i

EXAMINING FACTORS DETERMINING PERFORMANCE OFSME’s IN TANZANIA

THE CASE OF TEMEKE DISTRICT IN DAR-ES-SALAAM

By

Ezekiel Frederick Kirama

A Dissertation Submitted to Mzumbe University, Dar es Salaam Campus College in

Partial Fulfillment of the Requirements for the Award of Master of Science in

Accounts and Finance of Mzumbe University

2014

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CERTIFICATION

We, the undersigned, certify that we have read and hereby recommend for acceptance by

the Mzumbe University, a dissertation entitled: Examining factors determining

performance of SME’s in Tanzania; A Case of Temeke District in Dar es salaam, in

partial fulfillment of the requirements for award of the degree of Master of Science in

Accounts and Finance of Mzumbe University.

___________________________

Major Supervisor

___________________________

Internal Examiner

Accepted for the Board of …………………………………….

_______________________________________________________

CHAIRPERSON, FACULTY/DIRECTORATE BOARD

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DECLARATION AND COPYRIGHT

I, Ezekiel Frederick Kirama, declare that this dissertation is my own original work and

that it has not been presented and will not be presented to any other University for

similar or any other degree award.

Signature………………………….

Date………/…………/……………

©

This dissertation is a copyright material protected under the Berne Convention, the

copyright Act 1999 and other international and national enactments, in that behalf, on

intellectual property. It may not be produced by any means in full or in part, except for

short extracts in fair dealings, for research or private study, critical scholarly review or

discourse with an acknowledgement, without the written permission of Mzumbe

University, on behalf of the author.

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ACKNOWLEDGEMENT

My wish to undertake this study at a master’s degree level would not have materialized

had it not been for the Grace of God. I thus thank the Almighty God for giving me life,

power, strength and blessings during my study and to the completion of this programme.

A number of individuals and institutions have provided me with invaluable support and

encouragement. I am sincerely indebted to my supervisor Mr. Maige Mwakasege

Mwasimba for his inputs that contributed immensely in shaping this work continuously

to its present state. From the writing of the proposal to the production of this

dissertation, I greatly benefited from his attention, tireless efforts, resolute

encouragement, constructive criticisms, suggestions and comments. Without his

dedication, this work would not have seen the light of this day.

I am also grateful to the Mzumbe University, particularly, to the Department of business

studies for affording me the opportunity to undertake this programme. I would also wish

to express my profound and earnest appreciation to some staff members, through their

instruction during the coursework, which laid the foundation for this work.

I am also grateful to my colleagues in the MSc. (Accounts and Finance) programme for

our togetherness and consoling each other whenever the going got tough. Last but not

least, in a more personal level, I would like to thank my family for the sacrifice they had

to endure by missing me and my care as I went through the tough times of my second-

degree programme.

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DEDICATION

I dedicate this work to my lovely wife Jane and my children Gladness, Erick and

Jacqueline for their love, patience, support and comfort during the sleepless nights of

hard work on this study.

To our friends, well-wishers, relatives and all those who contributed in one way or

another to the success of this study through their great encouragement, morally and

materially.

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LIST OF ABBREVIATIONS AND ACRONYMS

BEF Business Excellence Framework

GNP Gross National Product

HOD Head of Department

KCB Kenya Commercial Bank

LM Line Managers

ME’s Medium Enterprises

MFIs Microfinance Institutions

MITM Ministry of Industry Trade and Marketing

NMB National Microfinance Bank

OP Organization Performance

SACCOS Savings and Credit Coop Societies

SIDO Small Industries development Organization

SMBs Small and medium-sized business

SME’s Small and Medium Enterprises

SSP Statistical Package for Social Sciences

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TCCIA Tanzania Chamber of Commerce, Industry and Agriculture

UDBS University of Dar es salaam Business School

UNDP United Nations Development Programme

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ABSTRACT

The general objective of this study was to find out the factors determining performance

of SMEs in Tanzania. The study was conducted in Temeke district in Dar-es-salaam

region. The study used descriptive research design. This study employed convinience

sampling and purposive sampling to collect data from 100 business people, government

officials and microfinance officials using interviews and questionnaires. The data was

analyzed descriptively and presented through figures, tables and percentages.

Quantitative data were collected through questionnaires which were processed using the

Statistical Package for Social Science (SPSS).

Generally, the findings indicate that internal, external and resource related factors affect

SME’s performance. The findings also indicate that SMEs face a number of challenges

including competition among themselves and from large firms, corruption, capital

constraints, hawkers, poor security and improper record keeping. In conclusion, this

study has achieved its research objectives. In this study, there are three significant

determinants affecting the performance of small and medium enterprises (SMEs). The

study recommends that: the government should get involved in determining the interest

rate and protecting the borrowers; the policies of the MFI, as guided by the Central

Bank, should be maintained with increased capacity on lending powers to make

available finances for the success of small and medium sized entrepreneurs’

development; SME’s should reform unions or organizations that are active in looking for

their rights and address their needs to appropriate authorities; the SME’s should further

be encouraged to get more investment opportunities instead of only one and have an

enterprise before borrowing the money to avoid using their loans to establish

investments instead of expanding and diversifying the already established investments;

there is also need to get trained in an area that is relevant to the business carried; there is

need to improve ways of gathering customer information for the purpose of personalized

marketing and service in the context of objectives.

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TABLE OF CONTENTS

CERTIFICATION ..............................................................................................................i

DECLARATION AND COPYRIGHT..............................................................................ii

ACKNOWLEDGEMENT ................................................................................................iii

DEDICATION..................................................................................................................iv

LIST OF ABBREVIATIONS AND ACRONYMS ..........................................................v

TABLE OF CONTENTS................................................................................................viii

LIST OF TABLES..........................................................................................................xiv

LIST OF FIGURES .........................................................................................................xv

CHAPTER ONE ................................................................................................................1

PROBLEM SETTING ...................................................................................................1

1.1 Introduction .........................................................................................................1

1.2 Background of the study .....................................................................................2

1.3 Profile of Temeke district....................................................................................4

1.4 Statement of the problem ....................................................................................5

1.5 Objectives of the Study .......................................................................................6

1.5.1 General Objective ........................................................................................6

1.5.2 Specific Objectives ......................................................................................6

1.6 Research Questions .............................................................................................6

1.6.1 General Research Question..........................................................................6

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1.6.2 Specific Research Questions........................................................................7

1.7 Significance of the Study. ...................................................................................7

1.8 Limitations of the Study......................................................................................8

1.9 Delimitation of the study .........................................................................................9

1.10 Organization of the study.................................................................................9

CHAPTER TWO .............................................................................................................11

LITERATURE REVIEW ................................................................................................11

2.1 Introduction .......................................................................................................11

2.2 Definition of Concepts ...........................................................................................11

a) SMEs .............................................................................................................11

b) Performance...................................................................................................14

c) Socio-economic development........................................................................14

d) Capital............................................................................................................14

e) Resources.......................................................................................................14

f) Microfinance institutions...................................................................................15

g) Savings...........................................................................................................15

h) Profit ..............................................................................................................15

j) Collateral ...........................................................................................................16

k) SACCOS........................................................................................................17

l) Poverty ..............................................................................................................17

m) Internal factors ...............................................................................................17

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n) External Factors .............................................................................................18

2.3 Theoretical reflections of the study...................................................................18

2.3.1 The Generic Stages of SME Growth .............................................................19

2.3.2 The Resource-Based Theory..........................................................................23

2.3.3 The Life-cycle models ...................................................................................24

2.4 The relationship between study objectives and SME’s performance. ...................26

2.4.1 Internal related factor affecting sme’s performance .......................................26

2.4.2 External related factor affecting sme’s performance ......................................30

2.4.3 Resource capacity related to sme’s performance ............................................33

2.4.4 Factors influencing SMEs performance in Tanzania......................................34

a. Age of the Firm on Business Performance........................................................34

b. Location of the Business on its Performance ................................................34

c. Socio- Cultural Background of an Entrepreneur on the Business.....................35

d. Education on Performance of Small Businesses ...........................................35

e. Legislative Processes and Policy Framework ...................................................35

2.5 Empirical Studies ..............................................................................................36

2.4.1 World related studies ..........................................................................................37

2.4.2 Tanzanian related studies ....................................................................................42

2.6 Conceptual Framework for the study ................................................................44

CHAPTER THREE .........................................................................................................48

RESEARCH METHODOLOGY.....................................................................................48

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3.1 Introduction .......................................................................................................48

3.2 Research paradigms/philosophy........................................................................48

3.2.1 Phenomenology...................................................................................................48

3.2.2 Positivism............................................................................................................49

3.3 Research Design.....................................................................................................50

3.4 Population of the Study.........................................................................................50

3.5 Unit of Inquiry .......................................................................................................51

3.6 Sampling design ................................................................................................51

3.7.1 Simple random Sampling....................................................................................52

3.7.2 Purposive Sampling ............................................................................................52

3.8 Data collection methods.........................................................................................53

3.8.1 Primary Data ...................................................................................................53

a. Interviews..............................................................................................................53

b. Questionnaire ........................................................................................................54

3.8.2 Secondary Data ...............................................................................................55

(a) Documentary review .........................................................................................55

3.9 Validity and reliability ...........................................................................................56

3.9.1 Reliability............................................................................................................56

3.9.2 Validity ...............................................................................................................56

3.10 Data Analysis and Presentation .....................................................................57

3.11 Dissemination of the Results ...............................................................................58

CHAPTER FOUR..............................................................................................................1

STUDY FINDINGS, ANALYSIS AND DISCUSSION...................................................1

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4.1 Introduction.............................................................................................................1

4.2.1. Gender of respondents .........................................................................................2

Figure 4.2: Age of respondents ..........................................................................................3

4.2.3 Educational Level .................................................................................................4

4.2.4 Duration of time business has been in operation. .................................................5

4.2.5 Number of employees in the firm. ........................................................................6

4.2.6 Sector that represents the SME’s main activity ....................................................7

4.2.7 Registration of SME’s business ............................................................................8

4.2.8 The type of the firm ..............................................................................................9

4.3 Findings as per study objectives ..............................................................................9

4.3.1 Internal factors and SME’s Performance ............................................................10

4.3.2 External factors for SME’s Performance ............................................................15

4.3.2.1 Capital accessibility .........................................................................................16

4.3.2.3 Corruption ........................................................................................................17

4.3.2.6 Government support.........................................................................................18

4.3.2.13 The government initiative to promote SMEs.................................................20

4.3.2.14 The government’s measures to ensure SMEs’ access finance ......................20

4.3.6 Challenges affecting SMEs performance............................................................27

4.3.6.1 Capital constraint .............................................................................................27

4.3.6.2 Competition......................................................................................................28

4.3.6.3 Improper record keeping..................................................................................28

4.3.6.4 Poor security. ...................................................................................................28

4.3.6.5 Hawkers. ..........................................................................................................29

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CHAPTER FIVE .............................................................................................................30

SUMMARY, CONCLUSION AND RECOMMENDATIONS......................................30

5.1 Introduction............................................................................................................30

5.2 Summary of the key findings .................................................................................30

5.4 Recommendations..................................................................................................33

5.4.1 Recommendations for internal related factors which affect SMEs performance33

5.4.2 Recommendations for External related factors affect SNEs performance ....34

5.4.3 Recommendations for resource capacity related factors to the performance of

the SMEs.. ................................................................................................................35

5.4.4 Recommendation for challenges faced by SMEs in Tanzania.......................35

5.5 Recommendations for further research ..................................................................36

REFERENCES ................................................................................................................37

APPENDICES .................................................................................................................44

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LIST OF TABLES

TABLE 2.1: CATEGORIES OF SMES IN TANZANIA ..............................................................13

TABLE 3.1: SAMPLE SIZE ..................................................................................................52

TABLE 4.2: AGE OF RESPONDENTS .....................................................................................3

TABLE 4.3: EDUCATION LEVEL OF RESPONDENTS..............................................................4

TABLE 4.4: LENGTH OF TIME BUSINESS HAS BEEN IN OPERATION ....................................5

TABLE 4.5: NUMBER OF EMPLOYEES IN THE FIRM.............................................................7

TABLE 4.6: REGISTERED SME'S ...........................................................................................8

TABLE 4.7: THE TYPE OF YOUR FIRM.................................................................................9

TABLE 4.8: ENTREPRENEURIAL SKILLS AND SME’S PERFORMANCE .................................10

TABLE 4.9: GENERAL MANAGEMENT SKILLS AND SME’S PERFORMANCE........................11

TABLE 4.10: RISKS HAMPER BUSINESS PERFORMANCE ....................................................11

TABLE 4.12: EXTERNAL FACTORS FOR SME'S PERFORMANCE ..........................................16

TABLE 4.13: FINANCIAL HUMAN RESOURCES ARE IMPORTANT FOR THE BUSINESS

GROWTH ...................................................................................................................21

TABLE 4.14: MANAGERIAL FUNCTIONS CONTRIBUTE TO THE PERFORMANCE OF YOUR

BUSINESS ..................................................................................................................24

TABLE 4.15: CHALLENGES FACED BY SME’S IN THEIR BUSINESS ENVIRONMENT............27

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LIST OF FIGURES

FIGURE 2.1: CONCEPTUAL FRAMEWORK FOR THE STUDY ..................................................46

FIGURE 4.1: RESPONDENT’S GENDER ..................................................................................2

FIGURE4.2: AGE OF RESPONDENTS......................................................................................3

FIGURE 4.3: RESPONDENTS’ LEVEL OF EDUCATION ............................................................4

FIGURE 4.4: REGISTERED SME'S.........................................................................................8

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CHAPTER ONE

PROBLEM SETTING

1.1 Introduction

Throughout the world, governments have acknowledged the impact of small and micro

enterprises (SMEs) on job creation, improvement of people’s standards of living and

hence an overall impact on the economy. The definition of SMEs is complex with

authors using the SME’s gross asset value, the number of employees and total revenue

as indicators to help define the term SME (Nieman, 2006).

SMEs all over the world are known to play a major role in socio-economic development.

URT (2003) estimates that about 1/3 of the GDP originates from SME sector; they tend to

be labour intensive thus creating jobs: the International Finance Company (IFC) of the

World Bank estimates that there are approximately 2.7 million enterprises in the country. A

large majority of these (98%) are micro enterprises (employing less than 5 people), effective

in the utilization of local resources using simple and affordable technology; and

complementing large industrial requirements through business linkages, partnerships and

subcontracting relationships Olomi, (2001); URT (2003).

Indeed, SMEs often form the backbone of national economies and moreover, SMEs

have increased in importance recently (McCartan- Quinn and Carson 2003). SMEs and

the development of SME sectors in national economies is an important element of

political and public policy life. However, in Africa, there are major problems affecting

the development and growth of SMEs which have been attributed to the environment

according to UNECA, focus on African Industries (Dec, 1991).

In many African countries, very little attention is paid to the SMEs and no special

facilities are offered to them. Moreover, political environment hardly motivates

individuals to enter into SMEs business.

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A number of initiatives have been taken to increase start-up rates and performance levels

of SMES in Tanzania. Among the initiatives is a formulation of SMEs policy in 2003.

The initiatives have been taken by government, international donors and non-

government organizations (NGOs), both local and international. However, SMEs are

still found predominantly in low growth areas, earning lower revenues. (Rutashobya,

1995).This raises questions on whether the SME owner/managers have the adequate and

requisite skills, competences and capacity to manage the SMEs in a manner that

enhances growth and survival or not. There is therefore a need for a study that provides a

rigorous and systematic analysis concerning the factors affecting SMEs performance and

the whole process of management of SMEs.

1.2 Background of the study

The importance of Small and Medium Enterprises (SMEs) sector in the economy has

increased tremendously since the mid-1980s. Indeed, the SMEs (herein defined as

enterprises employing between 1 and 49 persons) have now become the main source of

employment and income for the majority of people in developing countries, including

Tanzania. Entrepreneurship as a sector is widely seen by policymakers and donors as a

means of economically empowering marginalized groups such as the disadvantaged

women especially single parents or heads of household and women in rural areas

(Hannan-Andersson, 1995).

The development of SME has resulted into structuring of the economy agenda in

Tanzania. SMEs are considered to have great potential for making the highest

contribution to employment growth (ILO, 1993) and (Kitine, 2000). SMEs contribution

is to increase income, saving and encouragement to business ownership and

management at enterprise level. About 70% of people in sub Saharan Africa rely on the

small enterprises for their livelihood (Rutashobya, 1995), (Masawe, 2000). SME

business contributes substantially to the country’s GNP and employment in the country

(Olomi, 2001), (URT, 2001). It is estimated that there are over one million enterprises in

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the sector, employing between 3 and 4 million people or 20-30 per cent of the total labor

force (Massawe, 2000).

The MSE sector is considered to have the brightest potential for making the highest

contributions to employment growth and increased incomes. Employment in the sector

is growing at 10% p.a. Operators are able to generate between 2.5 and 10 times the

minimum earnings of civil servants. The MSEs have also shown great potential for

creating wealth. Their aggregate contribution to national income is estimated at between

35 per cent and 40 per cent of GDP. (Finseth, 1998). The SME sector is an arena where

the poor may not only make out a living, but also get most of their goods and services at

prices they can afford. Over 90 per cent of operators get credit, training, information,

water and sanitation from the sector. In Dar es Salaam, the capital city, over 90 per cent

of poor communities get water and sanitation services from the MSE sector.

In both developed and developing countries, thousands of SMEs enterprises are set up

every year although they are facing many problems. In fact, several thousand of these

enterprises collapse every year. The problems of such enterprises range from lack of

managerial knowledge, registration of SMEs, marketing of their products and service

and scarcity of financial resources. In the advanced countries, lack of capital for SMEs

has been considered as the most basic problem hampering the growth of the sector.

However, in Africa, there are major problems affecting the development and growth of

SMEs which have been attributed to the environment according to UNECA, focus on

African Industries (Dec, 1991). In many African countries, very little attention is paid to

the SMEs and no special facilities are offered to them. Moreover, political environment

hardly motivates individuals to enter into SMEs business.

A number of initiatives have been taken to increase start-up rates and performance levels

of SMES in Tanzania. Among the initiatives is a formulation of SMEs policy in 2003.

The initiatives have been taken by government, international donors and non-

government organizations (NGOs), both local and international. However, SMEs are

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still found predominantly in low growth areas, earning lower revenues. (Rutashobya,

1995). In particular, the limited performance SMEs enterprises impedes them from

creating decent work, or meaningful and sustainable jobs or enterprises that are able to

withstand the challenges posed by globalization and other significant trends. Therefore,

the aim of this study is to find out factors determining performance of SMEs in

Tanzania.

1.3 Profile of Temeke District

Temeke District is the southernmost of three districts in Dar es Salaam, Tanzania, with

Kinondoni located to the far North of the city, and Ilala being located in the downtown

of Dar es Salaam. To the East is the Indian Ocean and to the South and West is the

Coastal region of Tanzania. The 2012 Tanzania National Census reports that the

population of Temeke District is 1,368,881.

The area of Temeke District is 656 km² and subdivided administratively into 3 divisions

and 24wards. The wards are listed below: Azimio, Chamazi, Chang’ombe, Charambe,

Keko, Kigamboni, Kibada, Kimbiji, Kisarawe, Kurasini, Makangarawe, Mbagala,

Mbagala Kuu, Miburani, Mjimwema, Mtoni, Pemba Mnazi, Sandali, Somangira,

Tandika, Temeke, Toangoma, Vijibweni and Yombo Vituka.

Main economic activities taking place in Temeke Municipal Council are retailing

businesses. These includes small and medium shops, Hotels, bars and restaurants,

Transportation services, Industries, clearing and forwarding, Agro businesses, Medical

businesses, Handcraft Businesses, Banking businesses, Construction Business.

The Municipal revenues depend on collections levied on several economic activities

taking place in its area. These economic activities include Industrial and Agricultural

production activities, Commercial activities of selling goods and fishing. These activities

play a significant role to the Municipal economy in terms of revenue and in provision of

job opportunities. The main sources of revenue for the Municipality are:- Municipal

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Service Levy, Property Tax, Trade Licenses, Wrong Car parking Fees, Cattle Auction

Fees and Slaughtering Fees.

1.4 Statement of the problem

SMEs play a crucial role to almost all economies in the world, but especially to those in

developing countries. Most of the companies are micro sized enterprises. A

microenterprise is defined as an enterprise which employs fewer than 10 persons and

whose annual turnover and/or annual balance sheet total does not exceed 2 million

Euros. (www.europa.eu) If these small enterprises could grow they would greatly affect

the Tanzania economy. The Employment rate will remain the same if Tanzania is not

able to establish more SMEs and help the existing ones to grow into companies that have

an effect on the country’s export and import rates.

There are several challenges to economy growth. Tanzania needs a great improvement in

infrastructure. The overall business growth is slow and third and most important part is

to provide an internationally competitive environment. These obstacles affect in SMEs

growth both in importing and exporting phase. As a matter of fact, poor performance of

SMEs in Tanzania is the result of unique problems confronted by SMEs including heavy

costs of compliance resulting from their size. According to SME development policy of

Tanzania 2002 these constraints includes lack of access to finance ,Legal and Regulatory

Framework, lack of entrepreneurial skills , Poor technology, Marketing i.e. inadequate

marketing skills and stiff competition and Physical Infrastructure such as. Working

premises, roads, cold rooms, warehouses, power, water and communication that

adversely affect the development of the SMEs, other factors are poor Institutional

Framework for SMEs Development, inadequate Rural Industrialization, Environmental

Considerations and HIV-AIDS (URT, 2002)

Despite of government and other stakeholder’s efforts SMEs are still confronted with

number of challenges. The fact that poverty still exists amidst the attempts of provision

of microfinance creates room for exploring how far microfinance has benefited the

SMEs in Temeke district. (Kimura, 2002).This study is intended to examine factors

6

determining preference of SMEs in Tanzania with specific reference to temeke district in

Dar-es-salaam Region.

1.5 Objectives of the Study

1.5.1 General Objective

The general objective of the study was to find out factors determining performance of

SMEs in Tanzania

1.5.2 Specific Objectives

The study worked on the following specific objectives to attain the above general

objective.

i. To identify internal related factors affect SMEs performance.

ii. To determine the extent to which external related factors affect SMEs

performance.

iii. To find out the extent to which resource capacity relate to SMEs performance

iv. To verify factors influence SMEs performance in Tanzania.

v. To examine challenges faced by SMEs in Tanzania.

1.6 Research Questions

1.6.1 General Research Question

The general research question was “what were the factors determining performance of

SMEs in Tanzania?

7

1.6.2 Specific Research Questions

i. To what extent do internal related factors affect SMEs performance?

ii. To what extent do the external factors affect SMEs performance

iii. To what extent do the resources capacities related to SMEs performances?

iv. What are factors influence SMEs performance in Tanzania?

v. What are challenges faced by SMEs in Tanzania?

1.7 Significance of the Study

The study was expected to examine factors determining SMEs performance in Tanzania,

especially the SMEs in Temeke district, management of the SME industry, academia,

and the general public. First to the academia; the outcome of this study will contribute to

the body of knowledge on the subject and serve as a catalyst for further research. It was

useful as a source of reference to researchers, academics, students, policy makers,

marketing professionals and other stakeholders interested in factors determine SMEs

performance in Tanzania.

The study helped the management and workers of microfinance institutions at large to

identify the financing challenges of SMEs so as to meet their needs and expectations.

Third to policy makers like government agencies such as the Ministry of Trade and

Industry, microfinance institutions, Other Financial Intermediaries and the Bank of

Tanzania, the findings and results of the study will provide insights and a more reliable

guide for monitoring the factors determine SMEs performance including financing

challenges of SMEs. Third to experts/Professional this research brought to bear modern

8

trends of SMEs financing for cost effectiveness in the chain and supply management

industry; ensuring that the SMEs customer satisfactions were attained. The study was

expected to help SMEs managers/owners to implement the necessary structures to curtail

the high incidence of bad costs through obsolesce and deterioration of stocks.

To stakeholders like investors, shareholders, employees and pressure groups. The study

provided information for suggesting improvement in service delivery of the respective

microfinance institutions in Tanzania. Moreover this study was for partial fulfillment of

MSc (Accounts and Finance) of Mzumbe University.

1.8 Limitations of the Study

This study was anticipated to be limited by time factor and financial constraints. Due to

limited time and finances, the researcher was not able to carry out the study throughout

the whole country. To compensate, recommendations for future study will provided so

as to promote the continuous investigation on the issue in this way, a continuum of

learning through investigation on this issue could be promoted. It was limited to one

urban area (Dar es Salaam) which was selected on the basis of the availability of

information from the headquarters, easy access to the management and staff. The

researcher also gave results on the basis of returned questionnaires. For data collection

easiness, the researcher employed a research assistant. There may information also that

may not be disclosed because of its confidentiality.

9

1.9 Delimitation of the study

The limitations explained in 1.8 were addressed as follows: The researcher opted

initially to use public holidays and weekends to conduct the research. Since the option

was not seen as effective, the researcher decided to take annual leave (28 days) which he

effectively managed to solve the problem of time and was able to collect, analyze and

interpret the collected data on time.

The researcher borrowed a substantial amount of money from other sources. This

enabled him to have a wide coverage of study area as well as studying a relative good

sample size. He also took a time to inform respondents that there was no money and that

the study was for fulfillment of degree course. After long explanations, respondents

agreed to participate and collaborated effectively and efficiently in the study.

1.10 Organization of the study

This study is organized into 5 chapters. Chapter one is the general introduction. It looks

at the background to the study, the objectives of the study and the statement of the

problem. It also briefly looks at the research questions, Objectives, scope and

organization of the study. Chapter two is the literature review. Literature was reviewed

according to the research questions used in the study. The conceptual framework for the

study was also outlined. Chapter three is the methodology. It explains the research

design. It also gave details about the population, sample and sampling procedures used

in the study. It explains the research instruments, methods of data collection, data

analysis plan.

Chapter four focused on presentation and discussion the findings from the study as

guided by the research questions and objectives. The findings were discussed the

existing SMEs ,microfinance institutions and services offered, the utilization of loan,

financial challenges face SMEs during access and utilization of the loan, strategies to

overcome the challenges and recommendations for the MFI, beneficiaries, and the

10

government in order to enable MFI serve the clients better and for the clients to benefit

optimally.

Chapter five concentrated on the major summaries of the study that were established

during the research in relation to the objectives and guiding questions of the research.

The conclusion and recommendations are construed from the findings and provides

important policy implications for the stakeholders. The recommendations are put

forward for the government, SMEs and MFIs in order to encourage them to make their

programmes more accessible and effective to the beneficiaries. The last part of the study

contained references and appendices.

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CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter focuses on reviewing the literature related to factors determining

performance of SMEs in Tanzania. It starts with a definition of a few key terms used in

the study followed by the theoretical framework and the last part is empirical literature

review in Tanzania and other parts of the world.

The primary aim of this literature review was to analyze what has been researched in

relation to the topic under study. This provides profound insight into the topic and

facilitates the interpretation of the findings. The source of this literature has been

academic journals, the internet, newspapers and magazines, newsletters and reports of

specific institutions.

2.2 Definition of Concepts

The key concepts of this study are:

SMEs

What constitutes a small or medium enterprise is a major concern in the literature.

Different authors have given different definitions to this category of business. SMEs

have indeed not been spared with the definition problem that is usually associated with

concepts which have many components. The variables used to define SME’s vary

among researchers. Some attempt to use the capital assets while others use skill of labor

and turnover level. Others define SMEs in terms of their legal status and method of

production. Storey, (1994) tries to sum up the danger of using size to define the status of

12

a firm by stating that in some sectors all firms may be regarded as small, whilst in other

sectors there are possibly no firms which are small.

Pass et al. (2000: 194), define Small and Medium Size Enterprises (SMEs) as companies

that have annual turnover of less than £ 11.2 million; have gross assets of under £ 5.6

million; and not more than 250 employees. SMEs are formal enterprises which have a

cut-off range of 0-250 employees (.Ayyagari, Beck & Demirguc-Kunt, 2003). In South

Africa, An SME is any business with fewer than 200 employees, an annual turnover of

less than R5 million, capital assets of less than R2 million, and the owners are directly

involved in the management of the business (Cronje et al., 2001).

According to SME development policy of Tanzania (2002), The SMEs nomenclature is

used to mean micro, small and medium enterprises. It is sometimes referred to as micro,

small and medium enterprises (MSMEs). The SMEs cover non-farm economic activities

mainly manufacturing, mining, commerce and services. There is no universally accepted

definition of SME. Different countries use various measures of size depending on their

level of development. The commonly used yardsticks are total number of employees,

total investment and sales turnover.

In the context of Tanzania, micro enterprises are those engaging up to 4 people, in most

cases family members or employing capital amounting up to Tshs.5.0 million. The

majority of micro

Enterprises fall under the informal sector. Small enterprises are mostly formalized

undertakings engaging between 5 and 49 employees or with capital investment from

Tshs.5 million to Tshs.200 million. Medium enterprises employ between 50 and 99

people or use capital investment from Tshs.200 million to Tshs.800 million. This is

illustrated in the table below:

13

Table 2.1: Categories of SMEs in Tanzania

Categories EmployeesCapital Investment in

Machinery (Tshs)

Micro enterprise 1-4 Up to 5mil

Small enterprise 5-49 Above 5mil to 200mil

Medium enterprise 50-99 Above200mil to 800mil

Large enterprise 100+ Above 800mil

Source: (URT, 2002).

N.B. In the event of an enterprise falling under more than one category, then the level of

investment will be the deciding factor.

In Tanzania context, Wangwe (1999) defines micro enterprises as those engaging 1-5

persons and small enterprises as those which engage 6-20 persons. MSE therefore are all

those enterprises which engage between 1 and 20 persons. (Masawe, 2003) defines

Small and Micro Enterprises as those employing up to 4 persons; Small Scale

Enterprises as those is employing 5-49 persons and Medium Size Enterprises as those

employing 50-99 persons. Generally, therefore, one can take a working definition of

SMEs as those employing between 6 and 99 persons.

According to the European Union definition: ‘ The category of micro, small and

medium-sized enterprises is made up of enterprises which employ fewer than 250

persons and which have an annual turnover not exceeding 50 million euro, and/or an

annual balance sheet total not exceeding 43 million euro.’ Small and medium enterprises

are thus defined as firms with 10 to 250 employees as and more than 10 million euro

turnover or annual balance sheet total. This definition is more encompassing, and much

larger, especially with regards to turnover, than some others. The precise definition

however, does not impact the overall conclusions and findings of this report.

14

Performance

The accomplishment of a given task measured against preset known standards of

accuracy, completeness, cost, and speed. In a contract, performance is deemed to be the

fulfillment of an obligation, in a manner that releases the performer from all liabilities

under the contract (Schmitz, 1995).

Socio-economic development

According to Burkey (1993), defined social development as a process of gradual change

in which people increase their awareness of their own capabilities and common interests

and use this knowledge to analyze their needs, decide on solutions, organize themselves

for cooperative efforts and mobilize their own human, financial, and natural resources to

improve, establish and maintain their own social services and institutions within the

context of their own culture and their own political system.

Capital

“Capital” can mean many things. Its specific definition depends on the context in which

it is used. In general, it refers to financial resources available for use. Companies and

societies with more capital are better off than those with less capital. (Rodriguez, 2008).

Capital itself does not exist until it is produced. Then, to create wealth, capital must be

combined with labor, the work of individuals who exchange their time and skills for

money. When people invest in capital by foregoing current consumption, they can enjoy

greater future prosperity. (Rodriguez, 2008).

Resources

Mankiw, (2008) define resource as a source or supply from which benefit is produced.

Typically resources are materials, energy, services, staff, knowledge, or other assets that

15

are transformed to produce benefit and in the process may be consumed or made

unavailable. Benefits of resource utilization may include increased wealth, meeting

needs or wants, proper functioning of a system, or enhanced well being. From a human

perspective a natural resource is anything obtained from the environment to satisfy

human needs and wants

Microfinance institutions

Microfinance is the provision of a broad range of financial services such as deposits,

loans, payment services, money transfer, and insurance to poor and low-income

households and their micro enterprises. Microfinance does not only cover financial

services but also non-financial assistance such as training and business advice. (Repoa,

2006).

The principal providers of financial services to the poor and low income households in

the rural and urban areas of Tanzania consist of licensed commercial banks, regional and

rural unit banks; savings and credit cooperative societies; and several NGOs whose

micro-credit delivery operations are funded and supported with technical assistance by

international donors

Savings

Saving is income not spent, or deferred consumption. Methods of saving include putting

money aside in, for example, a deposit account, a pension account, an investment fund,

or as cash. Saving also involves reducing expenditures, such as recurring costs. In terms

of personal finance, saving generally specifies low-risk preservation of money, as in a

deposit account, versus investment, wherein risk is higher; in economics more broadly, it

refers to any income not used for immediate consumption.

Profit

A financial benefit that is realized when the amount of revenue gained from a business

activity exceeds the expenses, costs and taxes needed to sustain the activity. Any profit

16

that is gained goes to the business's owners, who may or may not decide to spend it on

the business (Cunningham, 2000).

The easiest way to explain profit is the income a business earned in a certain period of

time. There are two types of profit namely gross profit and net profit. Gross profit is not

the actual profit of a business and it is found by deducting the cost of goods sold from

net sales. Thus, net profit is considered as the actual profit retained by a business and it

is actually the difference between the revenue earned by the company and the expenses

incurred (Cunningham, 2000).

Loss

Loss may refer to a negative difference between retail price and cost of production.

Business loss is a state that occurs when a firm fails to generate enough revenue to cover

all expenses associated with the operation of the business. This disparate relationship

between profit and loss often results in the ability to claim the loss as a tax deduction,

although that is not always the case. Companies generally prefer to avoid business losses

if at all possible, and will usually take action to eliminate or at least reduce the amount

of the loss (Cunningham, 2000).

Collateral

Collateral is a borrower's pledge of specific property to a lender, to secure repayment of

a loan. The collateral serves as protection for a lender against a borrower's default that is,

any borrower failing to pay the principal and interest under the terms of a loan

obligation. If a borrower does default on a loan (due to insolvency or other event), that

borrower forfeits (gives up) the property pledged as collateral, with the lender then

becoming the owner of the collateral (Garrett, 1995).

In a typical mortgage loan transaction, for instance, the real estate being acquired with

the help of the loan serves as collateral. Should the buyer fail to pay the loan under the

mortgage loan agreement, the ownership of the real estate is transferred to the bank. The

17

bank uses a legal process called foreclosure to obtain real estate from a borrower who

defaults on a mortgage loan obligation. A pawnbroker is an easy and common example

of a business that may accept a wide range of items rather than just dealing with cash.

SACCOS

This term is used to refer to Savings and Credit Cooperative Organizations. A savings

and credit cooperative society is a form of financial institution formal in nature, owned,

controlled, used and democratically governed by members themselves. Its purpose is to

encourage savings among members and using the pooled funds, to make loans to its

members at reasonable rates of interest and providing related financial services to enable

members improve their economic and social conditions (Agriculture Support

Programme 2010).

Poverty

Poverty at its broadest level can be conceived as a state of deprivation prohibitive of

decent human life. This is caused by lack of resources and capabilities to acquire basic

human needs as seen in many, but often mutually reinforcing parameters which include

malnutrition, ignorance, prevalence of diseases, squalid surroundings, high infant, child

and maternal mortality, low life expectancy, low per capita income, poor quality

housing, inadequate clothing, low technological utilization, environmental degradation,

unemployment, rural-urban migration and poor communication (Repoa, 2006).

Poverty is caused by both internal and external factors. Whereas the internal causes can

be clustered into economic, environmental and social factors, the external causes relate

to international trade, the debt burden and the refugee problem. (Repoa, 2006).

Internal factors

Internal factors are inner strengths and weaknesses that an organization exhibits. Internal

factors can strongly affect how well a company meets its objectives, and they might be

seen as strengths if they have a favorable impact on a business, but as weaknesses if they

have a deleterious effect on the business (Rutherford, 1999).

18

The best thing about internal factors is that you can control many of them. Some factors,

such as your business's reputation, image and creditworthiness, are a result of the way

you run your business. Other factors, such as your organization's management structure

and staffing and the physical decor of your business, are based on your business

decisions, and you can change them as you see fit. Changing internal factors usually

involves some indirect costs, such as lost productivity while new employees are trained,

some direct costs, such as a penalty for terminating a lease before it expires, or some

combination of the two (Rutherford, 1999)

External Factors

Wright, (2000) defined external factors as all those things that are beyond your control.

Tight lending conditions, government regulations and competition are some of the

external factors that affect virtually every small business. Strategic planners anticipate

and manage some of the circumstances that affect their business. Exploring alternative

financing sources until lending restrictions ease, developing plans for compliance with

regulations and enhancing innovation and service to stay ahead of the competition are

forward-thinking ways to keep external factors from threatening the survival of your

business.

2.3 Theoretical reflections of the study

A theoretical framework is the conceptual model of how theories make logical sense of

the relationship between the several variables that have been identified as important to

the problem (Sekaran, 2003). It can be viewed as both a foundation and a pillar of a

research project. A research without a conceptual framework cannot be focused since the

researcher does not know what data to collect (Adam and Kamuzora, 2008). Therefore,

theories aid a researcher in understanding the problem and guiding the study.

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2.3.1 The Generic Stages of SME Growth

Based on the analysis of the secondary sources and especially the inputs of the Greiner’s

model, the Churchill and Lewis model and the Nieman and Nieuwenhuizen 2009’s

model, generic growth stages to guide the study of small and micro firms in Alice

communal area and identify the key internal factors affecting their growth, has been

constructed.

This model comprises of 4 critical stages of the supporting models and these are survival

/ abort, growth/decline, maturity/rejuvenation and decline.

Stage 1: Survival/ Abort Stage

This stage has duration of 0-3years as in the Churchill and Lewis growth model’s start

up stage. According to the Greiner’s model (1972) this stage is referred to as the

development/abort stage. The Greiner’s model (1972) describes this stage as a stage in

which agribusiness SMEs begin operation and are developed to viability or are aborted

at an early stage. According to Shafeek (2009) the thrust in this stage is to get enough

customers so as to make the business economically viable and this requires the owner/

manager to have good marketing skills.

In addition, Burns and Dewhurst (1996) state that in this stage the agribusiness SME

owner/managers need to focus on solvency with the task of monitoring cash flow and

meeting break-even as being of prime importance (sound financial management skills).

This view is also supported by Churchill and Lewis (1983) who suggest as a primary

strategy that the owner/manager attempts to keep the business solvent long enough for

the customer base to be expanded. Important to note in this stage is that the

owner/manager still does everything in addition to direct supervision of staff (Churchill

and Lewis 1983).

As the name of the stage suggests (survival), the primary strategy is simply to stay alive.

Shafeek (2009) also suggest that the margins that were initially projected are indeed

achieved and that the owner/manager must focus on developing the products unique

selling proposition based on the initial reaction from the customers (a combination of sound

20

operations and marketing skills). Therefore, the internal factors that are consistent with the

SMEs’ survival at this stage are: the personal characteristics of the agribusiness SME

owner/ manager (gender, educational qualifications and previous experience), access to

finance, access to technology, availability of a sound business plan to give direction to

the agribusiness SME owner/manager and help access funds, good marketing, human

resources management and operations management skills.

Stage 2: Growth/ Decline

This stage has duration of 4-6 years as in the Churchill and Lewis growth model’s

growth stage. According to Shafeek (2009) this stage is referred to as the high growth

stage, rapid growth stage or take-off stage of the organizational life cycle. In this stage,

the rate of growth accelerates and resources are under major pressure.

Growth is quite often so fast that the owner/ manager cannot keep up with it and at the

same time competition may become stronger (Nieman and Nieuwenhuizen, 2009).

Shafeek (2009) in support, state that during this stage, if managed properly by the

agribusiness SME owner/manager, the firm will face a period of rapid growth in sales as

the product is accepted and adopted by a growing number of consumers. He further

stresses that the SME owner/manager must not only manage the increase in sales but

also the resultant problems of an increasingly complex organizational structure.

The growth stage is believed by most researchers to be the most dangerous stage in the

life cycle of the new SMEs regardless of the sector of operation. This is so because it is

when most business failures occur, mostly due to the pressure on resources, hence it is

referred to as “Growth/ Decline stage” (Nieman and Nieuwenhuizen, 2009). Therefore,

it is during this stage that the agribusiness SME owner/manager must take heed by

keeping a close eye on new entries into the market to avoid pre-mature decline.

More important to note is the need for the agribusiness SME owner/manager to adopt

more control systems along with the recruitment of more skilled staff in preparation for

21

this increase in growth in this stage (Shafeek 2009).More so, it is during the growth

stage that the feeling of losing control emerges in the agribusiness SME owner/manager

as a result of the delegation of authority from the survival stage. With the firm growing

as well as the introduction of control systems, there is a need to coordinate the systems

more effectively which ought to result in the efficient allocation of the firm’s limited

resources (Shafeek 2009). Burns and Dewhurst (1996) and Churchill and Lewis (1983)

suggest that the owner/manager must now manage the allocation of the limited resources

as well as engage in strategic planning to cope with the expansion and the resultant drain

on the agribusiness SME’s cash flow.

Thus, if the owner/manager only concentrates on the increase in sales while failing to

manage the resultant constraints/ problems (overtrading), this will lead to pre-mature

decline (firm failure). The internal constraints/ factors that are consistent with the

growth/ failure of the agribusiness SME at this stage are: the finance management skills,

human resources management skills, marketing skills, operations management skills, use

of technology and an updated business plan that serves as an internal benchmark for the

organization’s performance.

Stage 3: Maturity/ Rejuvenation

This stage has a period of 6-9years. The maturity stage is a stage characterized by

stability which comes after the rapid growth and expansion of the business in the

previous stage together with the increase in competition (Churchill and Lewis 1983).

The role of the owner/manager changes during this stage and must be re-directed from

one that focuses on growth to ensuring that the company consolidates its position in the

market place and looks strategically to the future rather than complacently reaping the

fruits derived from past successes. More so, this stage is the one that will either drive the

firm onward to a higher level of profitability or censure it to decline and failure.

This responsibility is highly dependent on the actions of the owner/manager (Shafeek

2009).The high growth experienced by the business will eventually begin to slow down

22

due largely to the increase in the number of competitors attracted to the market. (Nieman

and Nieuwenhuizen, 2009) identified market saturation as the major cause for the

slowing down the growth which requires the firm to pursue other product positions in

order to sustain the growth or rejuvenate growth. It is believed that innovation is critical

at this stage to reduce the impact of failure and enhance re-growth (rejuvenation),

capitalizing on the abundant resources especially financial resources (Kuratko and

Hodgetts, 1995).

One of the potential pitfalls identified by Greiner (1972) is an increase in “red tape’ due

to abundance of control and coordinating systems implemented during the earlier stages.

Greiner (1972) believes that their proliferation exceeds their utility in that procedures

may take precedence over problem solving and innovative behavior if allowed. A

solution to this problem is to narrow the gap through collaboration between the

owner/manager and lower levels of management which may have been caused by the

proliferation of red tape. Dodge and Robbins (1992) see the need for innovative

behavior to be exhibited by the owner/manager as a basis on which to build the future

viability of the business. While the life cycle concept provides valuable information on

how a firm develops and evolves through the various stages of development, it is

necessary to be aware of some of the limitations imposed upon it.

Stage 4: Decline

This is the fifth and final stage of the venture life cycle. Models such as the Scott and

Bruce model in (Shafeek 2009); indicate that firm failure may occur a number of times

during the stages. Decline may occur during the growth stage or after the maturity stage,

when the owner manager fails to adopt strategies that favor re-growth in the maturity

stage.

Shafeek (2009) cited four limitations of venture life cycle models. Firstly, while implied

by the models, not all firms move sequentially through all stages due to business failure.

It is accepted that not all firms progress sequentially through all stages but not all models

expect it to, either implicitly or otherwise. Models such as the Scott and Bruce model

23

indicate that firm failure may occur a number of times during the stages (Shafeek 2009).

Also, the Eggers and Leahy (1995) model depicts the firm moving forward and

regressing, omitting some stages entirely.

Secondly, the firm’s management style maybe more advanced than the firm’s

organizational structure, which means they are not moving in parallel as suggested by

the models. Greiner (1972) admits that this could potentially be a problem if the

owner/manager attempted to institute an inappropriate organizational structure, for

example, an over-use of controls when the emphasis ought to be on creativity. This

problem is with the owner/manager more than with the models themselves. The

owner/manager might not even realize the stage the firm is going through or even

consciously think what they ought to be doing. By using the organizational life cycle

models as a guide, the appropriate managerial style might emerge as a solution to the

problem.

2.3.2 The Resource-Based Theory

The resource-based theory generally throws light on how firms in the same industry

perform better than the other. It lays emphasis on the internal resources of a firm in

developing its strategy to achieve a sustainable competitive advantage in its markets and

industry. The theory holds that not all resources of the firm are important to enable it

generate a competitive advantage. In order to have a sustainable competitive advantage

by making above average profits, these resources must be valuable, inimitable, non-

substitutable and non-transferable, (Barney 1991, 2001, Kraaijenbrink et al 2010, Peteraf

1993, Eisenhardt and Martin 2000, Amit and Shoemaker 1993). This means that

differences in the performance of firms are the result of their distinct resources and

capabilities. Again reaping above normal profits or having a competitive advantage in an

industry or market can be said to be temporal.

According to Fahy (2000:96), the key elements of the theory are:

24

●sustainable competitive advantage and superior performance;

●the characteristics and types of advantage-generating resources and

●strategic choices by management

A firm combines different sets of resources in order to achieve a competitive advantage.

Black and Boal cited in Shook et al (2009) contend that each firm possesses different

resources and capabilities and the way the firm acquires, develops, maintains, bundles

and applies these resources leads to superior performance thereby having a competitive

advantage over time. Thus, not only do firms resources becomes strategic when they are

valuable, difficult to be copied by competitors, non transferable or have no close

substitutes.

Hunt and Derozier (2004) have given a summary of the literature about what constitutes

resources of a firm. These are tangible assets, intangible assets and external assets.

Tangible assets are physical resources which can be seen and evaluated (Wilk and

Fensterseifer, 2003). These include plant, equipment, land, stocks, financial (debtors,

creditors, cash in hand and at bank). Intangible assets on the other hand are those that

cannot be seen and quantified (Wilk and Fensterseifer, 2003). For example, reputational

resources like trademarks, patents, brand and goodwill as well as networks, individual

and group skills, interactions and the organizational routines and processes used to

organize and co-ordinate these resources. External resources also include relationships

with and knowledge acquired through suppliers and customers, competitors and

institutions like universities.

2.3.3 The Life-cycle models

Life-cycle models present a series of generally three to four stages through which an

SME will typically pass throughout its development. They generally describe the

dynamic within this growth process as “S-shaped”: a slow growth in the early

25

development is followed by a rapid growth, before the dynamic tends to slow down

again:

In the first phase the business is set up, products are developed and first experiences are

made on the marketplace. It is usually marked by relatively low growth rates. This phase

is typically labeled “Start-Up” (e.g. Hanks et al 1993) or “Formation Phase” (Dodge /

Robbins 1992).When the small business manages to pass successfully through this early

stage it may enter the “Expansion” or “Early Growth Stage”. This phase is generally

characterized by a rapid expansion of production, turnover and employment.

After some time the development reaches a point where the initial business idea and

concept will no longer guarantee a further dynamic expansion. Growth rates will

decline, the company enters in the “Later Growth” (Dodge / Robbins 1992) or “Maturity

Stage” (Hanks et al 1993).

The future lies in a more defensive role of maintaining the conquered market position

(“Stability”, DODGE / ROBBINS 1992) or, alternatively, in the advancement towards a

broader business concept within which each new line of products or services may again

pass through the described S-shaped growth process (“Diversification Stage”, HANKS

et al 1993).

Life-cycle models can give very plausible descriptions of the typical growth of an SME

or business companies in more general terms. What they cannot provide are explanations

of exceptions from this S-shaped growth cycle. Why does the growth of SMEs in one or

various phases of their life-cycle atypically slow down? Why do crisis occur in points on

the growth curve where a rather strong dynamic could be expected.

26

2.4 The relationship between study objectives and SME’s performance.

2.4.1 Internal related factor affecting SME’s performance

Internal constraints/factors are those constraints that affect the SME owner/ manger’s

ability to operate efficiently, despite any inmate potential in the owner/manager (Baloyi

2010). According to Stokes and Wilson (2006) internal factors are the personal

attributes, skills and competencies of the individual owner/manager which are crucial to

how well the business faces up to the inevitable crises that arise. Important to note about

these constraints is the fact that they are controllable by the owner/manager. As earlier

identified in the generic stages of the growth and survival of SMEs, the factors include:

lack of capital, personal characteristics, marketing, financial management, strategy,

human resource, operations, access and use of information technology and the

availability of a sound business plan. The discussion on each of these follows below:

Marketing

According Shafeek (2009) marketing is the one and only functional area that links the

products or services of a business to its customers. He adds on to say, it is vitally

important to ensure that this function is properly performed. To have a good chance of

survival, a small or micro agribusiness firm needs to answer the basic strategic

questions: “what markets are we targeting, with what products?” A common weakness

in the (agribusiness) SME owner/ managers lies in their failure to understand key

marketing issues (Stokes and Wilson, 2006). Stokes and Wilson (2006) are of the belief

that product or service concepts and standards often reflect only the perceptions of the

owner, which may not be mirrored in the market place. He adds on to say, minor

fluctuations in markets can topple a newly established small/micro (agribusiness) firms,

particularly where it is reliant on a small number of customers.

Lack of Capital

According to Fatoki and Garwe (2010), the lack of capital seems to be the primary

reason for business failure and is considered to be the greatest problem facing

27

agribusiness small and micro business owners. This was supported by Shafeek (2009)

where he said; from a business viewpoint without adequate financing, the business will

be unable to maintain and acquire facilities, attract and retain capable staff, produce and

market a product, or do any of the other things necessary to run a successful operation.

Stokes and Wilson (2006) also add on to say that financial difficulties of SMEs

(agribusiness) arise, either because of an inability to raise sufficient funds to properly

capitalize the business, or a mismanagement of the funds that do exist or a combination

of both. He further explains that, access to external funds may be difficult to achieve for

new or young, small and micro agribusinesses with no track record, especially for

owners without personal assets to offer as security. Stokes and Wilson (2006) go on to

stress that many new owner managers, having received funds, misuse them; small

businesses are notorious for their lack of proper financial controls and information.

Strategy

According to Shafeek (2009) all firms undertake strategy whether or not they would use

the term to describe what they were doing. The small and micro agribusiness firms need

to decide on their operating hours, location, product lines, etc. all of which are strategic

decisions.

Thus, the key to business success lies in the decisions of the agribusiness SME

owner/manager who identifies opportunities, develops strategies, assembles resources

and takes initiative (Bidzakin 2009). More so, the ability of the small/ micro business

firm owner/manager to formulate and communicate his or her long term view (vision) to

their employees is vitally important. Strategy is all about the essence of understanding

the business environment. Therefore, the awareness of the impact of the strategy

elements on small and micro agribusiness firms is critical for these firms’ continued

existence given that they have limited resources and cannot absorb the implications of

making mistakes (Shafeek 2009). Hall (1995) found that formal strategic planning is not

common among SMEs (business). Moreover, for some owner/managers formal planning

28

is of help if only because there is comfort that something is being done (Clover and

Darroch 2005).

Operations

Most small and micro agribusiness firms fail due to a lot of technical inefficiencies

involved in their production/ operations. A small/micro agribusiness firm is said to be

technically efficient when it produces as much output as possible with a given amount of

inputs or produces a given output with the minimum possible quantity of inputs. Thus,

the more small / micro business firms strive towards the maximum possible level of

outputs obtainable from a given set of inputs in its operations, given a range of

alternative technologies available, the higher the chances of the firm’s survival and

growth (Bidzakin 2009).

Personal Characteristics

The personal characteristics of the business SME owner/manager are positively

correlated with the probability of the business SME’s survival and growth. These

include the business SME owner/manager’s level of education, gender, and previous

management/ professional experience (Shafeek 2009). The level of education and the

attendance of management training courses is an important aspect in terms of small and

micro business firm survival. According to Clover and Darroch (2005) education is

thought to increase intrinsic motivation and energizer behaviors, and the more enterprise

education an individual receives, the greater the possibility of the (business) SME’s

success. Guzman (2004) cited in Clover and Darroch (2005) identifies ‘energizer’

behaviors as behaviors that are considered to be essential in ‘good’ entrepreneurs

(business SME owners) as the ambition or capacity to grow; the capacity to innovate;

collaborating with other businesses and individuals in order to promote higher firm

growth; and behaviors such as planning, budgeting, and training employees, that derive

from a ‘venturesome spirit’ which should inspire any decision the business SME owner

makes to ensure business survival and growth.

29

Tied to education is the question of whether the business SME owner/manager had

previous management/ professional experience in terms of having owned/ managed a

business and whether or not the business had failed (Shafeek 2009). An entrepreneur

(business SME owner)’s management/ professional experience is an essential means of

acquiring abilities and attitudes, reinforcing motivations and improving energizer

capacity. An increased management/ professional experience improves the quality of an

entrepreneur (business SME owner), hence increasing the chances of the business

SME’s survival and growth (Clover and Darroch 2005).

Information Technology

Technological innovation has long been a chief contributor to progress in business and

will continue to influence the growth and survival of the agribusiness SMEs (Baloyi

2010). Small and micro agribusiness firms in developing countries like South Africa are

poor and as such have no access to information technology. It is this lack of access to

information technology that also bear a negative effect on the small and micro business

firms’ ability to survive and grow even in the Alice communal area (Baloyi 2010).

Education of employees

SMEs face difficulties employing and retaining skilled graduates, because they prefer to

work for LEs that can offer higher salary, job security and career possibilities. In order

to meet the demands of the fast changing work environment which is typically

associated with SMEs it is essential that smaller firms ensure that they are able to attract,

retain and motivate high quality employees with effective transferable skills through the

existence of a strategic training plan and a specific budget for training (Jameson, 2000).

Financial Management

According to Nieman and Nieuwenhuizen (2009), financial management must be

regarded as one of the most important aspects of business. Therefore, financial

information available to the agribusiness SME owner/manager must be detailed;

detached from their personal accounts; regardless of whether their financial information

30

was derived from a cashbook, bank statement, double entry bookkeeping, monthly or

quarterly management accounts, and whether their financial system was computerized or

not. Small and micro business SME owners with the expectation to use sophisticated

financial information would be coupled with a greater probability of their firms’

survival. However, the availability of financial information is not an indication of the

uses to which it is put (Shafeek 2009). Hall (1995) realized that those owner/ managers

who collected financial information mainly to assist in the running of the business were

more likely to survive than those limiting its use to assisting in their negotiations with

external businesses. More so, the frequency with which the information is collected and

the person who collects the information are of essence.

Thus, the more frequently information is gathered and the more the financial information

collection is left to an expert such as an accountant, the better. The management of cash

flow and surpluses, specifically, has a key impact on the survival of the small and micro

agribusiness firms. Therefore, the larger the amount of surplus cash ploughed back into

the business, in place of taking it as compensation by the owner, the better the chances

of survival (Nieman 2006).

2.4.2 External related factor affecting SME’s performance

a) Financial support-

According to Guffey business plan is essential when you start your own business. Unless

you can count on the bank of your relatives you will need financial backing such as a

bank loan or venture capital supplied by investors. A business plan is critical for

securing financial support. (Guffey, 2008, 401)

Throughout the region, SMEs do not have an easy access to credit and equity finance.

This is because of the weak banking institutions in the region, the absence of capital

markets, and the weak legal framework for credit and collateral. Finance in general are

critical issues for growing businesses, forming the primary resource base from which

other factor inputs are acquired. There are various ways the business owners can finance

31

the growth of their firms but the fundamental decision is whether or not to accept

external equity finance return for part ownership of the business. If owners allow

external equity finance they choose to relinquish part of their control to either a financial

institution or other individuals.

Financing the firm is essential and getting access to finance plays a crucial role on firm’s

growth process. For many lenders it is almost impossible to assess the risks of an

investment this is mainly because of the high level of uncertainty. (World Bank 2001,

77)

Laws and regulations- The World Bank researchers argued that constrains that are facing

for the growth of SMEs are complex tax systems. (World Bank 2000, 77) Also another

shortcoming in South Eastern Europe is low level of trust in the court system to enforce

claims, and the need to pay significant bribes for access to basic public services.

For SMEs to close the gap with their larger counterparts in the world of technology,

further action by regional governments will be required. Actions need to be done in

improved infrastructure, costs and IT training and in information relating to the business

opportunities that e.g. e-commerce can generate (Harvie & Lee 2005, 11)

b) Business location

The location of your business must be accessible to the customer base and should be

built to ensure efficient accessibility for future clients. When choosing a location the

business must take into account the costs of moving or establishing their business in the

location. According to one online article source (ezinearticles) when choosing locations

many different factors must be taken into account. The labor costs, transport, proximity

to suppliers, workforce disruption, language factors, and exchange rates are some of the

essential location factors.

According to Herzong et al, the change that initiates a location search is the need for

new production capacity to meet market demand. The change that that initiates a

location search could be changes in perceived market opportunities, or changes in the

entrepreneur’s own situation. After location consideration the decisions makers they can

32

gather information on the tax levels, wage-rate levels, and other cost levels at various

locations (1991, 66).

c) Competition

Defining competition can be done in several ways. It is important that in any discussion

of competition is to recognize that, entering into competition and organization is seeking

competitive advantage; this competitive advantage is the key of corporate success.

(Walley 1998, 186)

A survey for SMEs in developing countries was made by World Bank. The survey

demonstrates that to any individual firm, competition poses a threat to survival. Even

though competition is a threat to survival, it is the competition that that drives firms to

improve productivity and therefore drives growth.

In 2002 there were several surveys conducted for the obstacles that arise in SME growth

in Kosovo, and the main obstacle was “unfair competition” that includes taxation, the

informal economy and public services is considered as the main barrier, the intensity of

which has remained constant throughout the years (Dinh, Mavridis & Nguyen 2010, 9).

d) Globalization

Perhaps the most significant source of change impacting many organizations today is the

increasing globalization of organizations and management. This occurs because firms to

control costs, especially to reduce labor costs. Of course another reason why firms are

becoming more global is the response to competition. (Griffin & Moorhead 2009, 28)

SMEs that are internationally active are generally growing faster than their domestic

equivalents. This gives pressures to SMEs to develop environmental strategies to remain

competitive. Many SMEs lack the resources to meet the global challenge to

internationalize.

33

2.4.3 Resource capacity related to SME’s performance

According to the resource-based theory which indicates those firm’s resources constitute

strategic tools that affect their performance. It shows the relationship between resources

and the performance of firms. As can be seen, internal resources (tangible and

intangible) and external resources (competitors, suppliers and customers) are expected to

influence the performance (profit, stock turnover and customer satisfaction) of firms.

Though the resource-based theory states that internal resources of firms constitute their

strategic resources, external resources are the ones which determine whether there is a

relationship between them and firms’ performance.

A firm combines different sets of resources in order to achieve a competitive advantage.

Black and Boal cited in Shook et al (2009) contend that each firm possesses different

resources and capabilities and the way the firm acquires, develops, maintains, bundles

and applies these resources leads to superior performance thereby having a competitive

advantage over time. Thus, not only do firms resources becomes strategic when they are

valuable, difficult to be copied by competitors, non transferable or have no close

substitutes.

Hunt and Derozier (2004) have given a summary of the literature about what constitutes

resources of a firm. These are tangible assets, intangible assets and external assets.

Tangible assets are physical resources which can be seen and evaluated (Wilk and

Fensterseifer, 2003). These include plant, equipment, land, stocks, financial (debtors,

creditors, cash in hand and at bank). Intangible assets on the other hand are those that

cannot be seen and quantified (Wilk and Fensterseifer, 2003). For example, reputational

resources like trademarks, patents, brand and goodwill as well as networks, individual

and group skills, interactions and the organizational routines and processes used to

organize and co-ordinate these resources. External resources also include relationships

with and knowledge acquired through suppliers and customers, competitors and

institutions like universities.

34

2.4.4 Factors influencing SMEs performance in Tanzania

a. Age of the Firm on Business Performance

Study findings support consideration of age of an organization as a factor that may affect

firm survival and growth and/or organizational decline and death the liability of newness

that makes new SMEs face a greater risk of survival than older firms is that new firms

do not have the experience, access, links, reputation or the legitimacy of the older firms,

leading to limited access to external resources (Amyx, 2005). McPherson (1995)

confirms that enterprise size, as well as growth rates, are inversely related to the

probability of closure.

b. Location of the Business on its Performance

Geographic location has its implications for access to markets and other resources like

finance, skilled labor, subcontractors, infrastructure, distribution and transport logistics

and other facilities. SME success also depends on neighborhood appearance and

continued or maintained future business operations in that location Tustin, 2001 as

quoted in Thapa et al (2008) Orthodox regional development theory stresses that urban

areas have favorable supply-side conditions for firm development. (Keeble, 1997) For

example, SMEs located in urban areas typically have a relative ease of access to

customers and the inputs required (i.e. finance, premises, technology, etc.) to produce

goods or services. SMEs located in urban areas may benefit from “agglomeration

economies” and spatial externalities (i.e. specialized infrastructures, information,

network of suppliers, specialized labour, specialized knowledge, concentration of

existing exporters, etc.) (Malmberget al., 2000; Parr, 2002). Recently, Chevassus-Lozza

and

Galliano (2003) detected that urban firms benefiting from external agglomeration

economies were more likely than rural firms to be exporters. However, the costs

associated with most inputs are generally higher in urban areas, which may constrain

SME development.

35

c. Socio- Cultural Background of an Entrepreneur on the Business

Berryman J (1983) suggested that the personal characteristics of the business owner

interacting with managerial defects produce weaknesses in the firm. Theng and Boon did

an exploratory study on factors, which affects the failure of local small and medium

enterprises and found that the entrepreneurs’ personal attributes and shortcomings had a

significant impact on the performance of a business enterprise:

d. Education on Performance of Small Businesses

Education and skills are needed to run micro and small enterprises. Research shows that

majority of the lot carrying out micro and small enterprises in Kenya are not quite well

equipped in terms of education and skills. Majority of those who run SMEs are the

ordinary lot whose educational background is wanting. Hence they may not be well

equipped to carry out managerial routines for their enterprises. King and McGrath,(

2002) in their study suggest that those with more education and training are more likely

to be successful in the SME sector.

e. Legislative Processes and Policy Framework

Ever since the ILO (1972) recognized the important role played by SMEs’ informal

Sector in employment creation, various policies have been put in place to promote

establishment and growth of the sector. In Kenya, the major focus for this effort is the

establishment of the Small Enterprise Development (SED) which is taxed with the role

of creating an enabling environment for small enterprise growth including analysis and

adjustments to the regulatory environment that has been a hindrance to prospective small

business owners.

According to Perera and Amin (1996), problems encountered by enterprises in the

informal sector include the issue of legality, lack of infrastructure, substandard

structures, and the threat of demolition. Informal enterprises are also considered an

environmental hazard and urban planners argue that they can be a danger to the public,

36

especially those that are carried out along roads and sidewalks. However, most of these

problems would be eliminated if urban planners allocated land for the enterprise

2.5 Empirical Studies

Empirical studies are presented in the context of world related and Tanzania related

studies. A number of studies have been conducted in globally and Tanzania in particular.

In general, two areas of research have become prominent. First, there are studies that

have attempted to examine the implications of different financial structures found in

different sized firms. In part, these are based on survey work which has attempted to

catalogue the range of finance sources available to smaller firms and to examine their

implications for growth and investment. In firms where forms of equity have been

employed, this work has been extended to incorporate an investigation into a number of

distributional issues concerning income flows to owners and managers and inside and

outside shareholders (Myers, 1998). Much of this analysis has been set within the

framework of a principal-agent approach. The conditions under which each respective

interest operates are examined with reference to the internal incentive systems that

emerge in firms and to the external factors, such as the macroeconomic policy

environment and the development of legal systems that offer potential protection to

outside investors in firms (La Porter, et al., 1998).

There is considerable debate over whether or not banks in low income countries have a

comparative advantage in lending to smaller firms precisely because they may possess

an accumulated knowledge concerning the riskiness of investing that places them in a

position to make optimal rather than sub-optimal decisions over lending to smaller

enterprises. Building relationships with banks increases the information flow between

lender and borrower (Berger and Udell, 1995).

The emphasis on the relative lack of theoretical work ought not to imply that the stock of

knowledge gained about finance and smaller enterprises through empirical work is not

37

valuable. Considerable insights have been gleaned from a wide range of empirical

investigations (Hall, 1992), (Kaplan and Zingales, 1995) (Cosh and Hughes, 1996).

2.4.1 World related studies

Udell (2004) carried out a study in the United States. The objective of the study was to

find out whether banks are more stringent and cautious in approving the financing for

SMEs, as they do not consider them as attractive and profitable undertakings. The

finding shows that nearly half of small business (SMEs) financing comes from

externally provided debt. Realizing that, SMEs continued to receive strong support from

the banking sector. In 2004, the banking system approved RM31.6 billion of new loans

to more than 92,000 SME accounts which shown a significant increase of 21.9% from

2003. Loan disbursements grew strongly by 15.3% to RM100.4 billion, while

outstanding loans to SMEs expanded by 7.7% to RM88.3 billion.

Ocholah et al. (2013) carried out a study on their descriptive survey design on effect of

micro finance on performance of women owned enterprises. The study was carried out

in Kisumu City, Nyanza Province of Kenya with a population of over 968,909 (Male –

48.9 %, Female – 51.1 % in 2009) and a geographical area of 919 km². The target

population was small and medium sized women owned enterprises in Kisumu City,

which were estimated at 7000 registered businesses of which about 3000 were active.

The respondents were asked to give information concerning the microfinance and

businesses the women are involved. The results indicate that most women interviewed

joined the microfinance in 2009. The earliest time known that the women joined the

microfinance was in 2000 and the latest was 2011. Concerning the times they have

received the loan, most women had received loans twice. Some women had received as

much as five times. The results also indicated that 68% of the respondents had been in

business between 0-3 years and the remainder between 4-6 years. The results also

indicate that most women entrepreneurs engaged in an array of business ranging from

food outlet (29%), retail shop (23%), boutique (10%), saloon (29%) and in

communication (9%) e.g. selling phone accessories. The respondents were asked to

38

indicate how they could describe the microfinance services obtained. The results show

that a minority (3%) felt that the services were inadequate, 32% rated the microfinance

services as average. On the other hand 61% rated the services as adequate and only 3%

as very adequate. As a result of gender inequalities, women remain to some degree in all

parts of the globe-untapped economic resources and underutilized economic assets

(Landes, 2003). Most researchers have not focused their studies on women owned

enterprises and credit accessibility, hence the reason for current study.

William et al. (1989) carried out a study on a survey of small-scale enterprises (SSEs) in

November 1989 to learn more about the impact of the adjustment program on their

operations, to evaluate their potential contribution to dynamic industrial recovery, and to

identify appropriate measures that would accelerate the growth of small enterprises in

numbers, size and productivity. The objectives of the survey were to: learn more about

the characteristics of small firms and their owners analyze how policy changes have

affected small firms, highlighting entrepreneurs' strategies for adapting to their new

environments and comparing firm responses across sizes and subsectors, and identify

constraints to the future growth of small firms. Survey results show that adjustment

policies generally have forced Ghana's small-scale industries to become more

competitive to survive and that significant structural changes are taking place across

subsectors and within firms. Without doubt, the adjustment process has strained most

firms' operations. Profits have been squeezed between rising input costs and restrained

demand, and growth has been s lowed by the difficulty of financing working capital and

new investment. Nevertheless, there is evidence of considerable entrepreneurial

initiative in changing product mix and seeking market niches that have opened up under

the new exchange rate regime. Some SSEs have adapted to changing demand by

producing specialty products, custom-made items, or low-cost substitutes for imported

goods. Interest in exports is high, although success has been primarily in the recovery of

previously exported products such as furniture (William et al., 1989)

39

Responses to adjustment policies appear to have been less on the input than on the

output side. At least for SSEs, relative prices of imported versus domestic inputs may

not have changed as much as might have been expected, given the extensive

depreciation of the cedi-partly because SSEs already were paying black market prices

and partly because devaluation tends to raise prices of all tradable goods.

Krishma et al. (2012), carried out the study on factors affecting the Performance of

SMEs in Malaysia. In Malaysia, despite SMEs’ have a significant contribution to the

economy, they have not been given adequate attention as the various researchers have

been biased towards larger and listed enterprises in Malaysia. So, this study aims to

investigate the factors affecting the performance of SMEs in the manufacturing sector in

Malaysia. The Contingency Theory developed by Fiedler (1964) was used to support

this research. Based on the data collected from 300 SMEs in the Malaysian

manufacturing sector, the results showed that there is a significant negative relationship

between ineffective entrepreneurship as well as inappropriate human resource

management (HRM) and the performance of SMEs. On the other hand, the results also

proved that there is a significant positive relationship between the use of marketing

information as well as the application of information technology and the performance of

SMEs. In short, this study found out that the use of marketing information can influence

the performance of SMEs at the highest.

Rodriguez et al. (2008) carried out on the study on bank financing to Small and

Medium-Sized Enterprises (SMEs) in Colombia. The descriptive study aimed to shed

light on current trends and policy challenges in the financing of small- and medium-

sized enterprises (SMEs) by banks in Colombia. The paper is motivated by the well

documented financing gap for SMEs, whose causes are complex and multi-dimensional.

The descriptive study based on data collection and interviews with the authorities, a

representative sample of banks, and other relevant entities, the authors analyze the

evolution and characteristics of this market in recent years. The findings show that bank

40

financing to SMEs is becoming a strategic segment for Colombian credit institutions.

The current business and risk management models for SME lending are still relatively

underdeveloped, but greater sophistication is expected as the market matures. Important

institutional and policy constraints to SME lending remain, but are not yet binding. In

order to address these constraints before they “begin to bite”, the authors identify and

describe a potential policy reform agenda.

Kariuki’s, (1995) study on small and medium-scale firm’s bank credit access in Kenya.

A survey of 89 small and medium-scale firms in manufacturing and service industries,

combined with secondary information from commercial banks, found that from 1985 to

1990 the average real volume of credit for the sample firms fell, except for the year 1986

which showed a marginal increase of 1.5 per cent. Several deterrents to utilizing formal

credit were identified. Small scale borrowers were found to be faced with higher

nominal interest rates at higher inflation rates in the latter half of the 1980s. Moreover,

the explicit transactions costs of borrowing were found to be high in relation to interest

costs.

Graham and Quattara (1996) carried out a study on financial challenges facing SMEs in

South Africa. They carried out a cursory analysis of survey and research results of SMEs

in South Africa. Survey results revealed the common reactions from SME owners

interviewed. When asked what they perceive as constraints in their businesses

performance and especially in establishing or expanding their businesses, they indicated

that access to funds is a major constraint. This is reflected in perception questions

answered by SME owners in many surveys (Graham and Quattara, 1996). The gap for

the survey was to identify financial challenges facing SMEs in South Africa.

World Bank (1994) carried out the study on a survey study of small and medium-scale

enterprises in East Asia. The objectives of the study was to find out challenges faced by

middle income economies in east Asia .The findings shows that enterprises in middle

income developing economies, such as Singapore, Republic of Korea and Taiwan, have

benefited from industrial sector reforms. In this case, it is apparent that a relatively

41

developed market, skilled workforces, technology-intensive production and public and

private support mechanisms have assisted small enterprises in capturing niche markets

and undertaking sub-contracting arrangements. In contrast, countries such as Malaysia,

Thailand and, in particular, Indonesia, which have been relatively constrained by less

developed markets, less-skilled workers and inadequate government support, have had

less success in developing their small and medium-enterprise sectors. The lack of

absorptive capacity amongst small-scale enterprises is seen as the largest constraint to

their development. Factors such as a lack of management, technological skills, basic

technology and insufficient finance are seen to be significant, particularly where

multinational firms are able to offer considerable benefits to small-scale sub-contractors

who are able to offer technology-intensive quality products.

A case study by Hall and Fang (2004) also found out that the lending to SMEs is

generally more risky than larger firms. Therefore, it has been found that most of the

financial institution and non-financial institution required collateral in the form of land

or buildings. The value of the real-estate security is usually set at twice the amount of

loan (Bhattacharya, 2000), which many enterprises fail to provide as collateral. SMEs

also regarded as high risk borrowers because of their low capitalization, insufficient

assets, and high mortality rates (Sia, 2003) and consequently, they are not offered any

attractive deals in terms of loans and interest rate. Thus, this research is aimed at

investigating the factors that are evaluated by banks providing business financing to

SMEs.

A study by the World Resources Institute (2009) carried out in Malaysia showed that in

most countries, SMEs have difficulty in securing financing because they do not have the

necessary systems in place to provide transparent information to investors or lenders. In

addition, they cannot provide the high collateral requirements that banks require for the

higher risk. These financial conditions are similarly found in Malaysia whereby SMEs

like in most other developing countries typically operate in a much less supportive

environment whereby opportunities to tap into formal commercial lenders are much

42

fewer than developed economies. With regard to debt financing, SMEs are often

considered too large for microfinance institutions and too small for the commercial

lenders besides from being lacking the collateral requirements of banks. The World

Resources Institute also posits that for the large majority of local banks, SMEs finance is

regarded as unattractive business as their perception is characterized by high risk and

transaction costs. This perception may have resulted from the mismatch between the

bank’s requirement and the accounting and management practices common among

SMEs as well as the lack of suitable credit scoring mechanism for the SMEs (Wendel

and Harvey, 2006).

2.4.2 Tanzanian related studies

Empirical work on institutions and SMEs has shown that institutions are important for

business growth in general and the development of SMEs in particular.

The survey of SMEs in Tanzania was carried out by Swiss contact in May, 2003.They

conducted a survey of 4,050 households in the Uruhu Corridor, which includes five

regions of the country. The number of households in these regions totals about 2 million

and represents about a third of the country’s population. The purpose of the survey was

to estimate the number of micro and small enterprises (MSE) and micro and small farms

(MSFs), and to explore their challenges and use of financial and nonfinancial business

services. Fifty-seven percent of the households had a member who was operating an

MSE or an MSF; for the MSE portion, it was over 38 percent .Almost 43 percent of the

MSEs were owned by women, 48 percent by men; 8.6 percent by families (husband and

wife), and 0.5 percent by multiple owners. The 781,687 MSEs employed 1,260,520

persons, including the working owners, an average of 1.6 per enterprise.

Ngowi et al. (2006) carried out a study on SMEs competitiveness facility (SCF). The

desk study review methodology was applied to find out the benefits gained through the

removal of economic barriers. Findings from the research therefore are based on the

review of appropriate literature on the subject of this study .Generally, the review

43

process has been carried out by way of three different but interrelated stages of

methodology and approach. The first stage involved a pre-study meeting and discussion

between research consultants (sub-contractors), Lattice Consulting Ltd (contractors) and

SCF (client). The reviewed literature and the analysis of the same indicate that SMEs in

Tanzania play a substantial role in jobs and incomes creation, in economic growth and

poverty alleviation. The SMEs however are not competitive enough in terms the

capacity to produce the high quality products demanded in the export market. Initiatives

and activities that focus on addressing quality issues in the SME sector should therefore

be supported. SMEs are also not competitive enough in terms of prices of their products

due to high production costs, which are the result of many constraints facing the sub-

sector. The constraints, including weak, ineffective and inefficient LRJ framework harm

SME competitiveness; poor infrastructure and inadequate capital, lead to high

transaction costs that make the SMEs less competitive than those that do dot face the

constraints. These gaps in knowledge in the reviewed literature are presented here: SME

rate of growth, the regional density/presence of SMEs by sector and the proportions of

small enterprises to medium enterprises to micro enterprises. Evidence of similar

benefits being derived from increased access to better quality imports has also been

recorded by Kessous and Lessard,(1993) in Mali. Despite the success stories however, a

significant number of studies indicate that the majority of small scale enterprises lack the

capacity to meet standards required within these niche markets (Dawson, 1994). The gap

for the study understood the benefits gained through the removal of barriers which

previously restricted access to imports have been offset by the rising and prohibitive cost

of imports, created by currency devaluations. While several firms in (Dawson’s, 1993)

Tanzanian study contracted as a result of increasing import costs, others were forced to

cease operation.

Levy’s (1993) study, in contrast to the earlier work, a distinctive feature of the current

spate of empirical work undertaken in low income countries rests with its concentration

on attempting to identify the constraints facing the development of the small scale

sector. A large proportion of this information has been collected from smaller firms

44

through questionnaires asking owners and managers to give their views on either the

kind of constraint they face, whether it be related to such factors as access to finance,

poor managerial skills and lack of training opportunities and the high cost of inputs, or

on the severity of the constraints, often ranking them on an ordinal scale. Few studies

have concentrated on a particular constraint, so that finance has most often been

identified as an inhibiting factor as part of a larger investigation into a wider range of

variables. The results in terms of the significance of financing acting as a constraint to

development are mixed and it is difficult to draw firm conclusions about the subject.

Interpretation is complicated because of the qualitative nature of the surveys and to the

fact that enquiries have almost exclusively been directed at firms that exist rather than

following the histories of those that have eventually failed.

Anderson (1982) carried out a study in Nigeria on challenges faced by SME’s in low

income countries. The study concluded that the available empirical evidence suggested

that a significant part of the growth of large scale enterprises was rooted in the

expansion of once small firms through the size distribution. In low income countries

work directed towards the internal workings of enterprises has been hampered by the

lack of basic data on the management and characteristics of smaller firms. Considerable

effort has been expended on attempting to gather consistent and measurable information

about small firms. Industrial censuses in a large range of low income countries have not

been undertaken annually they have concentrated on larger enterprises; they have only

infrequently surveyed small enterprises and have often been published with long delays.

As a consequence, useful time series data for smaller enterprises from official sources

are largely absent.

2.6 Conceptual Framework for the study

A conceptual framework can be defined as a set of broad ideas and principles taken from

relevant fields of enquiry and used to structure a subsequent presentation (Reichel and

Raey, 1987).

45

It is a research tool intended to assist a researcher to develop awareness and

understanding of the situation under scrutiny and to communicate. It forms part of the

agenda for negotiation to be scrutinized and tested, reviewed and reformed as a result of

investigation (Guba and Lincolin, 1989).

The industrial structures in which a firm operates determine the conduct of firms and

hence their performance. However, the performance depends on the internal

characteristics of an enterprise and the way in which an organization adapts to its

environment and attempts to shape it. Therefore, the conditions found in a company's

external and internal environment are the principal determining factors in its

performance.

The conceptual model is supported by the growth theory which explains that factors

influencing growth of a small firm as according to (Storey,1994) is by combining three

components; the starting resources of the entrepreneurs the firm and the strategy.

Performance which can be understood by entrepreneur characteristics of the owner, the

performance of the firm and the strategy of the firm that the entrepreneur opts. SMEs

performance is defines by any internal or external factor or combination of both internal

and external factors. On the other hand, the SMEs performance determines which factors

are to determine its performance. This creates assumption that there is a direct

relationship between internal and external factors in determining the performance of

SMEs. Therefore, the question is what factors determines performance of SMEs.

Independent variables for this study are the factors determining performance of SMEs.

Any change of any factors has an impact to SMEs performance. The dependent variable

the extent of performance can be understood through indicators such are Outcome

indicators, Output indicators, Capacity indicators, Qualitative indicators. The figure

below illustrates the framework to be used in this research.

46

Figure 2.1: Conceptual framework for the study

Source: Developed by using Literature Review

Independent Variables

Resources

Access of funds Human resources

External Factors

Corruption

Competition

Government policy

Technological barrier

finances/funding

Bureaucratic processes

Unfavorable economicfactors

Internal Factors

background and experience

in the business

Capital

SMEs Performance

Customer satisfaction

Turnover

Market share

Financial state of health

of business

Dependent Variables

47

According to the conceptual framework of the study SMEs performance is defined by

any internal or external factor or combination of both internal and external factors and

resource capacity of an entrepreneur. On the other hand, the SMEs performance

determines which factors are to determine its performance. This creates assumption that

there is a direct relationship between internal, external factors and resource capacity in

determining the performance of SMEs. Independent variables for this study are the

factors determining performance of SMEs. Any change of any of the factors has an

impact to SMEs performance.

48

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter addresses how the whole study was carried out. It highlights the scope,

mode of operation, as well as techniques that were used in data analysis. It describes the

sampling technique or procedure and states the main methods used in data collection

from the field.

Research methodology is a way to systematically solve the research problem. It may be

understood as a science of studying how research is done scientifically. In it, we study

the various steps that are generally adopted by a researcher in studying his research

problem along with the logic behind them (Kothari, 2002:10). The next sections of this

chapter demonstrate the way this study was systematically conducted. It starts by

outlining the research paradigms.

3.2 Research paradigms/philosophy

3.2.1 Phenomenology

Phenomenology (from Greek: phenomenon "that which appears" and logos "study") is

the philosophical study of the structures of subjective experience and consciousness. As

a philosophical movement it was founded by Edmund Husserl (1859 – 1938) of the 20th

century and was later expanded upon by a circle of his followers at the universities of

Gottingen and Munich in Germany. It then spread to France, the United States, and

elsewhere, often in contexts far removed from Husserl's early work.

In the human sphere this normally translates into gathering ‘deep’ information and

perceptions through inductive, qualitative methods such as interviews, discussions and

49

participant observation, and representing it from the perspective of the research

participant(s). Phenomenology is concerned with the study of experience from the

perspective of the individual, ‘bracketing’ taken-for-granted assumptions and usual ways

of perceiving. Phenomenological approaches are based in a paradigm of personal

knowledge and subjectivity, and emphasize the importance of personal perspective and

interpretation.

In this study phenomenology approaches was used based on paradigms of experiences

of SMEs and perspective of individual respondents on financial challenges face SMEs.

The study also used qualitative methods such as interviews and observation which are

under phenomenological paradigm.

3.2.2 Positivism

Positivism is a philosophy of science based on the view that information derived from

logical and mathematical treatments and reports of sensory experience is the exclusive

source of all authoritative knowledge and that there is valid knowledge (truth) only in

scientific knowledge. Verified data received from the senses are known as empirical

evidence. This view holds that society, like the physical world, operates according to

general laws. Introspective and intuitive knowledge is rejected. Although the positivist

approach has been a recurrent theme in the history of Western thought the modern sense

of the approach was developed by the philosopher and founding sociologist Auguste

Comte in the early 19th century. Comte argued that, much as the physical world operates

according to gravity and other absolute laws, so also does society.

Positivism states that the only authentic knowledge is that which allows verification and

assumes that the only valid knowledge is scientific. Enlightenment thinkers such as

Henri de Saint-Simon, Pierre-Simon Laplace and Auguste Comte believed the scientific

method, the circular dependence of theory and observation, must replace metaphysics in

the history of thought. Sociological positivism was reformulated by Émile Durkheim as

a foundation to social research.

50

Positivism uses the quantitative method to gather their data to ensure maximum

objectivity and detachment. Methods used by positivism are questionnaires, structure

interviews to produce reliable data that cab be checked by other researchers repeating

the research.

In this study quantitative methods were used to gather data to ensure objectivity. This is

to its extent positivism view is concerned.

3.3 Research Design

Research design refers to the plan for undertaking the study especially obtaining a

sample from a given population including techniques or the procedure that would be

adopted (Patton, 1990). According to Panneerselvam (2007: 12), the research design

provides complete guidelines for data collection. Selection of research approach, design

of sampling plan, experiment and questionnaire are among the essence of research

design.

A research design is simply the framework or plan for a study used as a guide in

collecting and analyzing data. It is the blueprint that is followed in completing the study

(Churchill & Brown 2007). According to Adam and Kamuzora (2008), research design

can be understood as a detailed work plan which is used to guide a research study to

achieve specified objectives of the research.

3.4 Population of the Study

Study population is the totality of objects under investigation (Kamuzora and Adam,

2008). The target population for the current study consists of all SMEs in Temeke

municipality and microfinance institutions employees. According to Temeke trade

officer, the total number of SMEs in Temeke municipality is big but in his registry there

are 500 SMEs. For the purpose of this research, the total population considered to be 100

SMEs and microfinance institutions employees which constitute the population of this

study because they were affected directly or indirectly by SMEs’ performance.

51

3.5 Unit of Inquiry

The researcher selected SMEs from Temeke municipal and all registered SME by the

Temeke trade officer comprised the unit of analysis. However, before selecting SMEs,

the officer asked to group them by type of business in order to have a representative

sample from each type of business.

3.6 Sampling design

Sampling frame was utilized as a list of elements that has closely approximated all the

elements in the population (Kamuzora and Adam, 2008). According to Temeke

municipal there about 500 SMEs. (Sekaran, 2003) recommends that a sample size of

more than 30 and less than 500 is appropriate for any social science research. For this

study a 17% of sample size which is 85 respondents was selected using convinience

sampling and the remaining 15 respondents were selected using purposive sampling to

sample loan officers and municipal officers. As such, it is why a sample size of 100

respondents were selected and utilized to gather data from the field. The specified

sample size will be met by only including SMEs in Temeke municipality, microfinance

institutions employees (loan officers) and Community development officer Unit.

3.7 The Sample Size

During the study the researcher selected a sample of 100 which includes SME’s 85, loan

officer’s 10 and 5 community development officers to represent the whole population

for effective use of the available time to exhaust information relevant to the study.

52

Table 3.1: Sample size

Title of respondentsSample size

requiredPercentage

Sampling technique

Community developmentofficer

55%

Purposive sampling

Loan officers 10 10% Purposive sampling

SME’s 85 85% Simple random sampling

Total 100 100%

Source: Researcher’s Field Data, 2014

3.7.1 Convenience Sampling

Convenience sampling (sometimes known as grab, accidental sampling or opportunity

sampling) is a type of non-probability sampling that involves the sample being drawn

from that part of the population that is close to hand. That is, a sample population

selected because it is readily available and convenient, as researchers are drawing on

relationships or networks to which they have easy access. The researcher using such a

sample cannot scientifically make generalizations about the total population from this

sample because it would not be representative enough. For example, if the interviewer

was to conduct such a survey at a shopping center early in the morning on a given day,

the people that he/she could interview would be limited to those given there at that given

time, which would not represent the views of other members of society in such an area,

if the survey was to be conducted at different times of day and several times per week.

This type of sampling is most useful for pilot testing. Credibility of a researcher's results

by convenience sampling will depend on convincing the reader that the sample chosen

equates to a large degree of the population from which they are drawn.

3.7.2 Purposive Sampling

Under this sampling technique, the researcher chooses the sample based on who they

think would be appropriate for the study. This is used primarily when there are a limited

number of people that have expertise in the area being researched.

53

In this research, the Temeke municipal Trade officer, loan officers from microfinance

instructions and leaders of associations were selected purposively because they had

specific information on SMEs performance. Their responses were expected to reflect the

responses from many SMEs because of their experience or expertise.

3.8 Data collection methods

In order to get accurate and reliable data, the study used both primary and secondary

data.

3.8.1 Primary Data

This is the type of data which are collected in the field of study for answering research

questions. They are collected by research assistants from the field for the purpose of

answering a research question/issue (Adam & Kamuzora, 2008). The primary data are

collected through observation, direct communication with respondents or through

personal interviews. They can also be gathered through, among others, interviews or

questionnaires (Kothari 2009). However observation, questionnaire and interview are

common research tools used to collect primary data. In this study, the primary data were

collected through questionnaire and interview.

a. Interviews

This is face to face contact between interviewer and interviewee. It can take place at

home (do to do interviewing), office (executive interviewing) or even at the shopping

centers (mall intercept surveys) depending on the nature of respondents (Adam and

Kamuzora, 2008). In this study, this method was employed to gather information on the

respondents’ views on the topic under study. It used multiple ended questions which

were asked accordingly. The interview was conducted to the SMEs, loan officers and

community development officers

During the study, interview was used in two fold dimensions; structured and semi-

structured. In unstructured interviews; the questions, wording, and sequence are fixed

54

and identical for every respondent (Sounders et al, 2000). The structured interview

consisted of planned questions in advance in which the respondents were required to

answer them accordingly. This type of interview is highly standardized and follows a

rigid procedure, asking questions in a form and order prescribed (Kothari, 2004). On the

other hand, unstructured or semi structured interview does not have predetermined

questions and it is not standardized. The semi-structured interview contained planned

questions in advanced which were to be answered, but it provide opportunity to the

respondents to explore more on areas in which the questions were basing. This technique

is used when one intends to explore a problem under investigation. What was needed is

just to have a clear idea about what was intended to be explored and then the themes to

be exhausted or put down. It is flexible in nature and the interviewer has much freedom

on how the questions are to be asked (Adam and Kamuzora, 2008).

In this study, the interview schedule consisted of a list of questions which were filled by

the interviewer. The questions explored the opinions of various cadres such as drivers,

conductors and other normal citizens. Therefore, these tools were applied and helped the

researcher to get various information/views concerning the social-economic impact of

road traffic congestion in DSM region.

b. Questionnaire

There are various definitions of the term questionnaire and different authors on research

(researchers) have defined it differently. White (2002) defined questionnaire as a series

of questions, each providing a number of alternative answers from which the respondent

can choose. Hence questionnaire can be considered in general terms in which each

person is asked to respond to the same set of questions in a predetermined order.

Structured and telephone questionnaires and those in which each person is asked to

respond to the same set of questions as well as those in which the questions are

answered without the researcher being around are inclusive (Adam and Kamuzora,

2008).

55

In this study, the questionnaires were designed in a single way basing on research

questions. Through this tool, the respondents within the areas of the study were in

position to answer the questions concerning the study. During the study, the

questionnaires were administered by the researcher and the respondents were required to

fill them under his guidance. The questionnaires were of two main types: closed and

open ended ones. The rationale behind using closed ended questions was to get answers

or responses that were direct, brief and straight to the point. Above all, this method was

said to be efficiency in the field of research in the sense that it is not expensive, it is free

from bias of the interviewer and the respondents were in a position to provide answers

accurately and clearly. The aim of using open ended questions was to enable the

respondents give out their views without limitations. In this case, the researcher was in a

good position to select the appropriate and relevant answers concerning the study at

hand.

3.8.2 Secondary Data

Secondary data means data are already available. They refer to the data which have

already been collected and analyzed by someone else (Kothari, 2009). They are obtained

from literature sources or data collected by other people for some other purposes (Adam

and Kamuzora, 2008). They may be either published or unpublished. Thus, secondary

data provide second hand information and include both raw data and published ones

(Sounders et al 2000). Secondary data sources include books, journal articles, news

papers, report and publications of various associations and organization as well as other

documentary reviews from internet. Thus, apart from the primary data, this study

included also secondary as shown above.

(a) Documentary review

The secondary data were collected through documentary review. A number of

documents including annual and quarterly reports, addendum, previous research reports,

56

financial statements and reports in relation with the problem matter were reviewed to

supplement the primary data collected by the researcher. The purpose of this technique

is for triangulation which means the data collected through interviews and

questionnaires were compared with documents. But also the data which were not

possible to be collected by interviews and questionnaires were complemented by this

technique. Triangulation refers to the use of more than one approach to the investigation

of a research question in order to enhance confidence in the ensuing findings. Since

much social research is founded on the use of a single research method and as such may

suffer from limitations associated with that method or from the specific application of it,

triangulation offers the prospect of enhanced confidence.

3.9 Validity and Reliability

3.9.1 Reliability

The reliability of measuring instrument is defined as the ability of the instrument to

measure what is supposed to be measured. According to Kothari (1990), a measuring

instrument is reliable if it provides consistent results. The information collected from

different sources in the field were measured and used to guide the researcher as evidence

when drawing the conclusion of the problem.

3.9.2 Validity

Validity refers to the quality that a procedure or an instrument used in the research is

accurate, true, and meaningful and right (Enon, 1998). A measurement is valid when it

measures what is supposed to measure; so if whatever we use in the study enables us to

get what we want to get, there is validity. In this study the researcher tried the level best

to make sure that the method of data collection; sampling and methodology of the study

were proper and related to the study. The questionnaires were pretested, therefore, this

57

study is valid and reliable as valid methodology employed as well as the data &

information was collected from reliable sources and the support of the supervisor’s

guidance.

3.10 Data Analysis and Presentation

All data collected were organized and checked before they were presented and analyzed

to ensure completeness, accuracy, and validity. By completeness, it means all

questionnaires were checked to see whether all questions are answered and handed-over.

Either, questions were checked if they are complete and the meaning corresponds to the

data needed. By clarity, it means data were checked if they are correct and correspond to

the question’s requirements. By validity, data checked in terms of time reported and if

they conform to the objectives of the study. This facilitates proper presentation in terms

of tabulation, charts and graphs generation and computation of percentage and

frequencies through Microsoft Excel.

Discussion and Analysis was done in accordance with percentage and frequencies

generated and interpreted accordingly. By so doing, the researcher was able to discover

whether data collected or information provided has been in alignment with the stated

research objectives and questions. The method of data analysis was descriptive in most

cases.

Qualitative data analysis involved the reduction of accumulated data to a manageable

size, developing summaries and looking for patterns. It also includes the interpretation

of research findings in the light of the research questions. Most of this data from

interviews were analyzed interpretively.

Quantitative data were collected though questionnaires which were processed using the

statistical package for social science (SPSS). The results of the study were presented in

tables, percentage charts and graphs. Therefore, both qualitative and quantitative

methods of data analysis were used for the study. The variables of interest to the

researcher were factors determining performance of SMEs.

58

3.11 Dissemination of the Results

Results will be first presented to Mzumbe University and upon approval will widely be

disseminated to the Temeke District and maybe other stake holders for the betterment of

the SMEs performance methods.

1

CHAPTER FOUR

STUDY FINDINGS, ANALYSIS AND DISCUSSION

4.1 Introduction

This chapter presents the nature of data which were collected in the field, its analysis

and discussions. The data concerning factors determining performance of SMEs in

Tanzania were collected through various methods namely: questionnaire, open and

closed-ended interview. The data were collected in Temeke District. However, before

presentation, analysis and discussion of the empirical findings, the characteristics of

respondents were presented and analyzed since are among the ways which establish

validity and reliability of the data collected.

This chapter presents the findings established through the data collected from the

respondents. The respondents were persons who had participated in the entrepreneurial

activities on the area, MFIs in the area as well as key informants from the government

offices and MFI Credit or Loan officers. These provided the findings that are presented

in this chapter. Findings, analysis and discussion are presented in the context of

characteristics of the respondents and findings as per study objectives.

4.2. Characteristics of the respondents

In order to put the results of the study in perspective, the profile of the respondents and

their enterprises were presented. It provides brief description of some demographic

characteristics of the sampled respondents, specifically age and education. Examinations

of these characteristics of individuals not only helped the accuracy of the data but also

provided a look at trends in these characteristics over time, most importantly it provides

2

the basis for the analysis of the way these characteristics were related to most of the

other issue investigated in this study

4.2.1. Gender of respondents

The respondents were asked to indicate their gender. The following table 4.1 and figure

4.1 provide the findings.

Table 4 .1: Respondents’ gender

Gender Frequency Percent

Male 49 49%

Female 51 51%

Total 100 100%

Source: Researcher’s Field Data, 2014

Figure 4.1: Respondent’s gender

Source: Researcher’s Field Data, 2014

The study shows that 49 (49%) were males and 51 (51%) were females. The implication

for the findings is that females are greater in number than males. Nevertheless the

3

difference is insignificant suggesting that the findings are collected from gender

balanced sample.

4.2.2 Age

The respondents were asked to indicate their age. The following table 4.2 and figure 4.2

provide the findings.

Table 4.2: Age of respondents

Years Frequency Percentage Valid Percent

20-29years 15 15% 15

30-39years 23 23% 38

40-49years 52 52% 90

Above 50 10 10% 100

Total 100 100%

Source: Researcher’s Field Data, 2014

Figure 4.2: Age of respondents

Source: Researcher’s Field Data, 2014

4

The study shows that 23(23%) were between 30-39 years of age, 15 (15%) ranges 20-29

years of age, 52 (52%) were between 40-49 years of age and the remaining 10 (10%)

were from the age of 50. The implication of the study is people with the age from 40- 49

years are more engaged in entrepreneurial activities than the other groups.

4.2.3 Educational Level

The respondents were asked to indicate their education level. The following table 4.3

and figure 4.3 provide the findings.

Table 4.3: Education level of respondents

Level Of Education Frequency Percent Cumulative Percent

Primary education level 23 23% 23

Secondary education level 30 30% 53

Certificate level 12 12% 65

Diploma level 20 20% 85

Bachelor degree level 15 15% 100

Total 80 100%

Source: Researcher’s Field Data, 2014

Figure 4.3: Respondents’ Level of Education

Source: Researcher’s Field Data, 2014

5

Research findings show that 23 (23%) of respondents who participated in the study had

primary education, 30 (30%) had secondary education, 12 (12%) had certificate

education, 20(20%) had diploma education, 15 (15%) had undergraduate degrees.

The implication of the findings is that most of entrepreneurs have low level of education.

The results show that 53 (53%) percent have primary and secondary education and the

remaining 47(47%) have certificate, diploma and bachelor degree education level. This

may imply that formal education is not a critical factor in business success; this was

proved by the findings because most entrepreneurs in this study have low level of

education.

4.2.4 Duration of time business has been in operation.

The respondents were asked to indicate the duration of time their business has been in

operation. The following Table 4.4 provides the findings.

Table 4.4: Length of time business has been in operation

Years of existence Frequency Percentage

<1 year 20 20%

1-3 years 41 41%

3-10 years 31 31%

10> years 8 8%

Total 100 100%

Source: Researcher’s Field Data, 2014

Table 4.4 above indicates that 20 (20%) have stayed in the business for less than one

year. On the other hand 41 (41%) have stayed in the business for 1-3 years while 31

(31%) stayed in the business for 3-10 years. Furthermore, 8 (8%) have stayed in the

business for more than 10 years.

6

The data show that most of the businesses 61 (61%) in existence were less than three

years old this implies that many businesses died at the very early stages of their

operations while new business starts every day. Clearly, businesses that are starting

seem to face serious challenges that make owners considers their businesses are doing

poorly within the first year of startup. This finding is clearly supported by the literature.

It also seems that most micro and small businesses hit their peak at the fifth year.

Looking at the performance rating by length of time the businesses had been in

operation; one may conclude that as businesses mature their returns seem to decline.

This may signal a lack of innovation on their part. Lack of innovation and search for

changing customer needs reduces the survival of businesses. It is therefore imperative

that businesses proactively innovate to meet customer demands. Alternatively, this result

may be interpreted using the product life cycle. This could be especially true if the

business deals only with one product. As the product reaches the decline stage, the

business may decline and the business is likely to fail.

4.2.5 Number of employees in the firm.

The respondents were asked to indicate the number of employees their business has

employed. The following Table 4.5 and provide the findings.

7

Table 4.5: Number of employees in the firm.

Number of employees Frequency Percentage

<5 employees 90 90%

5 – 10 employees 10 10%

11- 15 employees - -

16 – 20 employees - -

20 – 25 employees - -

25 – 30 employees - -

Above 30 employees - -

Total 100 100%

Source: Researcher’s Field Data, 2014

The findings show that 90 (90%) of the respondents interviewed have less than 5

employees in their firms while the remaining 10 (10%) have number of employees

ranges 5 to 10. Moreover there was no firm with more than ten employees in their firms.

This implies that most of the SME’s firms are very small with low capital can’t afford to

pay large number of employees. This also implies that cheap labor is the best option for

SME’s as well as using their family members as employees.

4.2.6 Sector that represents the SME’s main activity

More than seven main industry from which SME are operating from were noticed by the

researcher. They are eight main associations from which one SME was selected are

Wood Workers, Soap Makers, Tailors, barbershops, food vendors, metal works,

beautician and hairdressers, mitumba sellers and bakery.

8

4.2.7 Registration of SME’s business

The respondents were asked to indicate the status of their business whether are

registered or not registered. The following Table 4.6 below provides the findings.

Table 4.6: Registered SME's

Registered SME's Frequency Percentage

Yes 36 36%

No 64 64%

Total 100 100%

Source: Researcher’s Field Data, 2014

The findings showed that 64 (64%) who are the majority of respondents indicated that

SMEs was not registered with the Registrar General and the remaining 36 (36%)

registered business operators. For those unregistered, majority did so as sole proprietor.

This implies that many SME’s operating their businesses without registering and the

government is losing a lot of taxes from this sector.

Figure 4.4: Registered SME's

Source: Researcher’s Field Data, 2014

9

4.2.8 The type of the firm

The respondents were asked to indicate the type their business. The following Table 4.7

provides the findings.

Table 4.7: The type of your firm

The type of your firm Frequency Percentage

Manufacture 10 10%

Service 30 30%

whole sales 15 15%

Retailer 30 30%

Others 15 15%

Total 100 100%

Source: Researcher’s Field Data, 2014

Researcher found out that about five types of firms in which manufacture was 10 (10%),

service 30 (30%), wholesale 15 (15%), retailer 30 (30%) and others 15 (15%).

The implication for the study is majority of SMEs are service providers and retailer

business which is 60 (60%). The reason behind is manufacturing and wholesale requires

large capital.

4.3 Findings as per study objectives

The general objective of the study was to find out factors determining performance of

SMEs in Tanzania. The specific objectives were i) to determine the extent to which

internal related factors affect SMEs performance ii) to determine the extent to which

external related factors affect SMEs performance iii)to determine the extent to which

resource capacity relate to SMEs performance. The findings are presented in the

context of these objectives.

10

4.3.1 Internal factors and SME’s Performance

Recall that the first objective of the study was to determine the extent to which internal

related factors affect SMEs performance. The findings are presented in the context of

entrepreneurial skills, general management skills and risk associated to SME’s

performance etc.

Factors that have a direct influence on the performance of the business

4.3.1.1 Entrepreneurial skills and SME’s performance

The respondents were asked to indicate whether entrepreneurial skills are important to

their business performance. The following Table 4.8 provides the findings.

Table 4.8: Entrepreneurial skills and SME’s Performance

Factors have a directinfluence on theperformancebusiness.

1.mostimportant

2.Important 3.Neutral4. Less

important5. Least

importantTotal

Freq % Freq % Freq % Freq % Freq % Freq %

Entrepreneurial skills 85 85 15 15 - - - - - - 100 100

Source: Researcher’s Field Data, 2014

Table 4.8 shows that 85 (85%) said entrepreneurial skills are most important, 15 (15%)

said important, there is no respondent who indicated neutral, less important and least

important. This implies that the majority of SMEs understand the importance of

entrepreneurial skills as a factor contributed to their favorable of their businesses.

4.3.1.2 General management skills

The respondents were asked to indicate whether general management skills are

important to their business performance. The following Table 4.9 provides the findings.

11

Table 4.9: General management skills and SME’s Performance

Factors have a directinfluence on theperformance business.

1.mostimportant

2.Important 3.Neutral4. Less

important5. Least

importantTotal

Freq % Freq % Freq % Freq % Freq % Freq %

General managementskills

75 75 15 15 10 10 - - - - 100 100

Source: Researcher’s Field Data, 2014

Table 4.9 above shows that 75 (75%) said General management skills are most

important, 15 (15%) said important, 10 (10%) were neutral while there was no

respondent who indicated less important and least important. The implication is the

SMEs understand the importance of general management skills as a factor contributed to

their favorable of their businesses. According to the findings 90 (90%) of respondents

who are the majority indicated that general management skills are most important and

important.

4.3.1.3 Risks and SME’s performance.

The respondents were asked to indicate how different categories of risks relate to the

business performance. Table 4.10 provides the findings.

Table 4.10: Risks hamper business performance

Risks thathampersentrepreneurialability

1.mostimportant 2.Important

3.Neutral 4.Lessimportant

5.Leastimportant

Total

Freq % Freq % Freq % Freq % Freq % Freq %

Career risk 20 20 15 15 40 40 15 15 10 10 100 100

Family risk 60 60 30 30 7 7 3 3 - 100 100

Social risk 10 10 15 15 20 20 20 20 30 30 100 100

Source: Researcher’s Field Data, 2014

12

Career risk: Respondents were asked to indicate how career risk hampers business

performance. The above table 4.10 provides the findings.

The finding shows that 20 (20%) said career risk is most important factor hamper

business performance, 15 (15%) indicated as important, 40 (40%) respondents were

neutral, 15 (15%) indicated as less important and the remaining 10 (10%) indicated as

least important. The implication of the study is the SMEs do not see the importance of

career risk as a risk hampers entrepreneurial ability. According to the findings 65 (65%)

of respondents who are the majority indicated that career risk is less important

Family risk; Respondents were asked to indicate how Family risk hampers business

performance. The above table 4.10 provides the findings.

The finding show that 60 (60%) said career risk is most important factor hamper

business performance, 30 (30%) indicated as important, 7 (7%) respondents were

neutral, 3 (3%) indicated as less important and no one indicated as least important factor.

The implication of the findings is the SME’s see the importance of family as a risk

hampers entrepreneurial ability. According to the findings 90 (90%) of the respondents

who are the majority indicated that family risk hampers their entrepreneurial ability.

Social risk: The respondents were asked to indicate how Social risk hampers business

performance. Table 4.10 provides the findings.

The finding show that 10 (10%) said social risk is most important factor hamper

business performance, 15 (15%) indicated as important, 20 (20%) respondents were

neutral, 20 (20%) indicated as less important and 30 (30%) indicated as least important

factor. The implication of the findings is the SME’s do not see the social risk as a risk

hampers entrepreneurial ability. According to the findings 70 (70%) of respondents who

are the majority indicated that social risk is not a threat to their entrepreneurial ability.

13

4.3.1.4 Selected aspects for the success and business performance

The respondents were asked to indicate different aspects for the success and business

performance. The following Table 4.11 provides the findings.

Table 4.11: Selected aspects for the success and business performance

Important Aspects for thesuccess of your businessventure

1.mostimportant

2.Important3.Neutral 4.Less

important5.Least

importantTotal

Freq % Freq % Freq % Freq % Freq % Freq %

A business plan 80 80 15 15 5 5 - - - - 100 100

Business opportunities 100 100 - - - - - - - 100 100

Training in business skills 98 98 2 2 - - - - - - 100 100

An entrepreneurial team 95 95 5 5 - - - - - - 100 100

Background andexperience in the business

90 90 5 5 5 5 - - - - 100 100

Overall internal factorscontribute to SME’sperformance for myorganization

80 80 - - 20 20 - - - - 100 100

Source: Researcher’s Field Data, 2014

4.3.1.4.1 A business plan

The respondents were asked to indicate whether a business plan is the important aspect

for success and business performance. Table 4.11 provides the findings.

The findings shows that 80 (80%) indicated that a business plan is the most important

aspect for the success of the business venture, 15 (15%) indicated as important, 5 (5%)

of respondents were neutral, no respondent indicated as less important and least

important.

14

4.3.1.4.2 Business opportunities

The respondents were asked to indicate whether business opportunities are the important

aspect for the success and business performance. Table 4.11 provides the findings.

The finding shows that all respondents i.e.100 (100%) indicated that a business plan is

the most important aspect for the success of the business venture. This implies that

SME’s understand how business opportunities are important for their business growth.

4.3.1.4.3 Training in business skills

The respondents were asked to indicate whether Training in business skills is the

important aspect for the success and business performance. Table 4.11 above provides

the findings.

The finding shows that 98 (98%) of respondents indicated that Training in business

skills is the most important aspect for the success of the business venture, and the

remaining 2 (2%) indicated as important. This implicate that SME’s understand how

Training in business skills is important factor for acquiring new knowledge and

exposure for their business growth.

4.3.1.4.4 An entrepreneurial team

The respondents were asked to indicate whether an entrepreneurial team is the important

aspect for the success and business performance. Table 4.11 provides the findings.

The finding shows that 95 (95%) of respondents indicated that an entrepreneurial team is

the most important aspect for the success of the business venture, and the remaining 5

(5%) indicated as important. This implicates that SMEs understand that unity in business

is important for their business growth.

15

4.3.1.4.5 Background and experience in the business

The respondents were asked to indicate whether background and experience in the

business is the important aspect for the success and business performance. Table 4.11

above provides the findings.

The finding shows that 90 (90%) of respondents indicated that background and

experience in the business is the most important aspect for the success and business

performance, 5 (5%) indicated as important and the remaining 5 (5%) indicated as

neutral. This implicates that background and experience in the business is important for

SME’s because they can learn from past mistake and made easier for this kind of

experience to make business prosper.

4.3.1.4.6 Overall the internal factors contribute to SME’s performance for my

organization.

The respondents were asked to indicate whether overall the internal factors contribute to

SME’s performance for their organization in the business is the important aspect for the

success and business performance. Table 4.11 above provides the findings.

The findings shows that 80 (80%) of respondents indicated that overall the internal

factors is the most important aspect for the success and business performance, 20 (20%)

were neutral. This implies that other factors are much important to business growth like

any other related factor mentioned as important for business growth.

4.3.2 External factors for SME’s Performance

Referring to the second objective of the study, which was to determine the extent to

which external related factors affect SMEs performance .These factors have to do with

decisions, rules and policies that affect a small firm indirectly, and in response the firm

has not really control over the decisions made but an influence to a change of their

existence is possible. These factors originate from outside the firm. They are as follows:

- Capital accessibility, education and training availability, corruption, competition,

16

government policy, government support, Access to finances/funding, technological

barrier ,legal, Bureaucratic processes , unfavorable economic factors and overall the

external factors contribute to SME’s performance for the organization.

Table 4.12: External factors for SME's performance

Statements1.Strong

agree2. Agree 3.Neutral

4.Disagree

5. Strongdisagree

Total

Freq % Freq % Freq % Freq % Freq % Freq %

Capital accessibility 100 100 - - - - - - - - 100 100

Education andtraining availability

50 50 20 20 20 20 10 10 - - 100 100

Corruption 90 90 - - - - 5 5 5 5 100 100

Competition 98 98 2 2 - - - - - - 100 100

Government policy 40 40 - - 10 10 40 40 10 10 100 100

Government support 10 10 - - - - - - 90 90 100 100

Technologicalbarrier

80 80 - - 10 10 10 10 - - 100 100

Legal 20 20 - - - - 80 80 - - 100 100

Finances/funding 70 70 30 30 - - - - - - 100 100

Bureaucraticprocesses

5 5 - - - - - - 95 95 100 100

Unfavorableeconomic factors

74 74 10 10 6 6 10 10 - - 100 100

Overall externalfactors contribute toSME’s performancefor my organization

20 20 - - - - 70 70 10 10 100 100

Source: Researcher’s Field Data, 2014

4.3.2.1 Capital accessibility

The respondents were asked to indicate whether capital accessibility is important to their

business. The table 4.12 provides the findings. The finding shows that 100 (100%) of

respondents indicated capital accessibility as the most important factor, The implication

17

is the SME’s understand that without capital there is no business and this is the

challenge for most of SME’s.

A study by (Kuzilwa, 2005) suggests that small entrepreneurs are reluctant to sharing

ownership which leaves them opting to short term debt financing which may constitute a

constraint upon the growth of the business. It has been argued that the businesses which

shared or were willing to share part of their ownership with other parties were likely to

grow or have grown rapidly than the businesses which did not share equity (Kinsella et

al. 1993). In the results, four respondents pointed out capital constrain as a limiting

factor to small firm growth and in access to finances was mentioned by four interviews.

The significance of finances as a constraint to small business growth cannot be

overlooked since capital is a major factor of production.

4.3.2.2 Education and training availability

The respondents were asked to indicate whether education and training availability is

important to their business. The table 4.12 provides the findings. The finding shows that

50 (50%) of respondents indicated education and training availability as the most

important factor, 20 (20%) agreed, 20 (20%) neutral and 10 (10%) disagreed. The

implication is the SME’s understand that without education and training availability they

can’t compete in this globalized world of business.

4.3.2.3 Corruption

The respondents were asked to indicate whether corruption is important to their

business. The table 4.12 provides the findings. The finding shows that 90 (90%) of

respondents indicated corruption as the most important factor 5 (5%) disagree and the

remaining 5 (5%) strongly disagree. This implies that, SME’s understand that corruption

is among the obstacle which makes them fail to get most of their rights in business

environment.

18

4.3.2.4 Competition

The respondents were asked to indicate whether competition is important to their

business. The table 4.12 provides the findings. The finding shows that 98 (98%) of

respondents indicated competition as the most important factor and the remaining 2

(2%) agree .The implication of this finding is that there is high competition among

SMEs for market and quality of products i.e. businesses are struggling to survive in the

competitive market.

4.3.2.5 Government policy

The respondents were asked to indicate whether government policy is important to their

business. The table 4.12 provides the findings. The findings show that 40 (40%) of

respondents indicated government policy as the most important factor, 10 (10%) neutral

40 (40%) disagreed and the remaining 10 (10%) strongly disagreed .The implication is

the government policies are not in favor of SMEs.

4.3.2.6 Government support

The respondents were asked to indicate whether government support is important factor

to their business. The table 4.12 provides the findings. The finding shows that 10 (10%)

of respondents indicated government support as the most important factor and the

remaining 90 (90%) strongly disagreed .The implication is there is poor government

support to SMEs performance.

4.3.2.7 Technological barrier

The respondents were asked to indicate whether technological barrier is important factor

to their business. The table 4.12 provides the findings. The finding shows that (80%) of

respondents indicated technological barrier as the most important factor, 10 (10%) were

neutral and the remaining 10 (10%) strongly disagreed .The implication that the

technological barrier affects the SMEs performance.

19

4.3.2.8 Legal

The respondents were asked to indicate whether legal is important factor to their

business. The table 4.12 provides the findings. The finding shows that 20 (20%) of

respondents indicated legal as the most important factor and the remaining 80 (80%)

disagreed. The implication is the laws and law governing bodies are not friendly to

SMEs performance.

4.3.2.9 Finances/funding

The respondents were asked to indicate whether finances or funding is important factor

to their business. The table 4.12 provides the findings. The finding shows that 70 (70%)

of respondents indicated finances/funding as the most important factor and the

remaining 30 (30%) agree .The implication is the finances/funding is important aspect

for any business as well as to SME’s performance.

4.3.2.10 Bureaucratic processes

The respondents were asked to indicate whether bureaucratic processes are important

factor to their business. The table 4.12 provides the findings. The finding shows that 5

(5%) of respondents indicated bureaucratic processes as the most important factor and

the remaining 95 (95%) strongly disagree. This implies that the bureaucratic process is

not in favor to SMEs performance.

4.3.2.11 Unfavorable economic factors

The respondents were asked to indicate whether unfavorable economic factors are

important factor to their business. The table 4.12 provides the findings. The finding

shows that 74 (74%) of respondents strongly agreed, 10 (10%) agreed, 6 (6%) neutral

and the remaining 10 (10%) strongly disagree. The finding shows that 84 (84%) agreed

that unfavorable economic factors affects their business. This implies that unfavorable

economic factors are among the challenges which affect the SMEs performance.

20

4.3.2.12 Overall external factors contribute to SME’s performance for my

organization

The respondents were asked to indicate whether overall external factors are the most

important factor to their business. The table 4.12 provides the findings. The finding

shows that 20 (20%) of respondents strong agreed, 70 (70%) disagreed and the

remaining 10 (10%) strongly disagreed. This implies that overall external factors do not

contribute on SMEs performance.

4.3.2.13 The government initiative to promote SMEs

The respondents were asked to indicate whether government initiatives promote SMEs

business performance.

The findings shows that 20 (20%) percent of respondents indicated that the government

has done something to promote SME's but not enough, the remaining 80 (80%) indicated

that the government has done nothing to help SME's instead is just supporting big

businesses. This implies that government concentrates on the growth of big business and

leave small business dying.

4.3.2.14 The government’s measures to ensure SMEs’ access finance

The respondents were asked to indicate whether they have benefited from the

government measures to ensure SMEs’ access finance.

The findings shows that 98 (98%) of respondents indicated no to the question the reason

behind was most of SME’s business were not registered the government could not

recognize that kind of business for support and the remaining 2 (2%) agreed they access

finance from the government through the help of their relatives working with the

scheme.

21

4.3.3 Resource capacity factors related to SME performance

Recall to the third objective which was to determine the extent to which resource

capacity relate to SMEs performance. The findings are presented in the context of

financial resources important for the business growth and Managerial functions

contribute to the business performance.

4.3.3.1 Financial resources important for the business growth

Respondents were required to rank the different options of resource capacity related

factors on a Likert scale of 1 – 5, where: (1) = Most important (2) = Important (3) =

Neutral (4) = Less important (5) = Least important.

Table 4.13: Financial Human resources are important for the business growth

Financialhuman resource

1.Mostimportant

2.Important 3.Neutral4.Less

important5.Least

importantTotal

Freq % Freq % Freq % Freq % Freq % Freq %

Book keepingskills

50 50 25 25 20 20 5 5 - - 100 100

Financialstatementspreparation

60 60 12 12 8 8 15 15 5 5 100 100

Debit and creditcontrol

95 95 5 5 - - - - - - 100 100

Budgeting skills 98 98 2 2 - - - - - - 100 100

Tax 25 25 5 5 10 10 30 30 30 30 100 100

Source: Researcher’s Field Data, 2014

4.3.3.1.1 Book keeping skills

The respondents were asked to indicate how bookkeeping skills are important for

business growth. The table 4.13 provides the findings.

Table 4.13 of finding shows that 50 (50%) of respondents indicates that bookkeeping

skills are most important for business growth, 25 (25%) important, 20 (20%) of

22

respondents were neutral and the remaining 5 (5%) less important. The implication for

these findings is 75 (75%) of the SMEs are aware of the importance of keeping records

in business.

4.3.3.1.2 Financial statements preparation

The respondents were asked to indicate how financial statements preparation is

important for business growth. The table 4.13 provides the findings.

Table 4.13 of finding shows that 60 (60%) of respondents indicate that financial

statements preparation is most important for business growth, 12 (12%) important, 8

(8%) of respondents were neutral, 15 (15%) less important and the remaining 5 (5%)

least important. The implication for these findings is 72 (72%) of the SMEs are aware of

the importance of financial statements preparation in business despite of their low

knowledge on financial issues.

4.3.3.1.3 Debit and credit control

The respondents were asked to indicate how debit and credit control is important for

business growth. The table 4.13 provides the findings.

Table 4.13 of finding shows that 95 (95%) of respondents indicate that debit and credit

control is most important for business growth and the remaining 5 (5%) of respondents

indicated as important. The implication for this findings is that, all the respondents

i.e. 100(100 %) understands that discipline in finance use is important for business

growth and the knowledge of debit and credit control is essential for a successful

business.

4.3.3.1.4 Budgeting skills

The respondents were asked to indicate how budgeting skills is important for business

growth. The above table 4.13 provides the findings.

23

Table 4.13 of finding shows that 98 (98%) of respondents indicated that budgeting skills

is most important for business growth and the remaining 2 (2%) of respondents indicated

as important. The implication for this finding is that, all the respondents i.e. 100 (100%)

were aware that budgeting skills to any kind of business to ensure proper allocation of

resources available.

4.3.3.1.5 Tax

The respondents were asked to indicate how tax is important for business growth. The

above table 4.13 provides the findings.

Table 4.13 of finding shows that only 25 (25%) of respondents indicated that tax is most

important factor for business growth, 5 (5%) indicated as important, 10 (10%) were

neutral, 30 (30%) less important and the remaining 30 (30%) of respondents least

important. The implication for this finding is that, 70 (70%) the respondents do not

understand the importance of paying tax because most of their businesses were not

registered.

4.3.3.2 Managerial functions and business performance

Respondents were required to rank the different options of resource capacity related

factors on a Likert scale of 1 – 5, where: (1) = Most important (2) = Important (3) =

Neutral (4) = Less important (5) = Least important. The following table 4.14 presents the

findings.

24

Table 4.14: Managerial functions contribute to the performance of your business

Managerialfunctions

1.Mostimportant

2.Important 3.Neutral4.Less

important5.Least

importantTotal

Freq % Freq % Freq % Freq % Freq % Freq %

Skilled personnel 10 10 15 15 30 30 35 35 10 10 100 100

Managementskills

100 100 - - - - - - - -100 100

Planning(forecasting)skills

70 70 15 15 15 15 - - - -100 100

Customer care 100 100 - - - - - - - 100 100

Marketingknowledge andskills

100 100 - - - - - - - -100 100

Knowledge ofhuman resourcespractices

40 40 15 15 20 20 25 25 - -100 100

Source: Researcher’s Field Data, 2014

4.3.3.2.1 Skilled personnel

The respondents were asked to indicate how skilled personnel as a managerial function

contribute to the performance of the business. Table 4.14 presents the findings.

Table 4.14 shows that 10 (10%) of respondents indicate that skilled personnel are most

important managerial function contribute to the performance of the business, 15 (15%)

indicated as important, 30 (30%) neutral, 35 (35%) less important and the remaining 10

(10%) of respondents indicated as least important. The implication for this findings are

75 (75%) respondents do not see the importance of skilled since it is expensive to

employ skilled labor for their small business therefore they opt for the cheapest labor

which is not expensive.

4.3.3.2.2 Management skills

The respondents were asked to indicate how management skills as a managerial function

contribute to the performance of the business. The table 4.14 presents the findings.

25

Table 4.14 shows that 100 (100%) of respondents indicated that management skills are

most important managerial function contribute to the performance of the business. The

implication for this finding is 100% of respondents understand the importance of

managing their business professionally although most of them do not have those

management skills.

4.3.3.2.3 Planning (forecasting) skills

The respondents were asked to indicate how planning (forecasting) skills as a

managerial function contribute to the performance of the business. The table 4.14 above

presents the findings.

Table 4.14 above shows that 70 (70%) of respondents indicate that management skills

are most important managerial function contribute to the performance of the business, 15

(15%) indicated as important and 15 (15%) were neutral. The implication for these

findings is 85 (85%) of respondents understood the importance of planning or

forecasting in their business although most of them do not have those skills.

4.3.3.2.4 Customer care

The respondents were asked to indicate how customer care skills as a managerial

function contribute to the performance of the business. Table 4.14 presents the findings.

Table 4.14 above shows that 100 (100%) of respondents indicated that customer care

skills are most important managerial function contribute to the performance of the

business. The implication for these findings is 100 (100%) of respondents understood

the importance of customer care in attracting new customer and retaining them.

4.3.3.2.5 Marketing knowledge and skills

The respondents were asked to indicate how marketing knowledge and skills as a

managerial function contribute to the performance of the business .Table 4.14 presents

the findings.

26

Table 4.14 shows that 100 (100%) of respondents indicated that marketing knowledge

and skills are most important managerial function contributes to the performance of the

business. The implication for these findings is 100 (100%) of respondents understand the

importance of marketing knowledge and skills in advertising their products, attracting

new customer and retaining them.

4.3.3.2.6 Knowledge of human resources practices

The respondents were asked to indicate how knowledge of human resources practices as

a managerial function contributes to the performance of the business .Table 4.14

presents the findings.

Table 4.14 shows that 40 (40%) of respondents indicate that knowledge of human

resources practices is most important managerial function contribute to the performance

of the business, 15 (15%) indicated as important and 20 (20%) were neutral and 25

(25%) less important. The implication for these findings is 55 (55%) of respondents do

see the importance of knowledge of human resources in their small businesses.

4.3.4. Estimate enterprise’s performance

The respondents were asked to rank their business performance with the following

option: excellent, good, not bad, not good and no idea.

According to the research findings, 10 (10%) of respondents ranked their business with

excellent performance, 15 (15%) ranked good, 40 (40%) ranked not bad, 33 (33%)

ranked not good and 2 (2%) had no idea. This implies that 73 (73%) of the respondents

were not sure about the performance of their businesses (not bad or not good). This is

resulted due to their low level of education as they cannot understand how to measure

the performance of their businesses.

4.3.5 Estimation of enterprise size

The respondents were asked to estimate their business size using the following factors:

Capital, Number of employees and Number of asset owned.

27

According to the research findings, 90 (90%) of respondents used capital to estimate

enterprise size, 2 (2%) mentioned number of employees and 8 (8%) mentioned number

of asset owned. The implication of this finding is that, respondents were only able to

identify the size of their business by measuring the size of the capital injected in the

business. On the other hand respondents were not able to identify or measure the value

of their assets they owned. This is due to their level of education as measuring the value

of their physical assets during the study one must know how calculate its depreciation.

4.3.6 Challenges affecting SMEs performance

The respondents were asked to mention challenges affecting the performance of their

business. Table 4.15 below presents the findings and followed by explanation.

Table 4.15: Challenges faced by SME’s in their business environment

Challenges Frequency Percentage Cumulative frequency

Capital constraints 50 50 50

Competition 25 25 75

Hawkers 5 5 80

Improper record keeping 8 8 88

Poor security 12 12 100

Total 100 100

Source: Researcher’s Field Data, 2014

4.3.6.1 Capital constraint

Despite the constraint of raising funds from financial institutions being raised by the

business owners. In the results of this study, 50 (50%) respondents pointed out capital

constrain as a limiting factor to small firm growth and in access to finances was

mentioned. The significance of finances as a constraint to small business growth cannot

be overlooked since capital is a major factor of production.

28

A study by Kuzilwa (2005) suggests that small entrepreneurs are reluctant to sharing

ownership which leaves them opting to short term debt financing which may constitute a

constraint upon the growth of the business. It has been argued that the businesses which

shared or were willing to share part of their ownership with other parties were likely to

grow or have grown rapidly than the businesses which did not share equity (Kinsella et

al., 1993).

4.3.6.2 Competition

During the study respondents mentioned competition as a challenge affecting the

performance of their business. Table 4.15 above presents the findings, 25 (25%) of the

respondents mentioned competition as a challenge.

4.3.6.3 Improper record keeping

During the study respondents mentioned improper record keeping as a challenge

affecting the performance of their business. Table 4.15 above presents the findings, 8

(8%) of the respondents mentioned Improper record keeping as a challenge.

The improper record keeping comes as a result basically of inadequate education and

training in business; because of this a firm loses track of its cash flows and in turn

leading to cost control and liquidity problems just to name a few. If the records of the

transactions a business undertakes are not kept properly, growth cannot be achieved

since the firm loses track of where it is heading.

4.3.6.4 Poor security.

During the study respondents mentioned poor security as a challenge affecting the

performance of their business. Table 4.15 above presents the findings, 12 (12%) of the

respondents mentioned competition as a challenge.

Security threats pose a great challenge to businesses and many business owners and

managers employ various means to help prevent or deter would-be criminals.

29

Respondents said they use a number of ways to protect their properties; for instance, use

of security firms or guards to safeguard their businesses, close early to avoid thugs, carry

their stocks home, sleep in their business premises as a security measure. This implies

higher cost of doing business as they respond to the security challenges.

4.3.6.5 Hawkers.

During the study respondents mentioned hawkers as a challenge affecting the

performance of their business. Table 4.15 presents the findings, 5 (5%) of the

respondents mentioned hawkers as a challenge. As a response to this challenge

businesses that face this problem reported that they sell cheaper than the hawkers while

other said they sell goods of a higher quality. Competing with hawkers on price is

debatable since hawkers are known for selling cheaply. Nevertheless, respondents

mentioned that they used competitive pricing strategy to counter the hawkers. There is

also a sense of security experienced by customers when they deal with a trader who has

a physical location.

30

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Introduction

This chapter provides a summary of the major findings, conclusion and

recommendations in relation to the stated purpose. It also gives suggestions on areas for

further studies. The purpose of this study was to evaluate factors influencing SME’s

performance in Temeke district in Tanzania. Specifically, it was attempting to find out

the extent to which the internal related factors affect SMEs performance, and the extent

to which the external factors affect SMEs performance and the extent to which the

resources capacities related to SMEs performances.

5.2 Summary of the key findings

About 90 percent of businesses that participated in this research are faced with various

challenges, which if not managed well can lead to business failure. It is the researchers’

view that the seeds of future business performance are sown in the early stages of the

business life and that understanding them has a predictive value. It is also clear that

infant businesses need as much support and help in their early years when their

motivation is high as well as in their maturity phases when their levels of innovations are

low.

Lack of Capital, competition, insecurity, corruption, lack of market information and

networking were the top cited challenges facing businesses in Dar-es-salaam. While the

challenges facing small businesses do not include capacity concerns such as input

availability or labor costs, unfavorable government policies, in addition to high taxes

indicates that government and its regulations are a major obstacle to SMEs operations.

The government has also failed to maintain law and order with 68.2 percent of the

respondents reporting insecurity among top five challenges.

31

Different SMEs meet the above mentioned challenges in different ways. Strategies used

included fair pricing, discounts and special offers, offering a variety of services and

products, superior customer service and continuously improving quality of service

delivery. Clearly, there is no magic bullet in achieving success. Business success is a

consequence of embracing the whole package of strategies in order to succeed. Selling a

variety of products or offering a variety of services is just as important as embracing

prudent financial management systems.

Most of businesses sampled in this research were less than three years old. Considering

that a simple random approach was used in the selection, the results of this research

suggest a high failure rate. Looking at the performance rating by length of time the

businesses had been in operation; one may conclude that as businesses mature their

returns seem to decline. This may signal a lack of innovation on their part. Lack of

innovation and search for changing customer needs reduces the survival of businesses. It

is therefore imperative that businesses proactively innovate to meet customer demands.

Alternatively, this result may be interpreted using the product life cycle. This could be

especially true if the business deals only with one product. As the product reaches the

decline stage, the business may decline and the business is likely to fail.

The research also indicates that 90.9 percent of SMEs interviewed serve the customers

who live and work in the same town or city. With globalization, businesses need to look

beyond their local catchment areas (Ronge et al., 2003). Globalization is a reality and a

challenge that small businesses have to contend with. Globalization presents both

challenges and opportunities. As much as SMEs remain local, they need to think global

and target markets beyond their regional boundaries.

The citing of competition as a top challenge is expected as most SMEs, especially small

sellers and producers tend to congregate in dense markets and overcrowded cities .It also

suggests a lack of market information and innovation as most new businesses are a

duplication of already existing ones.

32

Slightly more than half of the respondents (50.5 percent) said having good

communication skills is necessary in any business. This is mainly because of the

personalized services that most customers anticipate when dealing with small business

owners or managers. Financial management knowledge is also considered as key with

47 percent of the respondents mentioning it.

5.3 Conclusion

In conclusion, this study has achieved its research objectives. The hypotheses

development, theoretical framework and research design were designed to achieve the

research objectives. In this study, there are five determinants that significant to affect the

performance of small and medium enterprises (SMEs). Based on the results, the first

objective of the study was to identify internal related factors which affect SMEs

performance. According to the study findings the internal related factors were

Marketing, lack of Capital, strategy, operations, Personal Characteristics, Information

Technology, Education of employees and Financial Management

The second objective was to determine the external related factors affect SMEs

performance which were Financial support, Business location, competition,

globalization, Education and training availability, Corruption, government policy,

Technological barrier and Legal.

The third objective was to find out the resource capacity related factors related to the

performance of the SMEs. The study findings revealed resource capacity related factors

were Financial resources: which includes Book keeping skills, Financial statements

preparation, Debit and credit control, Budgeting skills and tax, Managerial functions and

business performance which includes Skilled personnel, Management skills, Planning

(forecasting) skills, Customer care, Marketing knowledge and skills and Knowledge of

human resources practices.

The fourth objective was to verify factors influencing SMEs performance of SMEs in

Tanzania which includes business networking, competitive pricing or low cost, selling

variety of products and services and availability of capital as well as credit from the

33

banks as some of the key reasons .The results reveal that there is no magic bullet and

that all factors mentioned above are important in contributing to good performance of

businesses.

The last objective was to identify challenges faced by SMEs in Tanzania whereby

according to the study findings the challenges are Capital constraint, Competition,

Improper record keeping, Poor security and Hawkers. Both construct have strongest

positive relationship with Performance of the SMEs

5.4 Recommendations

Based on the research findings and available literature, researcher recommends the

following strategies that SMEs and government can use to boost their performance.

It is appreciated that each business has its own unique combination of critical success

factors, but some are important for all businesses. First small businesses should have a

‘global outlook’. Businesses of all sizes across the globe can interact and share

information, technology and products. Small businesses should consider what global

trends are affecting availability of resources, increasing or decreasing demand for

products or service and where there is an unfilled need one might be able to meet. This

may prove a challenge to SMEs but the government can step in here to provide

information on business trends.

5.4.1 Recommendations for internal related factors which affect SMEs

performance

i. The SME’s are further encouraged to get more investment opportunities instead

of only one, have an enterprise before borrowing the money and not to use credit

to start investments but rather to expand or diversify investments.

ii. SMEs should make sure have disciplined finance management, differentiating

products and services to satisfy customer needs, having business located within the

reach of their customers and good networking can make a difference between

succeeding and failing.

34

iii. Further, there is need to improve ways of gathering customer information for the

purpose of personalized marketing and service. The more a business owner

knows about its customers, the better they can meet their needs

iv. Belonging to a professional body helps gain a competitive advantage in a business.

Being a member of an industry association implies that one is serious about the

business they do. This could also help in networking and obtaining of business

information.

5.4.2 Recommendations for External related factors affect SMEs performance

i. The government is urged to get involved in determining the interest rate,

centralize the interest rates such that the rate is uniform for the MFIs and also

monitor the services of the MFIs. Moreover, financial institutions should develop

better lending terms enabling small firms to benefit from them. In this also the

services of financial institutions should be improved to ensure their reliability

and stability eliminating the problem of financial constraints to small firms while

increasing the goodwill of these particular institutions.

ii. The government should invest in research and development so as to explore what

can be done to improve the small firm’s situations either by looking into what

other developing countries have done or by coming up with new ideas.

iii. The policies of the MFI as guided by the Central Bank should be maintained

with increased capacity on lending powers to make available finances for the

success of small and medium sized entrepreneurs’ development.

iv. The respondents also recommend that the government could protect the

borrowers from the MFIs and also provide community sensitization and training

guidelines for the access and utilization of MFI services.

35

5.4.3 Recommendations for resource capacity related factors to the performance of

the SMEs.

i. Stakeholders should develop training programmes and courses aimed at small

business owners and their respective staffs. This will ensure that the small business

owners are equipped with adequate business knowledge and experience for them to

run successful small businesses

ii. There is also need to get trained in an area that is relevant to the business carried.

This research has clearly shown managers with relevant training run successful

businesses compared to their untrained counterparts.

iii. The respondents recommended that as MFI clients they should be trained

thoroughly before undertaking credit facilities for an enterprise to use money for

intended purposes only and avoid money misuse and diversion of funds.

5.4.4 Recommendation for challenges faced by SMEs in Tanzania

i. Small businesses should consider what global trends are affecting availability of

resources, increasing or decreasing demand for products or service and where there

is an unfilled need one might be able to meet. This may prove a challenge to SMEs

but the government can step in here to provide information on business trends.

ii. SME’s should reform unions or organizations that are active in looking for their

rights and address to their needs to appropriate authorities.

iii. The respondents also recommend that the government could protect the

borrowers from the MFIs and also provide community sensitization and training

guidelines for the access and utilization of MFI services.

iv. SME’s should try to seek professional advice and consultancy in matters that are

not very familiar to them such how to access loan ,how to write a business plan

,marketing strategies and human resource management etc.

36

5.5 Recommendations for further research

Since the study picked a case study of one district in urban area, further studies can be

conducted in the same study basing in rural area. Moreover, further research could be

carried out on the factors that contributing to SMEs failure in Tanzania.

37

REFERENCES

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APPENDICES

Appendix No. 1: Questionnaire to SMEs (owners)

Introduction

This study is being conducted as part of the requirements for the award of Master of

Science in Accounts and Finance Degree by the Mzumbe University. The research topic

is “Examining Factors determining SMEs performance in Tanzania”. The information

you provide will therefore be used for academic purposes only and will be treated with

confidentiality. Please answer the questions which are stated below

PART A: Enterprise Profile:

1. Gender

a) Male ( )

b) Female

2. Your job position in the firm:

a) Owner ( )

b) Manager ( )

c) employee ( )

d) Others (specify) …….

3. What is your level of education?

a) Standard VII ( )

b) Form IV ( )

45

c) Form VI ( )

d) Diploma ( )

e) First degree ( )

f) postgraduate ( )

4. What is the type of your firm?

a) Manufacture ( )

b) Service ( )

c) whole sales ( )

d) Retailer ( )

e) Others (specify) ………………….

5. How many years has your firm been in business?

a) 5 – 10 years ( )

b) 11- 15 years ( )

c) 16 – 20 years ( )

d) 20 – 25 years ( )

e) 25 – 30 years ( )

f) Above 30 year ( )

6. Please estimate the number of employees in the firm.

a) 5 – 10 ( )

b) 11- 15 ( )

46

c) 16 – 20 ( )

d) 20 – 25 ( )

e) 25 – 30 ( )

f) Above 30 ( )

7. Identify the sector that represents the main activity of your business

a) Food processing industry ( )

b) Bakery industry ( )

c) Wood products industry ( )

d) Furniture works industry ( )

e) Metal works industry ( )

f) Machinery works industry ( )

g) Food vendors (mamalishe) ( )

h) Second hand clothes ( )

8. Have you registered your business?

a) Yes ( )

b) No ( )

47

PART B: Internal Factors related to SMEs performance

Answer the following questions by ranking the different options on a Likert scale of

1 – 5, where:

(1) = Most important

(2) = Important

(3) = Neutral

(4) = Less important

(5) = Least important

1. The following factors have a direct influence onthe performance of your business.

1 2 3 4 5

Entrepreneurial skills

General management skills

48

2. The following risks hampers your entrepreneurialability

Career risk

Family risk

Social risk

4. Which of the following aspects are important forthe success of your business venture?

A business plan

Business opportunities

An entrepreneurial team

Training in business skills

Background and experience in the business

Overall the internal factors contribute to SME’sperformance for my organization

5. Did your firm applied for loan to any financial institution

a) Yes

b) No

6. How did the firm first request a financing from financial institution?

a) Application filled in at branch ( )

b) Application made by phone ( )

c) Application over the internet (include electronic mail and website ( )

d) Others (please specify ( )

7. What type of product/financing did the business request from financial institution?

49

a) SME current account ( )

b) Overdraft ( )

c) Business loan ( )

d) Trade finance ( )

e) Working capital facility ( )

8. How did the firm used the financing that was requested from financial institution

a) To purchase fixed assets ( )

b) Working capital/operating capital ( )

c) Research and Development ( )

d) Debt Consolidation ( )

e) Others ( )

(Please specify)……………………………………………………………………

Thank you for your cooperation

50

PART C: External related factors to SMEs performance

1. Is the government doing enough to promote SMEs?

a) Yes ( )

b) No ( )

Please, elaborate your answer……………………………………………………………

………………………………………………………………………………………….

2. Have you benefited from the government’s measures to ensure SMEs’ access finance?

a) Yes ( )

b) No ( )

If yes, was it through ( )

i. Credit finance ( )

ii. Risk capital ( )

iii. Credit guarantees ( )

iv. Others (specify) …………..……………………………..

3. Has the government done enough to address skills shortages in SMEs?

a) Yes ( )

b) No ( )

Please, elaborate your answer……………………………………………………...

………………………………………………………………………………………

51

4. The following factors are important for SMEs performance? Please tick the most

closely answer that matches your opinion

Statements1.Strongagree

2.Agree

3.Neutral4.Disagree

5. Strongdisagree

Capital accessibility

Education and trainingavailability

Corruption

Competition

Government policy

Government support

Technological barrier

Legal

Finances/funding

Bureaucratic processes

Unfavorable economicfactors

Overall external factorscontribute to SME’sperformance for myorganization

6. What are the challenges affecting SMEs performance?

(1) …………………………………………………………………………….

(2) …………………………………………………………………………….

(3) ……………………………………………………………………………

(4) ……………………………………………………………………………

Thank you for your cooperation

52

PART D: Resource capacity factors related to SME performance

Answer the following questions by ranking the different options on a Likert scale of

1 – 5, where:

(1) = Most important

(2) = Important

(3) = Neutral

(4) = Less important

(5) = Least important

1. The following financial human resourcesare important for the growth of your business

1 2 3 4 5

Book keeping skills

Financial statements preparation

Debit and credit control

Budgeting skills

Tax

2. The following managerial functionscontribute to the performance of yourbusiness

Skilled personnel

Financial Management skills

Planning (forecasting) skills

Customer care

Marketing knowledge and skills

Knowledge of human resources practices

53

4. How do you estimate your enterprise’s performance?

a) Excellent ( )

b) good ( )

c) not bad ( )

d) not good ( )

e) no idea ( )

5. How do you estimate your enterprise size?

a) Capital ( )

b) Number of employees ( )

c) Number of asset owned ( )

Thank you for your cooperation