financial sector (microfinance) plays a crucial role in accelerating growth and development
of economy through deployment and mobilization of financial resources (Dhliwayo in the SMEs
banking and the Microfinance Summit, 2014). The financial sector in developing countries
particularly the microfinance sector plays an important role in the promotion of growth and
development of SMEs. He further elaborated that, in several developing countries markets there
is evidences which shows that MFIs and other banks have navigated around some other well-
known challenges facing small businesses and they are serving them profitably.
In the study carried out by Wang (2013), on the impact of microfinance institutions to the
development of small and medium enterprises in TaiZhou, the largest home of small businesses
in China he shows that MFIs plays an important role on the growth in terms of revenue and profit
of the SMEs. He further revealed that small enterprises with lower level of productivity and
higher financial risk are firms which most likely seek MFIs. He also mentioned some firm
characteristics that determine its likelihood of receiving micro financing which includes
managerial and entrepreneurial attitudes and product innovation efforts.
Muchingambi (2014) stated that, MFIs gives new opportunities to the people by helping them to
obtain and secure finances in order to equalise the chances and also make them responsible for
their own future. He further explained that, microfinance has become very crucial in enhancing
small enterprises access to financial services because they provide services which are specifically
meant for the SMEs which banks failed to provide. SMEs are believed to have low access to
financial services such as deposits and other credit facilities which are provided by the formal
financial institutions, this is because many small businesses do not provide necessary securities
as collateral so that banks fear up losing their money in times of default.
Nahamya et al (2013) examined the impact of microfinance institutions services to the growth of
small and medium firms in Uganda and he stated that, MFIs plays a crucial role in the growth of
small enterprises in Uganda, but this is possible only when their products are accessible and
reasonably priced. SMEs in Uganda are increasingly playing a strategic role in the economic
growth and development, despite challenges they are experiencing in accessing financial services
and other non-financial products from microfinances to finance their business as working capital.
2.2.7.2 Providing financial services to the Informal sector (Financial inclusion)
MFIs have emerged to address the market failure by providing financial services to the SMEs
which were previously neglected by the formal financial sector (Littlefield and Rosenberg,
2004). In addressing this gap in a financially sustainable manner, microfinances are now
becoming part of the formal financial system and they can now access funds from capital
markets in order increase the number of people they serve and also fund their lending portfolios.
Microfinance have emerged strongly as the vehicle to provide access to financial services to the
informal sector members taking advantage of banks in neglecting the informal sector (ZAMFI
Report, 2011).
According to Munene (2014), microfinance institutions in Kenya have expanded their operation
by serving small business including the informal sector which was not being served by
traditional banks and also MFIs financial services has contributed much to the growth of SMEs.
SMEs in Kenya has contributed much to their economy which was declining, thus also reducing
poverty to the poor people through the provision of microfinance services which gives them
access to capital in order to start-up businesses and further explained that there is positive
contribution of MFIs to the growth of SMEs. When SMEs benefit from loans obtained from
microfinances, they continue borrow loans and they end up graduating to bigger loans thereby
leading to the sustainability of lending institutions.
Mataruka (2015), described financial inclusion as the sustainability provision of financial
services to the majority of population at affordable cost enabling households and other small
businesses to engage in income generating activities in order to improve their economic welfare.
He added that, financial inclusion also promotes efficiency allocation of available resources in an
economy and best way to achieve this is through microfinance institutions. Again low cost
physical structures of microfinance institutions have allowed them to operate in remote areas and
provide financial services to people who were previously not served by traditional banking
institutions.
2.2.7.3 Giving financial assistance to SMEs
Improving the access of financial services to the SMEs is crucial in increasing competition,
entrepreneurship, growth and innovation in both developing and developed countries
(Chipangura and Kaseke, 2012). Small enterprises in developed and developing countries are
facing challenges in accessing adequate and sufficient funds (capital) so as to achieve growth and
expansion of their businesses. Small enterprises have challenges in accessing finance because
many traditional financial service providers consider their operations as high risk businesses
activities which are associated with low returns on investments and high transaction costs.
Therefore, MFIs in developing countries are taking this advantage and took the intermediary role
of channeling funds to those small businesses which were not being served by banks.
Muchingambi (2014) also added that, small businesses do generate income to the poor, create
employment opportunities, reduce poverty and contribute to economic growth. Accessing of
financial services however have remained as an obstacle to their growth despite their increasing
roles in the economy.
Munene (2014) in his research shows that microfinance institutions financial services contribute
much to the growth of small and medium enterprises. Indeed, all business that were obtaining
financial services from MFIs reported a growth in revenue, sales and also number of employees.
He also clearly shows that SMEs who were receiving financial services from MFIs succeeded
much than those firms which were not receiving. His research shows that, entrepreneurship in
Kenya is greatly expanding and it is also helping the economy to stimulate the nation declining
economy at the same time contributing to poverty alleviation through provision of microfinance
services. In Thika, capital (loans) to start up and expand the business is more important for SMEs
and those receiving it recorded a positive growth. He further stated that non-financial services to
the SMEs, plays a circular role on relationship with the lending institutions; most customers end
up borrowing from same institutions where they obtain other services. This is of great
importance to the microfinance who might sometimes suffer from the increase in default rate
because of the problems from client retention and multi funding.
In addition, microfinance provides various services to the growth of SMEs besides funding such
as short-term insurance, business advisory services, carrying out of seminars with SMEs so as to
encourage capacity utilisation, management services offering and financial planning, invoice
discounting services, matching local small and businesses with foreign suppliers and trade
exhibitions supporting. (SMEs banking and Microfinance Summit report, 2014).
2.2.8 Challenges faced by MFIs in providing services to SMEs
Microfinance institutions face different challenges in providing services to small and medium
business and some of the challenges includes competition MFIs and liquidity constraints.
2.2.8.1 Diversion into Non-core business
Dube (2015) stated that, diversion into non-core business by microfinance institutions is one of
the major challenge which leads to the downfall of various micro lending businesses. Micro
lending businesses were only mandated to provide small loans mostly to low income earners but
they found themselves taking the role of deposits taking and some giving big loans both to the
corporate and individual clients thereby enhancing the risk profile of the business. Some MFIs
were not transforming those deposits into loans but rather invest them into other ventures. The
issue of deposit taking require effective management of liquidity and credit risks which various
MFIs do not have. The panic withdrawals by depositors affected MFIs because deposits were
invested into long term projects and this caused liquidity challenges as MFIs were failing to meet
their short term obligations when they fall due. Some MFIs had to borrow loans from
commercial banks to finance their operations but some were failing to repay so they were now
unable to access further loans.
2.2.8.2 Competition
Micro lending business has also affected by competition in the industry, as microfinance lending
regulations are not strictly enough as compared to that of banking regulation (Dube 2015). Lax
regulation to the MFIs usually caused immense competition in the industry as they will be
competing for clients so some MFIs ending up charging less interest rates as compared to others
and this drives away those with weak capital base. This has also resulted in other banks that
owned micro finance institutions competing with microfinance institutions that are not owned by
banks. Micro finance institutions owned by banks had greater access to finance from their parent
banks as compared to microfinance institutions that are not owned by banks. The same banks
which now have microfinance departments were the ones providing loans to their competitors
and to MFIs not owned by banks also and this gives them competitive advantage thereby driving
away new emerging MFIs. The non-bank owned MFIs are less creditworthy than MFIs owned
by banks, so funding preference were given to bank owned MFIs relative to non-bank owned
MFIs.
2.2.8.3 Inefficient Credit Risk Management
Inefficient credit risk management also caused the downfall of micro lending institutions. Most
MFIs did not make follow ups to the loans they issued to establish whether the loans were used
for the intended purposes or not and this caused some borrowers to divert loans to other uses.
Some people tend to misuse funds borrowed for business purpose and this usually cause loan
repayment to be very difficult. Credit risk management in many developing countries was not
effective in verifying customer’s physical address and this made it difficult to trace that money in
times of default especially the informal sector and this also motivated other informal sector
clients to default.
2.2.8.4 Poor Risk Management Techniques
Lack of expertise or knowledge of running microfinance business also affected the operations of
various MFIs (Ndoro, 2012). Microfinance lending business involved variety of risks such as
operation risk, credit risk, liquidity risk and interest rate risk all of which need to be managed
effectively and efficiently to ensure survival of business. Some people owning micro finance
institutions do not have proper knowledge about the industry, so it is difficult for those people to
progress under difficulty economic situations. However, the success of micro finance lending
businesses greatly depends on the ability to manage operation risk, credit risk and liquidity risks
effectively.
2.2.8.5 Liquidity Challenges
Liquidity crunch is another problem that affects MFIs lending activities especially when the
economy is depressed. Liquidity crunch is a situation when financial institutions are not able to
meet their financial obligation when and as they fall due. The liquidity challenges usually cause
MFIs which are not owned by banks to have challenges in accessing loans which they
transformed into micro loans. The liquidity crunch can not only affect the financial sector but
also the demand for goods and services thereby affecting cash flows of small businesses or micro
borrowers (Dube, 2015). In this case micro borrowers usually respond by defaulting due to the
nature of business environment because their sales are greatly compromised.
2.2.8.6 Operational Costs and Issuing Consumer loans rather than Projects loans
Operational cost is another major problem which can affect MFIs operations. Several micro
lending enterprises usually operate in rented premises, rental costs are high and this affect MFIs
which have opened many branches and those who want to start business for the first time.
Microfinance institutions tend to offer or issue consumer loans instead of financing projects
(micro projects), so loan repayments tend to be easy when the source of payment is from
business operation cash flows. Consumption expenditure cannot generate income as cash flows
to repay funds borrowed, therefore it is mostly associated with default risk because funds will be
consumed rather than invested. (RBZ Publication, 2014).
2.2.8.7 Undercapitalization
Inadequate capitalization of MFIs contributed to collapse and disturbance of their operation.
When a micro finance is well capitalized it can absorb losses and this can lead to the success of
that business. In poor countries, the financial sector is characterised by high level of non-
performing loans which is a threat to the whole financial sector including MFIs especially when
they are not fully capitalized. So undercapitalization of micro lenders greatly affects their
operation such that it becomes difficult for them to assist their customers (Mago, 2013).
In addition, several microfinances suffer chronic challenges with customers leaving their
programmes and the major cause of customer drop outs is because of inappropriate products
designed that fails to meet the demands of the customers (Munene, 2014). The source of this
problem in Kenya as suggested by Munene was caused by the attempts to duplicate products and
models from foreign cultures specifically Bangladesh without reference to the socio-cultural and
economic environment where they imported. The idea of product development is a crucial factor
for a market-responsive microfinance. He further explained that, client-responsive products
usually reduce customer drop-outs, attract new customers and therefore contribute to the long-
term sustainability of microfinance services and increase the effectiveness of the financial
products
provided.
2.2.9 The moderating effects of government policies on the relationship between
microfinance and growth of SMEs.
Literature reviewed indicates that the government effects the operations of microfinance
institutions and businesses in various ways. The government through its policies such policies on
interest rates (RBZ, 2020), policies on taxes, policies on minimal capital requirements required
to register microfinance institutions positively affects the relationship between microfinance and
the growth of SMEs. For example, the government limits the growth of informal sources of
finance through the registration and supervision role. This puts sanity in the financial sector. The
government through policies such as financial inclusion improves the financial literacy of SMEs.
The government through its policies enhances financial deepening (International Monetary Fund,
2015), ensures availability of safe, appropriate and affordable credit, increases productivity
(Khan, 2015), increases economic growth (Zhu et al, 2018), facilitates smoothening of
consumption by the low-income households facilitates, increases employment levels, enhances
financial stability
Mishkin (2018). Literature review indicates that less has been undertaken to test the moderating
effect of government policies on the relationship between microfinance products and growth of
SMEs. However, literature indicates that scholars are in agreement that government policies
affects the operations of microfinance institutions and ultimately affects the nurture and price of
products they offer to SMEs. The government affects the relationship between microfinance
products and growth of SMEs through regulations. In a study in Kenya, Moretti, Chesoli and
Muya (2020) established the moderating role of government policies in the relationship between
microfinance services and financial performance of small and medium enterprises, the study
found a significant positive relationship between government policies and financial performance
of SMEs.
2.2.9.1 Objectives of the government when they regulate the relationship between
microfinance institutions products and SMEs development
According to Muiruri, (2021) government regulates the relationship between microfinance
institutions and SMEs development and try to address the following objectives:
2.2.9.1.1 Protection of depositors.
Depositors are shielded from shady microfinance practices by government policies. Through
some policies, the government safeguards depositors so that in the case of failure, depositors are
not harmed. By preventing depositors from losing their money to deposit taking microfinance
organizations, the Reserve Bank of Zimbabwe in the case of Zimbabwe moderates the interaction
between the government and microfinance institutions. According to Christen and Rosenberg
(2000), financial institutions are regulated to protect small depositors from losing their savings in
the event of insolvent. In support, Nzaro et al. (2013) claims that regulations are essential as they
guarantee that the financial system won’t be unstable due to loss of confidence as a result of
insolvency. Depositors are also protected from entities that appear as MFIs but act dishonestly;
otherwise, a pyramid scheme can pretend to be an MFI in order to perpetrate fraud. Therefore,
there are reasons to oversee and regulate MFIs that accept public deposits.
2.2.9.1.2 Protection of borrowers.
The government through its policies regulates the interest rates which are charged by
microfinance institutions. In most cases MFIs have high costs and they would want to pass that
as high interest rate to customers. This is especially rampant in areas where microfinance
institutions are monopolies. In such situations, if microfinance institutions are not regulated, they
may end up charging higher interest rates which affects SMEs. Higher interest rate means the
higher the cost of money. There, the government regulates the interest rates charged by
microfinance institutions through their monetary policies.
2.2.9.1.3 Protection of the financial system.
When an MFI borrows a significant amount of money from commercial banks or other financial
institutions, or when the failure of the MFI is likely to raise (possibly unfounded) concerns about
the soundness of the system as a whole, the financial soundness of the MFI can have an impact
on the state of the financial system as a whole. This is the traditional justification for more
regulation of the financial sector than other industries. However, as the institutions involved tend
to be small in comparison to the normal banking system, the implications of MFI failures are
probably of little significance in most instances. But certain MFIs have the potential to grow to
be large in size. Additionally, the failure of a dishonest MFI can undermine public confidence in
other financial institutions. In addition, the failure of a fraudulent MFI could affect the public’s
trust in all financial institutions.
2.2.9.1.4 Promotion of the MFI sector.
Governments regulates microfinance institutions to promote the development of the MFI sector.
Proper regulations of MFIs enable them to attract more deposits from the public and obtain
financing at a lower cost. Regulators for example in Zimbabwe, the RBZ, mandate MFIs not
only to lend for consumption but also to lend for businesses. This makes the micro finance sector
to grow.
2.2.9.1.5 Protection of public funds.
Regulation and oversight of MFIs may be motivated by two different factors to protect public
funds. When public money was used to create an MFI, the government is responsible for
ensuring that management and business decisions are of a high standard, much like any large
shareholder would be. The second situation is one in which either explicit or implicit deposit
insurance covers the MFI's liabilities. In order to reduce moral hazard and properly price deposit
insurance, governmental regulation is thus required as a result of public policy regarding deposit
insurance.
2.2.9.1.6 Financial inclusion
Government policies through policies enhances financial inclusion of SMEs and the general
populace. Though there are various definition of financial inclusion in the literature, the common
theme in the use of financial inclusion is access to credit, savings and payment services to
everyone (Wu, 2005). United Nations (2007) defines financial inclusion as access to credit,
saving and payment services to everyone. Relatedly, Fiallos and Wu (2005) views financial
inclusion as the process of ensuring that vulnerable groups such as SMEs and low income groups
have timely and adequate access to financial services at a reasonable cost. Similarly, Basavaraja
(2009) defined financial inclusion as the provision of banking services to disadvantaged and low-
income people at a reasonable cost.
2.2 9.2 Positive effects of government policies
2.2.9.2.1 Limits the growth of informal sources of credit
The government enacts policies which regulates the operations of microfinance institutions
(RBZ, 2020). This prohibits the proliferation of informal sources of finance who operate as
money shacks and affects the reputation of registered microfinance institutions and charges
exorbitant process to clients. The government through various pieces of legislation regulates the
operations of those in the financial sector. This puts sanity in the industry.
2.2.9.2.2 Enhances financial deepening.
The International Monetary Fund (2015) defines financial deepening as the whole process
through which financial markets offer services that permit the interchange of products, services,
savings, and investments effectively and efficiently. Building and expanding institutions, tools,
and markets that enable this investment and growth process is necessary Fitzgerald, 2006). The
government encourages financial deepening through its programs such as financial liberalisation
(Demetriades & Andrianova, 2004). Financial liberalisation produces more financial resources
for an economy (World Bank, 2005). More openness and the lifting of capital restrictions
accompany financial development which increases competition in the microfinance sector
(Demetriades & Andrianova, 2004). Financial liberalization increases the effectiveness of
financial institutions, giving investors more options, allowing them to diversify their holdings
and lowering risks (Fitzgerald, 2006). Large pools of private savings that would otherwise be
idle can be introduced into the financial markets.
2.2.9.2.3 Ensures availability of safe, appropriate and affordable credit.
Low-income groups, especially MSMEs, are unable to obtain credit due to lack of required
collateral such as immovable property which is required as security by mainstream lenders
(financial institutions). As a result, these economic agents are left with "dead capital" in the
form of movable assets that they can't use as collateral. The construction of a collateral registry
has been shown to help low-income groups to leverage their transportable assets to receive
financing in other countries. A crucial aspect of effective economic development initiatives is
ensuring that SMEs have adequate access to financial resources. Policymakers have long
recognized that SMEs who are unable to meet their financing demands must settle for less than-
optimal growth options. Entrepreneurs are forced to forgo opportunities to boost their
productivity, income, and well-being when they are unable to make the necessary upfront
investments or take on greater risk (Boucher et al., 2008, and; World Bank 2008a). If they have
access to well-designed credit, savings, and insurance services, SMEs business owners can
employ money to pay for their supplies, labour and machinery they need to make a profit. They
can effectively access markets, invest in riskier but more lucrative businesses and asset
portfolios, and employ more effective techniques to control their food consumption (Zeller et al.,
2017).
The function of the government cannot be restricted to providing low-interest loans to the poor.
It is their responsibility to establish a legal environment that benefits them. Private moneylenders
are viewed as monopolists who regularly take advantage of the poor (Armendariz de Aghion and
Morduch, 2005). Moneylenders have a local monopoly because potential rivals are unable to
enter the market due to asymmetry in information (information) and relationships. High interest
rates continue to worry governments today. This issue transcends Zimbabwe.
2.2.9.2.4 Higher productivity
Policymakers have examined and concluded that strengthening financial systems is a key
component of the development agenda for economic and social advancement which lead to
increased productivity in all sectors served (Mankiw et al, 2011). Millions of people are being
shut out of formal financial institutions around the world, resulting in the loss of deposits and
savings as well as investable capital and the global economy's ability to build wealth.
Policymakers are attempting to reduce financial inclusion delinquency by loosening regulations
to ensure that everyone is financially included, and it is widely recognized as capable of
stimulating loan creation and capital accumulation, hence increasing investment and economic
activity (Khan, 2015).
2.2.9.2.5 Increased economic growth and development
The advancement of financial inclusion has recently piqued the interest of the entire world.
Individuals and enterprises with financial inclusion have access to useful and cheap financial
products and services that fulfil their requirements supplied responsibly and sustainably (Zhu et
al, 2018).

2.2.9.2.6 Facilitates smoothening of consumption by the low-income households

Consumption smoothing is the process of maximising the standard of living by maintaining a
healthy balance of spending and savings throughout our lives. Though some argue that
microfinance does not effectively pull individuals out of poverty, others argue that providing a
mechanism to smooth consumption through difficult times has proven to be effective (Gruber,
2016). This is consistent with the theory of declining marginal utility, which holds that persons
who have previously suffered in severely low-income countries desire to prepare for the next
time they face adversity. This leads to support for microfinance as a method to smooth
consumption, with individuals in poverty valuing microloans highly due to their extremely high
marginal utility.
2.2.9.2.7 Mobilization of financial resources from the informal sector
Collecting taxes from the informal sector is clearly a challenging task, but the potential benefits
justify considering incentive methods that encourage people to pay their taxes. The government
plays an important role through mobilising income from the informal sector which they use for
the provision of facilities for SMEs.
2.2.9.2.8 Increase in employment levels
Financial inclusion is a multi-faceted notion that includes not just access but also utilisation and
quality. As a result, comprehensive understandings of financial inclusion take into account
service availability and accessibility, frequency of usage, as well as the suitability and quality of
financial solutions for people of all income levels (Kull, 2015). This provides information on
how SMEs can have access to financial goods particularly loans, in order to start their own
enterprises and create jobs. A completely effective financial system for clients should provide
easy access to information about available products and their terms. The system should also
include regulations to safeguard consumers from being duped or exploited.
2.2.9.2.9 Enhances financial stability
Financial stability refers to the ability of the financial system to accomplish its three key
functions satisfactorily at the same time (Mishkin, 2018). First, the financial system is making
the intertemporal allocation of resources from savers to investors, as well as the distribution of
economic resources in general more efficient and seamless. To achieve this motive, the
government put in place ministries which are accountable for the distribution of resources to
SMEs so that everyone benefits and be able to start their businesses and also to have access to
the financial resources. Second, financial risks in the future are being identified and priced rather
properly, and they are being managed reasonably well. Third, the financial system is in such
good shape that financial and real-world economic surprises and shocks can be absorbed
pleasantly, if not smoothly.
2.2.9.3 Negative effects of government policies
The government has put in place the policies with the intention to benefit entrepreneurs so that
the economy will grow. However, there are some negatives which came along with these
policies.
2.2.9.3.1 Poor Connectivity
Because technology has become such a key enabler of access to financial services, many areas of
the country with weak connectivity have been left behind in assuring access to financial services,
resulting in a digital divide (Sinclair, 2013). Technology may be the most effective link between
financial service providers and last-mile customers. Fintech firms may be one of the most
effective ways to address this problem. Improving tele and internet connectivity in the rural
hinterland, as well as attaining connectivity across the country, is a major problem that must be
overcome.
2.2.9.3.2 Implications for pro-cyclicality
In periods of prosperity, countries with greater financial inclusion tend to have higher levels of
financial intermediation credit booms and higher levels of local economic activity, both of which
are beneficial to the economy (Simbanegavi, 2014). However, in difficult circumstances, such as
a recession or a crisis, everyone will be impacted by their active participation in the financial
sector. Credit will be scarce in difficult times, resulting in low levels of local economic activity
and high unemployment, both of which are detrimental for the economy and for entrepreneurs
(Zins and Weill, 2016).
2.2.9.3.3 Systematic risk
Because there will be full integration between the informal and formal financial sectors once full
financial inclusion is realized, it has implications for systematic risk (Fonte, 2012). A payment
system failure, for example, will have a contagion effect and spill over into the informal sector,
hence raising systemic risk in the financial system (Evans, 2018).
2.2.9.3.4 Moral hazard problem
Because the policies were created in order for everyone to be financially included, it means that
anyone can enter the formal financial system, including evil persons who want to swindle
vulnerable and poor people (Chakaipa, 2017).
2.2.10 Conceptual framework
The conceptual framework shows the effect of microfinance loans on SMEs' growth.
Microfinance loans are the dependent variable, and SME growth is the dependent variable,
which is measured by sales growth, firm size and profitability. Sales growth, firm size and
profitability are the predictor variables or explanatory variables considered in this study.
 Government Policy
(mediating Variable)

Figure 1. Microfinance loans and SMEs Growth conceptual framework

Source: Primary and Secondary data (2024)
In light of the above conceptual framework, the following hypotheses are proposed.
Microfinance institutions can help small businesses access the capital they need to start or
expand their businesses, improve their business skills, and reduce their vulnerability to financial
shocks (Masanga & Jera, 2017). The authors argued that small businesses that managed to
receive microfinance loans were more likely to report an increase in sales and profits. The
monetary policy had been playing a moderate role on the conduct of SMEs in Zimbabwe as
changes in the monetary policy would determine the supply of money in the lending rates as well
as the rate of interest on borrowings.
2.3 Empirical Studies
Effects on microfinance on SME growth.
Extant literature has mixed findings on the effects of microfinance on SMEs growth. Majority of
studies confirm that microfinance products has a positive effect on SMEs growth (Novignon,
2022; Salhuddi et al, 2021; Bekalo, 2018; Chatterjee et al.,2018; Kumar, 2016). In addition,
literature has substantiated that microfinance financial products complemented by microfinance
non-financial products has a positive effect SMEs development (Kumar, 2016).
Empirical studies have been conducted in other countries to determine the effects of
microfinance products on development (Novignon, 2022; Salhuddi et al, 2021; Bekalo, 2018;
Chatterjee et al., 2018; Kumar, 2016). In Jamaica, Novignon (2022) examined the impact
microfinance funding on MSMEs development. The study concluded that microfinance products
had positive effects on MSMEs development. Relatedly, Salhuddi et al (2021) established the
effects of microfinance and on development of entrepreneurship in Punjab, Pakistan. The study
found a positive relationship between microfinance funds and SMEs development. In addition,
the study noted that microcredit needs to be customised to address the needs of SMEs.
Chatterjee et al. (2018) noted a one on one positive relationship between group based financial
services and empowerment of microenterprise loanees both in economic and social terms. In
Bolivia, Vogelgesangu (2001) examined the impact of microfinance loans on customer
productivity and growth. The study results reviewed that micro credit increased loan borrowers’
sales revenue. Importantly, the study revealed that microfinance borrowers who utilised
efficiently the loans benefited while those who misused the loans entered into a debt trap.
Thaher (2021) established the effect of microfinance services on entrepreneurs in Jordan. The
study concluded that microfinance financial products are crucial in uplifting the entrepreneurs.
Shkoder, Ymir & Ibis (2021) conducted a study to establish the role of microfinance institutions
on developing entrepreneurship in Kosovo. The study confirmed that microfinance institutions
increase the performance of SMEs.
Relatedly, Aninze, El-Gohary & Hussain, (2018) established the role of microfinance on
indigenous empowerment in developing countries. The study confirmed that microfinance
institutions improves the standard of living of people, improves empowerment. In Bangladesh,
Hashemi, Schuler, and Riley (1996) examined the influence of microfinance products on SMEs.
The study found a significant positive results and SMEs. The study observed that microcredit
specifically increases SMEs ability to make decisions, which empowers them.
Lakwo (2006) claims that there is evidence that SMEs borrowers are developing their money
management skills, opening bank accounts, acquiring more independence outside of their home
and feeling proud of their contribution to the family's income. In support, Kumar (2016)
observed that Keralan SMEs economic circumstances significantly improved after they received
microcredit. Bekalo (2018) established the impact of microfinance on the development of micro
and small enterprises owned by SMEs in ADDIS ABABA, Ethiopia. The study sample consisted
of 120 owners of micro small and medium enterprises. The study used a survey method and
found that SMEs who accessed microfinance products improved their living conditions, cash
savings, income for the family, child education, household food and diet, household health,
business investment and decision making in their families.
Shane (2003) discussed the credit and non-credit aspects of microfinance (education) on the
entrepreneurial opportunity of male and female entrepreneurs in the United States of America
and came to the conclusion that prior business experience gained through education leads to
preparedness for entrepreneurial activity and that the acquisition of capital is also required
forsuccessful entrepreneurship start-up.
Eversole (2009) discussed micro-finance factors and micro-enterprise development in the
informal sector of the Australian economy and concluded that micro-finance is a leading strategy
for poverty reduction and grassroots development as it could lead to self-employment, social
wellbeing of entrepreneurs and enable them participate in household and community decision-
making. The emphasis of the study was on household empowerment of local entrepreneurs. The
conclusions from the study would have been far more persuasive if the study had also appraised
any other welfare policy on local entrepreneurs.
2.13 Gaps in literature.
Literature review focused on areas that comprise types of financial products being availed to
SMEs, types of microfinance non-financial products, effects of microfinance products on SMEs
growth, the moderating effects of government policies on the relationship between microfinance
products and SMEs growth, typologies of businesses being pursued by SMEs and the barriers
being faced by SMEs when trying to access microfinance products. There are no studies that
focused on the influence on microfinance products (microfinance financial and nonfinancial
products) on SMEs development in Zimbabwe. Most of the studies undertaken focused on the
impact of SMEs development and on SMEs in Harare. This leaves a gap to establish the effects
of microfinance products in their totality on SMEs development. Further, studies incorporating
the moderating role of government policies on the relationship between microfinance products
and SMEs are scarce. Thus, this study aims to close that gap.
2.4 Summary
This chapter has reviewed some of the literature written by other researchers before this study
was carried out. The finding from theoretical literature shows that there are various sources of
finance available for small and medium businesses. Although there are more sources of finance
for SMEs, but they are vast empirical literature which shows that there are still more challenges
which are affecting SMEs in order to access financial services from agents of financial
intermediation. The next chapter is research methodology.