THE COPPERBELT UNIVERSITY

(In Association With)

TECHNICAL & VOCATIONAL TEACHERS’ COLLEGE

NAME: CHILUFYA KALEMBWE

THE CHALLENGES FACED BY SMALL AND MEDIUM

LEARNING BY DOING
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 CHAPTER ONE

1.0 INTRODUCTION

This chapter discusses the background of the study, the statement of research problem, the
research objectives, research questions, and the significance of the study

1.1 BACKGROUND

There is growing recognition of the important role small and medium enterprises (SMEs) play
in economic development. The SMEs constitute about 90% of total business units in Zambia
and account of 60% of Zambia’s employed labour force (ABOR & BIEKPA, 2005). They are
often described as efficient and prolific job creators, the seeds of big businesses and the fuel
of national economic engines. Even in the developed industrial economies, it is the SME
sector rather than the multinationals that is the largest employer of workers (ANTWIASARE
& ADDISON, 2000). This is also supported by a research done on small businesses in the
United States by Dr. Charles Ou in June 2006, which indicated that U.S. small businesses
numbered 23 million in 2003, and it employed about half of the private sector work force,
and also produces about half of the nation’s private sector output. The Korean Development
Institute (KDI) in its study, “Building the Foundations for the Development of

SME in Zambia” (September 2008) noted rather grimly, the obstacles these SMEs face daily
in Zambia. The study enumerated these as smaller sizes of the SMEs; they are few in number
and lack competitiveness internationally. These factors affect the SMEs in many ways. For
instance, over 80% of SMEs in Zambia are reportedly having employees numbering less ten.
The smaller size of these SMEs means less value addition as fewer processes are possibly
involved in the production.

1.2 STATEMENT OF PROBLEM

Despite the role of SMEs in the Zambian economy, the financial constraints they face in their
operations are daunting and this has had a negative impact on their development and also
limited their potential to drive the national economy as expected. This is worrying for
developing economy without the requisite infrastructure and technology to attract big
businesses in large numbers. Most SMEs in the country lack the capacity in terms of qualified

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personnel to manage their activities. As a result, they are unable to publish the same quality
of financial information as those big firms and as such are not able to provide audited
financial statement, which is one of the essential requirements in accessing credit from the
financial institution. This is buttressed by the statement that privately held firms do not
publish the same quantity or quality of financial information that publicly held firms are
required to produce. As a result, information on their financial condition, earnings, and
earnings prospect may be incomplete or inaccurate. Faced with this type of uncertainty, a
lender may deny credit, sometimes to the firms that are credit worthy but unable to report
their results (GOLDSMITH, 1996).

1.3 RESEARCH OBJECTIVE

To highlight the specific challenges inhibiting SMEs in accessing credit in Ghana with a view
to proposing some recommendation to help mitigate these challenges.

1.4 RESEARCH QUESTION

1.4.1 Does SMEs have challenges in accessing credit in Ghana? What are they? ¾To what
extent has these challenges affected their operations?

1.4.2 What alternative sources of funding are SMEs resorting to and how viable are these?

1.5 SCOPE AND LIMITATION OF STURDY

Studying why SMEs in Zambia have difficulty in accessing credit or funding from financial
institutions from the perspective of the operators of these SMEs is crucial since it would
present the problem from the perspective of the SMEs thereby making it a base line study for
policy interventions by state agencies, development partners and non-governmental
organization with missions to develop the SME sector.

1.6 SIGNIFICANCE OF STUDY

The Thesis is organized as follows: The first chapter contains the background which
introduces the topic and touched on some of the issues with regards to SME access to credit.
The literature review that forms the second chapter looks at the various financing schemes
available to SMEs and the challenges these SMEs faced in accessing credit in Zambia.
Thirdly, the method used in gathering the data forms the third chapter. Chapter four contains

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the data analysis, presentation and discussion of the findings. The conclusion and
recommendations will form the chapter five of this Thesis.

CHAPATER TWO

2.1 LITERETURE REVIEW

The literature review describes aspects connected to the study of the challenges faced by
SMEs in obtaining credit in Zambia. It therefore follows a particular layout. First, some
definitions relating to SMEs are given, which is followed by looking at the characteristics of
the Zambian SMEs. This paves the way for the discussion of their contribution to the
economic development and growth and without forgetting to also look at the literatures on the
constraints SMEs faced in accessing credit.

2.1.1 Some SME Definitions

According to TULLER and LAWRENCE (1994) there is no universal definition for SMEs
since the definition depends on who is defining it and where it is being defined. For example,
in Canada SME is defined as an enterprise that has fewer than 500 employees and small
enterprise as one that has less than 100 employees. On the other hand, the World Bank
defines SMEs as having no more than 500 employees. SMEs can be defined in two ways:
based on the number of employees in an enterprise and/or the enterprises fixed assets.
According to GOLDSMITH (1996), the size of the enterprises employment is the most
important criterion used in Ghana. But one must be cautious when defining SMEs based on
fixed assets because of the continuous depreciation in the exchange rates, which often makes
such definition out-dated. UNIDO defines SMEs in developing countries based on the
number of employees in an enterprise. A small enterprise has between 5 and 19 workers and
takes the example of the ubiquitous small shops in the cities such as hair dressing saloons and
chop bars. A medium enterprise has 20 to 99 workers and these include manufacturing firm
and exporting companies.

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The Ghana Statistical Service, in their 1987 Ghana Industrial Consensus, considers firms
employing between 5 and 29 employees and with fixed assets not exceeding $100,000 as
small scale, while those employing between 30 and 99 employees medium scale category.

2.1.2 Characteristics of SMEs in Ghana

A distinguishing feature of SMEs from larger firms is that the latter have direct access to
international and local capital markets whereas the former are excluded because of the higher
intermediation costs of smaller projects. In addition, SMEs face the same fixed cost as Large
Scale Enterprises in complying with regulations but have limited capacity to market product
abroad (ABOR & BIEKPA,2005). SMEs in Zambia can be categorized into urban and rural
enterprises. The former can be subdivided into ‘organized’ and ‘unorganized’ enterprises.
Organized ones tend to have employees with a registered office and are mostly solely owned
by an individual whereas the unorganized ones are mainly made up of artisans who work in
open spaces, temporary wooden structures or at home and employ little or in some case no
salaried workers. They rely mostly on family members or apprentices. Rural enterprises are
largely made up of family groups, individual artisans, women engaged in food production
from local crops. The major activities within this sector include: soap and detergents, fabrics,
clothing and tailoring, textile and leather, village blacksmiths, timber and mining, bricks and
cement, beverages, food processing, wood furniture, electronic assembly, agro processing,
chemical based products and mechanics as cited by (HALLBERG & KRISTEN,2000).

2.1.3 SMEs Contribution to Economic Development and Growth

“The private sector is the engine of growth of the economy therefore they must be given the
necessary tools to increase their growth.”Economic development is a process of economic
transition involving the structural transformation of an economy through industrialization,
rising GNP, and income per head. Economic growth on the other hand, contributes to the
prosperity of the economy and is desirable because it enables the economy to consume and
contribute to more goods and services by increasing investment, increase in labour force,
efficient use of inputs to expand output, and technological progressiveness. Any nation that
experiences economic development and growth will benefit from improvement in the living
standards especially if the Government can assist in growth by implementing complementary

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and growth-enhancing monetary and fiscal policies (BREANLEY, RICHARD & STEWARD
MYERS, 1996) The SME sector is considered very important in many economies because
they provide job, pay taxes, are innovative and very instrumental in countries participations in
the global market. TULLER and LAWRENCE(1994) state that SME activity and economic
growth are important because of the relatively large share of the SME sector in most
developing nations and the substantial international resources from sources like the World
Bank group, that have been channeled into the SME sector of these nations.

2.1.4 Constraints Faced by SMEs in Accessing Credit

HALLBERG and KRISTEN (2000) indicate that access to bank credit by SMEs has been an
issue repeatedly raised by numerous studies as a major constraint to industrial growth. A
common explanation for the alleged lack of access to bank loan by SMEs is their inability to
pledge acceptable collateral. In their view the current system of land ownership and transfer
regulations clearly retards and to some extend limits access to formal credit. First, due to lack
of clear title to much usable land in Ghana, there is a limited amount of real property that can
be put up as collateral.

Second, a Government embargo on transfer of stool and family land has further restricted
land availability for collateral. Finally, where title or lease is clear and alienable, transfer
regulation needlessly delay the finalization of mortgages and consequently access to
borrowed capital. ABOR and BIEKPA (2005) supported the view of ANTWI-ASARE and
ADDlSON (2000) that from the view point of private sector, problems related to finance
dominate all other constraint to expansion .They claimed that the available of collateral plays
a significant role in the readiness of banks to meet the demand of the private sector. Collateral
provides an incentive to repay and offset losses in case of default. Thus collateral was
required of nearly 75 percent of sample firms that need loans under a study, which they
conducted on the demand supply of finance for small enterprises in Zambia. The study also
indicated that 65 percent of the total sample firm had at various times applied for bank loans
for their business.

CHAPTER THREE

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3.1 THEORETICAL FRAMEWORK:

Many theories have raised the issue on the financing gap for small and medium enterprises
(SMEs), meaning that there are a good number of SMEs when given access to credit could
use it profitably to grow their businesses but cannot obtain credit from the formal financial
system (bank), because of the inability of the SMEs to meet the stringent requirement of these
financial institutions. The issue of lack of credit to SMEs can be looked at from two fronts:
the financial institutions (banks) and the SMEs operators.
3.2 CONCEPTUAL FRAMEWORK

Due to time constraint, a relatively small sample size of 80 SMEs will be employed and as
such it limits the extent to which we will generalize the issues raise. Again it would will be
better to have sample some SMEs in the Middle and Northern belt of the country compared to
just those in the Southern belt forming the sample frame. But if we have time constraint, we
can travel to those areas. It is also very difficult in getting information from the selected
SMEs because of fear that the information given would one way or the other get to the tax
authorities as most of them do not fulfill their tax obligation despite the assurance the
researchers have given them.

CHAPTER FOUR

4.1 QUALITATIVE DESIGN

Qualitative design will be used in this study. Qualitative research involves collecting and
analyzing non-numerical data (e.g., text, video, or audio) to understand concepts, opinions, or
experiences. It can be used to gather in-depth insights into a problem or generate new ideas
for research (ABOR & BIEKPA, 2005).ANTWI- ASARE and ADDISON explained that in
qualitative research, the researcher focuses on the way people interpret and make sense of
their experiences and the world in which they live which eventually enables them to explore
the behavior, perspectives, feelings and experiences of people and what lies at the core of
their lives. This is generally done through: interviews, observations and focus group
discussions. Despite this design having higher degree of validity because of its flexibility in
data collection through the method of triangulation than quantitative design, its method of
drawing conclusion is questionable by many researchers(GOLDSMITH, 1996).This could be

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because the researcher is not completely detached from the study hence the aspect of
subjectivity. In addition, qualitative researchers tend to encounter some difficulties when
studying human beings where individuals’ feelings, attitudes or complex and need to be
quantified (BREANLEY, RICHARD & STEWARD MYYERS, 1996).

4.2 SAMPLE SIZE AND PROCEDURES

Following (GOLDSMITH, 1996) definition of SMEs that classified SMEs into: Micro
enterprise – (1 to 9 workers), Small enterprise – (10 to 29 workers) and Medium enterprise –

(30 to 140 workers). A sample size of the 80 participants was targeted for responses. 80
questionnaires were distributed to these SMEs out of which we received responses from 68
respondents. This represented about 85% of the response rate which we deemed to be
impressive for this study.

The method of convenience sampling will be employed in arriving at the 80 SMEs, which the
researchers believe possesses the experience relevant for this study and who have sufficient
time and were willing to participate (TULLER&LAWRENCE, 1994). This technique,
convenience sampling, involves obtaining responses within the sample frame from willing
respondents and also their availability for the study.

After deciding on the target population, a list of SMEs is received from the National Board of
Small Scale Industries (NBSSI). After contacts made to seek the consent of some of these
SMEs to be part of this research, the numbers of 80 SMEs were therefore arrived at. The
various SMEs that will agree to be part will be subsequently contacted and given a brief
about what the study sort to achieve through the means of telephone. After getting the
required number for the study, the questionnaires will then dispatched. The respondents will
then given a week to complete the questionnaires, as this will give them ample time in giving
out the right responses.The data gathered will then be analyzed through the means of relative
frequencies and graphs; tables and charts after the data is edited for completeness.

The advantage here is that respondents will participate on their own volition and not selected
against their will. This technique was chosen to boost response rate because respondents in
this sector are reluctant in giving out information since they believed in one way or the other,
information about their business may leak through to competitors and also exposed them to
tax authorities. Besides, the quality of responses was high as participants took their time to
respond to the questionnaire.

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4.3 TARGET POPULATION

SMEs are scattered across the length and breadth of the country with most of them located in
Lusaka, Western, Central and Greater southern regions of the country. These regions were
identified to have high concentration of SMEs. In adopting a case study method in a research,
the selection of the research site is most important (HALLBERG&KRISTEN, 2000). With
this in mind, Greater Southern region was selected for the following reasons.

Firstly, most of the SMEs are located in this area, so are the banks and non-bank financial
institution since the capital city Livingstone is also located in this region. With the objectives
of the study in mind, selecting this region afforded the researcher the opportunity to contact
SME operators who have made numerous contacts with different banks for financial support
and therefore have a lot of experience to share.

Secondly, it was easier for the researchers to approach these SMEs operators since the
researchers are also located in the same region. Choosing any other region would mean
travelling a long distance just to make contact with the SMEs operators, which would have
been very difficult considering the time frame of this Thesis. The sampling frame however
for this study chose a few SMEs in the Greater Southern region, specifically those located in
the rural areas part of the Greater central of Zambia because of the easy access to these
SMEs.

4.4 RESEARCH BUDGET

(GOLDSMITH, 2017) and (ABOR AND BIEKPA, 2005), like most writers on the subject of
SME financing, describe two basic types of financing, namely debt and equity.
(BREANLEY,RICHARD & STEWART,1996 ) and Anderson and (TULLER &

LAWRENCE,1994) describe debt as funds borrowed to be paid at a future date and a fee,
referred to as interest to be paid an at agreed time schedule. The payments of interest are
supposed to be done regardless of whether the firm makes profit or loss. Equity, on the other
hand, is defined as funds contributed by entrepreneurs or investors who become owners or
part owners of the firm and whose returns are primarily based on the profits. This implies that
if a firm fails to make profits its owners do not get any returns.

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Generally, equity funds are long-term funds but debt may be short to medium or long-term.
Mention another basic classification of funds: internal and external funds. Internally
generated funds come from a number of sources within a company and are more frequently
employed. They include operational and investment profits, sales of assets, extended payment
terms, reduction in working capital and accounts receivable. Another important source of
internally generated funds is expediting the collection of receivable accounts. This releases
funds that may be locked up with suppliers and distributors for the firm’s use. Sources that
are external to a firm include owners, friends and relatives, commercial banks suppliers and
distributors, government and non-government agencies (ABOR & BIEKPA, 2005).

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4.5 RESEARCH ETHICS

Since research often involves a great deal of cooperation and coordination among many
different people in different disciplines and institutions ,ethical standards promote the values
that are essential to collaborative work, such as trust ,accountability ,mutual respect and
fairness. For example, many ethical norms in research, such as guidelines for authorship,
copyright, and patenting policies, data sharing policies and confidentiality rules in peer
review, are designed to protect intellectual property interests while encouraging
collaboration. Most researchers want to receive credit for their contributions and do not want
to have their ideas stolen or disclosed prematurely (ANTWI-ASARE & ADDISON, 2000).

The researcher protects confidential communication, such as papers or grants submitted for
publications, personal records, trade or military secrets and patient records. Publish in order
to advance research and scholarship, not to advance just your own career. Avoid wasteful and
duplicative publications. Respect your colleagues and treat them fairly. Strive to promote
social good and prevent or mitigate social harms through research, public education and
advocacy.

In addition, an ethical norm in research also helps to build public support for research. People
are more likely to find research project if they can trust the quality and integrity of research.

Also, many of the norms of research promote a variety of other important moral and social
values, such as social responsibility, human rights and animal welfare, compliance with the
law and public health and safety. Ethical lapses in research can significantly harm human and
animal subjects, students and the public for example, a researcher who fabricates data in a
clinical trial may harm or even kill patients and a researcher who fails to abide by regulations
and guideline relating to radiation or biological safety may jeopardize his health and safety or
the health and safety of staff and students.

Furthermore, many of the ethical norms help to ensure that researchers can be held
accountable to the public. For instance, federal policies in research misconduct conflicts of
interest, the human subjects’ protections and animal care and use are necessary in order to
make sure that researchers who are funded by public money can be held accountable to the
public.

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 CHAPTER FIVE

5.1 DATA ANALYSIS

A descriptive statistics was found to be an ideal analysis technique and subsequently used in
ascertaining the difficulties that SMEs faced in accessing bank loans. Aided by the tabulation
of data extracted from a close–ended questions surveyed, it was easier to understand the
issues identified by the respondents. Also to help answer the question whether or not SMEs
have challenges in accessing credit in Zambia as contained in the objectives in chapter one,
the below hypothesis were formulated and tested using test of proportion: Ho: Not more than
50% of SMEs face challenges when accessing credit

H1: More than 50% of SMEs face challenges accessing credit these could also be expressed
statistically to be:

Ho: P = 0.5

H1: P > 0.5

Where P = the proportion of respondents who face major challenges in accessing credit in
Zambia.

n = sample size, hence n=68 and X being the number of respondents facing difficulty in
accessing credit

Level of significance: Let α = 0.05

Test Statistics: Z = X – np √ (npq)

Where z follows the standard normal distribution N (0, 1)

Null distribution: X follows B (68, 1/2) and since np = n (1-p) = 68 x 0.5 > 5, we can
approximate the binomial to the normal distribution

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Decision Rule: If the computed p value is less than the level of the significance α = 0.05 we
reject Ho otherwise we fail to reject Ho ie p* = P(X ≥ x/ Ho)

Computation: Given that n = 68, x = 50 and p = 0.5 Our P value can be calculated as: 31P* =
P( x ≥ 50) By approximating the binomial to the normal distribution, we had P* = P Z ≥ 50 –
68*0.5 √ (68*0.5*0. (n = 50 has been reduce to 49.5 due to continuity correction) This
implies, P* = P (Z ≥ 3.759) = 1 – P (Z ≤ 3.759) = 1 – 0.9999 (read from the Standard Normal
Table) = 0.00

Decision: Since the P value ( p* = 0.00) < the level of significance, we reject Ho

Conclusion: The small P* value of 0.00 which is far less than the level of significance gives
us enough evidence to conclude that more than 50% of SMEs face challenges accessing
credit.

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 CHAPTER SIX

REFERENCE

Abor, J, and Biekpa, N, (2005) CORPASRATE DEBT POLICY OF SMALL and MEDIUM
ENTREPRISE IN ZAMBIA. University of Stellenbosch: South Africa.

Antwi-Asare, T. O and E.K.Y Addison (2000) FINANCIAL SECTOR REFORMS AND

Brealey, Richard, A. and Stewart, C. Myers. (1996) PRINCIPLE OF CORPORATE

Goldsmith, R.W. (1996) FINANCIAL STRUCTURE AND DEVELOPMENT, Yale

Hallberg, Kristen (2000) A MARKET ORIENTED STRATEGY FOR SMALL AND

Tuller, Lawrence, W. (1994) ENTREPRENEURS GROWTH STRATEGY. Bob Adams,

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