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An Analysis of Bottlenecks to SME Growth in Developing Countries: A Case of Malawi

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Trade and industry have been key and crucial aspects of economic growth in every country and in most economies that are matured and self reliant, overall productivity has been realised mostly from trade activities. The most important question entrepreneurs struggle to address is where their businesses would be after some period of time, that is, whether the entities will grow substantially as anticipated by the owners on the onset. A lot of challenges exist that suffocate business especially those in the SME category and the lucky ones among many remain stagnant in size, profitability and efficiency. This paper investigates the key challenges faced by small businesses which hinder most of them from growing to the expected levels with particular emphasis on developing African economies which are mostly donor dependent. Through a questionnaire survey, the study reveals that the SME challenges are multifaceted ranging from basic management skills to access to finance. The findings of this study will assist firstly, the policy makers in the economy to create an environment conducive to the growth and consistent outstanding performance of SMEs in any economy; and secondly the entrepreneurs themselves will be able to identify any self made challenges in their operations and avoid recurrence of the same.
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An analysis of bottlenecks to SME growth in developing
countries: A case of Malawi
Byson Beracah Majanga
Faculty of Commerce, Dept of Accountancy, University of Malawi, The Polytechnic, P/Bag 303, Blantyre,
Malawi.
Abstract
Trade and industry have been key and crucial aspects of economic growth in every country and in most
economies that are matured and self reliant, overall productivity has been realised mostly from trade activities.
The most important question entrepreneurs struggle to address is where their businesses would be after some
period of time, that is, whether the entities will grow substantially as anticipated by the owners on the onset. A
lot of challenges exist that suffocate business especially those in the SME category and the lucky ones among
many remain stagnant in size, profitability and efficiency. This paper investigates the key challenges faced by
small businesses which hinder most of them from growing to the expected levels with particular emphasis on
developing African economies which are mostly donor dependent. Through a questionnaire survey, the study
reveals that the SME challenges are multifaceted ranging from basic management skills to access to finance.
The findings of this study will assist firstly, the policy makers in the economy to create an environment
conducive to the growth and consistent outstanding performance of SMEs in any economy; and secondly the
entrepreneurs themselves will be able to identify any self made challenges in their operations and avoid
recurrence of the same.
Key words: Small and Medium Enterprises, economic development, business growth, SME financing,
entrepreneurship
1. Introduction
Since the dawn of democracy in Malawi in 1993, the business environment has been so conducive to small scale
traders such that many individuals and families have been able to establish their own businesses. This has led to
the increase in the number of small scale businesses to account for at least 80% of business entities in Malawi.
Ever since the world became a global village, business activities have advanced at very fast rate and this has seen
countries getting engaged in trade relations with other countries with little or no difficulties at all. The free trade
benefits realised by most countries have seen the development of business entities within nations. In small
African economies, Malawi being one of them, a number of small businesses have also mushroomed of late. The
blossoming of small scale businesses, many of which are owned by individuals or a group of individuals, has had
a bigger impact on the economic development of Malawi. For instance, the employment rate has increased as the
small businesses established absorb into their systems some work force which the public sector could not
otherwise absorb (Kedrock & Agar, 2007). In addition, the existence of SMEs directly aids the state government
by way of contributing towards the consolidated fund through tax payments based on the businesses’ annual
profits, mitigation of national poverty, and as an economic empowerment vehicle for previously disadvantaged
people (Masarira & Msweli, 2013). The General business environment has not been constantly rosy for business
entities in the private sector and this has not spared the SMEs who by their nature lack the protective corporate
coat enjoyed by government owned entities (Hepworth, 1993), as well as some large businesses in the private
sector and as a result, the SME growth trends over the years has not been as expected. The actual growth of the
SMEs has been dwindling over time and a number of such small scale entities have actually collapsed.
Researchers have attempted to look into the causes of SME failure in Malawi and have established that among
other causes, most SMEs collapse due to lack of finances for survival and growth, registration procedures,
inadequate business skills, HIV Aids pandemic (Wanjohi, 2010). Research conducted by Bowler, Dawood &
Page (2006), estimate that 40% of new business ventures fail in their first year, 60% in their second year, and
90% in their first 10 years of existence.
1.1. Nature of SMEs
The International Finance Corporation (2012) defines a Small and Medium Enterprise (SME) as a firm with less
than 300 employees and total assets less than US$15 Million (for large economies). In smaller economies, an
SME is defined as a firm with less than 20 employees (PECC finance forum, 2003), but according to
International Finance Corporation (2012), an arm of the World Bank Group, the definition of SMEs is well
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understood and appreciated by grouping the businesses on the bases of number of employees, value of total
assets, and value of annual sales or turnover. The IFC classification of SMEs is illustrated in the table below:
Table 1: IFC classification of Small and Medium Enterprises
Scale Number of employees Total assets Annual sales
Micro 10 $100,000 $100,000
Small 50 $3 Million $3 Million
Medium 300 $15 Million $15 Million
Source: International Finance Corporation (2012)
Notwithstanding the classification of SMEs world over, let alone Malawi, their impact on the national GDP has
been so tremendous. SMEs are the back bone of all the economies and are a key source of economic growth,
dynamism, and flexibility in advanced and industrialised countries as well as emerging and developing
economies. They are responsible for between 60-70% net job creations worldwide and are particularly important
for bringing innovative products or techniques to the market (OECD Observer 2006). According to Samuels
(1993), the common business objective for profit seeking firms, whether small or big in size, is growth, and
Nieman et al (2003), identified five stages a business passes through in the process of its growth. The first stage,
called the incubation stage or pre-start up stage, is where the business is still in its conceptual stage where the
entrepreneur cannot harvest anything from it. Following this stage is the start up stage which is associated with
increasing risks and potential for failure. The business’ future at this stage still remains uncertain and as such, the
entrepreneur cannot harvest from the business just as the incubation stage. These two stages require among
others, high level of investing and resilient managerial skills as such entrepreneurs require a strong financial
muscle to survive through these two stages. The next stage in the business growth process is the growth stage
itself where the business shows some fruits for the entrepreneur to harvest. This is where the business gets stable
and established in the industry, acquire a reasonable market share in the industry and show some profitability
potentials. This stage is normally attained after an average period covering one third of the business’ entire life
(Scott & Bruce 1987). From the growth stage, the business evolves to the maturity stage which is characterised
by tougher completion, especially with pressure in the distribution channels. At this stage, sales revenue decline
and the available options to overcome problems faced by the businesses at this stage are mergers and alliances.
In addition to the problems at this stage, profits of the business also go down. Finally, the business reaches its
final stage, called the decline stage. This is where sales and profits rapidly decrease. According to Scott & Bruce
(1987), as the transition from one stage to the next requires change, it will be accompanied by some crisis or
another which tend to be disruptive and these problems of change can be minimized if managers are proactive
rather than reactive. It is therefore crucial for business owners to possess prior knowledge of what generates
crises and what to expect in each stage as this smoothens the process of change.
The purpose of this study is to examine the major factors that affect the growth and operational effectiveness of
SMEs in the developing nations. To accomplish this objective, the paper is divided into five sections. The next
section of the paper reviews the literature on SMEs while the third section describes the methodology used in
this study. The fourth section presents the results and the analysis. Finally, there is a summary and conclusion
section.
2. Literature review
2.1. SMEs contribution to economic development
Quite a number of studies have been conducted on SMEs concerning their positive contributions towards the
national economy; their growth patterns world over, as well as challenges hampering their growth and
performance, including studies by Zimmerer & Scarborough (2002) and Nieman, et al (2003). These made
significant contributions regarding SMEs’ contributions and operations. In their assessment of roles of SMEs in
national economies, Maserira & Msweli (2013), argue that the SME sector is and has been acknowledged
worldwide as an economic powerbase to stimulate economic growth. They further claim that Small and medium-
sized businesses are not merely necessary, but vital in an emerging and growing economy. In their study, they
find that SMEs account for about 91% of the formal business entities, contributing to about 51% of GDP, and
providing almost 60% of employment in South Africa. Supporting these arguments is Cant (2012), who
estimates that small business undertakings create about 80% of all new job opportunities annually in South
Africa and that the sector has been placed on the South African government’s priority list due to its
contributions. PECC Finance Forrum (2003), further indicates that SMEs account for about 88.7% of the work
force in Indonesia, and that they are also significant in enhancing the quality of human resources, nurturing a
culture of entrepreneurship, fostering creativity and opening up new business opportunities Small and medium
enterprises play an important role in the development of a country (Feeney and Riding, 1997). SMEs contribute
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to economic development in various ways: by creating employment for rural and urban growing labour force,
providing desirable sustainability and innovation in the economy as a whole (Fida, 2008). The development of
SMEs is seen as the way to accelerating the achievement of wider socio-economic goals, including poverty
alleviation (Cook & Nixon, 2000). According to the findings of Longley (2006), small businesses with fewer
than 500 employees drive the US economy by providing jobs for every half of the nation’s workforce. According
to Ackah & Vuvor (2011), the SME sector is considered very important in many economies because it provides
jobs, pays taxes, is innovative and very instrumental in countries’ participations in the global market. They
further explain that SMEs account for nearly 93% of the registered businesses in Ghana and therefore play an
important role in economic development by providing employment opportunities, opening up new business
opportunities, enhancing entrepreneurship, and fostering creativity among many other things. According to
Nkwe (2012), SMEs across the world have been identified as vital in achieving industrial and economic
development objectives and that SMEs are earmarked as the cornerstones of both developed and developing
economies. Governments themselves, according to Mutula & Brakel, (2006) view SMEs as major sources of
employment, economic growth and wealth creation and in addition, development of this sector contributes to
poverty alleviation and generation of potential entrepreneurs. Apart from these contributions, Nkwe (2012)
further states that the sector offers linkage development to large industries and essential for a competitive and
efficient market. SMEs support the rural economy in providing income generating activities thus increase the
rate of growth of real per capita income, balance income distribution and improve economic stability. It is also
argued that SMEs offer a large part of the solution to countries like Botswana where there are difficulties faced
by marginalized groups such as disabled, youth and women (Acquah & Mosimanegape, 2007). In addition to
their positive contributions to developing economies, Monks (2010), analyses the contributions of SMEs even to
the already developed economies. Table 2 below shows the contributions made by SMEs to the developed
economies world over.
Table 2: SMEs contributions in developed countries
Economy SME contribution
Australia 73% of businesses are SMEs
Contributes 46% of GDP
Austria 98% of businesses are SMEs
Contributes 56% of the employed population
United Kingdom 99.3% of businesses are SMEs
USA 99.7% of businesses are SMEs
Contributes 50% of private sector employees
Source: Monks (2010)
In his paper, Kongolo (2010), finds that SMEs play a significant role in the national development as they
contribute to the transition of agriculture-led economies to industrial ones furnishing plain opportunities for
processing activities which can generate sustainable source of revenue and enhance the development process.
The creation of SMEs by individuals is commonly termed entrepreneurship which is defined as the emergence
and growth of new businesses (April, 2005) and whose main motivational factor is the maximization of profits
(Nieman et al 2003), which becomes a basic and traditional measure of business growth and success over time
(Samuels, 1993). Unlike other big entities, SMEs are mostly owned by individuals or a small group of
individuals who are involved in the ownership and control of such small business entities and prefer it that way
to being employed due to, according to Zimmerer & Scarborough (2002), the fact that entrepreneurship creates
an opportunity for the trader to be independent and able to achieve what is important to him as a person; and that
with entrepreneurship, the owner of the business is able to reach their full potential since most entrepreneurs use
their businesses as instruments of self expression and self actualization.
2.2. Measuring SME growth
Due to the dimensions in which SMEs are defined, the measurement of their growth is not universal as it also
depends on which dimension it is being defined. Scott & Bruce (1987) defines small based on three aspects that
management is independent, capital is supplied and ownership is held by an individual; and that area of
concentration is mainly local. The International Finance Corporation (2012) defines the same SME on the basis
of monetary values of total assets and annual sales and the number of employees. This means that growth in an
SME may be viewed differently depending on the analysts’ view point. These variations notwithstanding, it is an
undisputable fact that any profit making entity aims at increasing its levels of profits, expand its scope of
operations, and thereafter be able to increase the number of employees, and so on.
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It is the normal anticipation that after the early years of its existence, a business wishes to expand or grow.
Again, depending on one’s view point, business growth is defined differently. Lawder (2001) asserts that
business expansion can be achieved by increasing either the range of products or the number of locations, which
eventually lead to maximising sales and profit. This view point according to Lawder (2001) has been considered
a good measure of growth for most small business owners though from the economic view point it is not without
limitations. As an alternative to define and understand business growth, Kemp, Verhoeven and Zoetermeer
(2002) argues that growth can be achieved by using more production factors (more labour or more capital), or a
more efficient use of these production factors (e.g. higher labour productivity). This means that business growth
must be looked at considering the usage of the production inputs as a proportion of the production outputs.
According to Kemp, Verhoeven and Zoetermeer (2002), when business productivity and efficiency keeps on
increasing over time, it is said to be growing in as far as its contribution to the economy is concerned. In their
research report, Danes, Bonner, Hart and Mason (2009), using turnover as a basis for measuring business
growth, assess the impact of high growth firms on the UK economy on the employment side. They argue that in
both time periods 2002 and 2005, high-growth firms were responsible for the creation of around half of the net
employment change in existing businesses in the UK in the years before the recession. According to White
(1997), the main indicator of business success is growth which can be measured in terms of the magnitude of the
profits, expansions of operations, or even number employees. As Scott and Bruce (1987) pointed out, business
growth, regardless of how it is defined, evolves from stage to stage each of which brings its own challenges to be
dealt with to make growth successful.
2.3. SME challenges to growth
A lot of research has been done on investigating challenges facing SMEs in their quest to expansion, both in
Africa and the world as a whole. In his study, Cant (2012) made a direct link to the lack of marketing skills and
the failure of businesses and concluded that there is a positive correlation between the success of a business and
the need for marketing skills in South African SME’s. In agreement with Cant (2012); Van Aardt (1997); April
(2005); Bowen, Morara & Moreithi (2009) and Jones (2009); argue that small entrepreneurs lack proper
management skills which help to control a wide range of functions when running a business and be able to
compete amongst themselves and other large firms. Other than lack of proper management skills as highlighted
by some scholars, Rudjito (2003) and Ramukumba (2014) mention lack of appropriate technology and low
production capacity as another challenge hindering SMEs’ growth in the African region. It is argued, according
to Monk (1991), that if productivity is to be increased, the efficiency of an existing production process must be
increased and the way in which production is organised must be improved through innovation. Most SMEs use
old and traditional equipment in their operations and they lack transportation and communication infrastructure
not befitting the current business environment where almost everything is automated. This challenge leads to
another challenge of having a restricted market access (Rudjito, 2003 and Cant, 2012).
Much as most scholars attribute SMEs failure to the reasons highlighted, Argent (1976), argues that business
failure cannot wholly and always be attributed to the owner(s) personality, life style, or lack of business
management skills. He says in his study that 90% of small scale businesses fail to grow (or actually collapse) due
to lack of proper financing measures. Storey, Keasy, Watson & Wynarczyk (1987) argue that if SMEs cannot
find the financing they need, brilliant ideas may be frustrated and this leads to a loss in potential growth for the
entire economy. Ackar & Vuvor (2011), state in their study that SMEs in Ghana face challenges in obtaining
credit whenever they desire to expand their operations by failing to devise appropriate development strategies
that will capture the financial services requirements of small and medium entrepreneurs. This according to
Klapper, Allende & Sulla (2002); McKee (2003); Olaiton (2006) and Bowen, Murara & Mureithi (2009) is a
major challenge facing many developing countries, especially in Africa. The challenge of lack of access to
finance has been cited as an important problem for Small and Medium Enterprises. While information on the
financial performance and capital structure of SMEs is generally unavailable, existing surveys by most
researchers indicate that supplier credit and bank borrowing (including leasing) are the main sources of external
SME financing. Based on a 2003 Fundes survey of 687 Small and Medium Enterprises whose results are
summarized in Rodriguez (2003), access to finance was ranked the second most important constraint,
particularly for smaller, industrial and younger firms, in the creation, development or diversification of their
economic activities. Within the access to finance category, credit conditions, relating primarily to interest rate,
maturity, collateral requirements and lending procedures, were perceived to be the most important limiting
factors. Small and Medium Enterprises therefore cannot access sufficient long-term borrowing to allow them to
modernize their operations, while they lack alternative non-bank financing sources. Partly as a result, some
Small and Medium Enterprises resort to the use of informal lending sources or worse still they cease to operate.
Other researchers further discussed reasons why it is harder for Small and Medium Enterprises to access debt
financing. Berger & Udell (1995) found that small and young firms, with generally shorter banking relationships,
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pay higher interest rates and are more likely to be required to pledge collateral. Satio & Villanueva (1981) and
Peel & Wilson (1996) showed that in general, Small and Medium Enterprises have higher costs and reduced
access to financing because of the information asymmetries associated with newer, smaller firms. Furthermore,
Levy (1993) concluded that restricted access to financial services slows the growth of Small and Medium
Enterprises. According to Von Blottinz (2001), a survey conducted among several financial institutions and
lenders involved in SME finance gives some indication that compared to the average of institutions with an
exposure to Small and Medium Enterprises, commercial banks strongly rely on the existence of collateral, but
also use the greatest variety of means to assess their risk. They are also the strongest users of automatic or semi-
automatic credit-scoring systems, which mostly do not work in favour of small entities in need of funding from
such lenders.
3. Research objective
This study was conducted with the aim of identifying the key challenges that hinder SMEs growth in the
developing countries like Malawi. As most of the developing countries world over share similar economic
characteristics, the author projects the challenges and recommendations in this study to apply to all developing
countries. In achieving the goal of the study, and in line with what other researchers have found on the same
issue, the author investigates the challenges on the basis of the following hypothetical areas:
i. Lack of management skills hinders business growth
ii. Advancement of information technology hinders business growth
iii. Financing problems hinder business growth
iv. The Malawi legal environment hinders business growth
4. Methodology
The study was conducted through primary research using structured questionnaire. The researcher followed basic
procedures that are employed when developing the Likert scale questionnaire to investigate the challenges facing
and hindering growth and expansion of SMEs in Malawi and other developing nations. The formulated
statements on the structured questionnaire were based on procedures recommended by Saunders, et al. (2009),
and they culminated into the formulation of the statements that represented main variables of the study as
summarised in Table 3 below.
4.1. Data Collection
Empirical data were collected by means of a survey. The results were used for an empirical analysis of the
research findings. A structured questionnaire was designed, guided by the research aims. The questionnaire
focused on variable statements that would evaluate and analyse the factors hindering the expansion of SMEs
from Malawian small and medium entrepreneurs’ point of view. The researcher surveyed sample of businesses
operating in the City of Blantyre, which is a major industrial and commercial capital of Malawi. The researcher
is of the opinion that the views obtained from this sample reflect the view point of the majority of the businesses
in Malawi as a nation.
4.2. Questionnaire Structure
To make the questionnaires user-friendly, the researcher formulated statements whose response would require
the respondent to agree or disagree with a particular statement based on the Likert-style rating scales with the
rankings signifying the degree of agreement ranging from a scale of “1” referring to “Strongly Disagree” to a
scale of “5” referring to “Strongly Agree” on a five-point rating scale of the structured questionnaire. A five-
point scale was used to assess validity as to the extent of agreement on each statement. In Likert scales, it is
assumed that all participants will perceive “Strongly Agree” as expressing greatest favour or agreement towards
the given statements than “Somehow Agree” and “Strongly Disagree” (Babbie, and Mouton, 2007; Saunders, et
al., 2009; Welman, et al., 2005). The same order of response categories was maintained so as not to confuse
respondents, as recommended by Dillman (2000). Small business owners were asked to rate their responses on
the continuum scale that they were given. The questionnaire also assisted in the formulation of an objective and
scientific report of the study findings.
4.3. Sampling
The structured questionnaire was administered in hard copy format and was delivered to the respondents who
were then followed up for any feedback. Small and medium firms based in the city of Blantyre and involved in
production, retail and service delivery were randomly selected from those that are registered with the Registrar
of Companies. The researcher also used a list of companies from the Malawi Confederation of Chambers of
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Commerce and Industry (MCCCI) which represents the private sector of Malawi; as well as a companies’ list
from the Malawi telephone directory that is prepared by the Malawi Telecommunications Limited (MTL)
4.4. Sampling Adequacy
During data collection, a total of 104 questionnaires were dispatched to various businesses from the commercial
sector in the city of Blantyre, Malawi. Out of these questionnaires, 76 responded to the questionnaire giving a
final response rate of 73.1%.
5. Analysis and Discussion of Research Results
Ratings on each statement were done through univariate analysis by using individual rating statistics and
frequency tables. Overall, the analysis shows that there were varied responses from participants regarding the
extent of their agreement on each of the questionnaire statements. Statements 1 to 6 investigate the challenges to
do with lack of management skills; statements 7 to 10, with challenges on information technology; statements 11
to 15 with challenges on access to finance and statements 16 to 17 with challenges on the business legal
environment in Malawi. This section reports on the study results and analysis of ratings on the questionnaire
statements
Statement 1: We formally are equipped with business management skills: There seems to be a general consensus
among the entrepreneurs that most of them undergo business management courses to understanding the skills
and principles of running their businesses. 69.73% of the respondents agreed (30.26% “Agree”, 39.47%
“Strongly Agree”). Only 23.68% somehow agreed and 3.95% of the respondents disagreed with this statement.
The analysis thus indicates that most business owners understand the need to formally acquire some managerial
skills.
Statement 2: We expose ourselves competitively on the advertising spaces: The study findings indicate the
existence of some appreciation among the entrepreneurs of the need to advertise and market their products or
services. A total of 44.74`% agree (19.74% “Agree” and 25.0% “Strongly agree”) with the above statement,
while only 26.32% disagree and 18.42% “Somehow agree”. The analysis demonstrates that a good number of
entrepreneurs strive to make sure their business is known far and wide by investing in advertising and marketing
campaigns. As concluded in the study by Cant (2012) that there exists a positive correlation between the success
of a business and the need for marketing skills in South African SME’s, it is advisable that SMEs must increase
their investments in acquiring marketing and advertising skills if the chances of survival of these SME’s are to
increase.
Statement 3: Our key positions are held by relations with requisite skills. Some commentators argue that SMEs
have a tendency of not trusting professionals who are not their relatives to run the business, and this has been
equally attributed to business failure. The results of the survey show that 28.93% of the respondents agree that
their key positions are held with relations with requisite skills 39.47% disagrees with the statement, while
31.58% “somehow agree”. The findings demonstrate that 60.51% of the respondents concede the fact that most
SMEs hire relations to run and manage the business entity and a considerable number of them prefer well
qualified and skilled relations.
Statement 4: Our key positions are held by relations regardless of skills. This statement was included to test if
indeed entrepreneurs value skills from their workers or they just disregard the skills as long as a relation is in
charge. The research findings show that a total of 49.99% of the respondents agree (28.95% “Agree” and 21.04%
“Strongly agree”) that entrepreneurs prefer hiring relations regardless of their skills. Only 28.95% disagree,
while 21.05% “Somehow agree” with the above statement. As is the case with statement 3, the findings indicate
that most entrepreneurs do not mind the skills as long as they work with their relations.
Statement 5: Our key positions are held by any individuals with requisite skills. The study showed that only
34.21% agreed with the statement that people hired to run the businesses have the requisite skills. Only 32.89%
disagree and 32.89% “somehow agree” with the statement. The findings from statements 3 to 5 reveal the
existence of weakness in management of SMEs among entrepreneurs regarding the identification of appropriate
skills required to run their businesses.
Statement 6: We maintain a proper accounts recording system. Adom, Amakye, Doh & Anku (2014) suggest
that in order to properly manage the cash flow position of any business, the accounts are to be maintained
regularly and where the entrepreneur lack accounting skills, they must engage a competent book keeper. This
statement was aimed at ascertaining whether the entrepreneurs posses some book keeping skill or engage some
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skilled book keeper to aid them appreciate the financial position of their entity. A vast majority (69.74%) of
respondents agree to the statement and only 30.27% disagree. This analysis demonstrates that most SME owners
do maintain proper accounts in their businesses.
Statement 7: Our operations are automated. This statement, together with statements 8, 9 and 10 was intended to
test the impact of technological change on the performance of SMEs, at least from the entrepreneurs’ own
assessment. The results show that most operations in the SME sector are not automated, or do not use high tech
sophisticated equipment. 34.21% agree with the statement while 26.35 somehow agree with the statement.
Statement 8: Our machine model has been updated at least 4 times since our inception. The survey shows that
31.58% of the respondents agree while the majority disagrees implying generally that there has not been any
significant evolution of the production equipment they use in production.
Statement 9: We have been able to respond to the changes in the machine model we use. From the little number
of operational equipment in statements 7 and 8, a good number of entrepreneurs have been able to replace their
equipment to suit with advancing technology. This is evidenced by 61.84% of the respondents agreeing with
statement 9.
Statement 10: Our competitors have been able to respond and update their models as well. In a perfect
competition, whenever advanced methods of production are discovered and the business still sticks to the old
methods while its competitors adopt the new methods, the business is likely to fail because the competitors will
be able to capture almost the entire market. This statement was intended to test if the SMEs were moving
together with their competitors, technology wise. The results show that both the SMEs and their competitors
were moving at the same pace and therefore the resultant effect is zero. This is evidenced by the majority of
65.78% of the respondents agreeing that competitors were not technologically lagging behind.
Statement 11: More than 50% of our capital requirement is from external sources. This statement was intended
at investigating the capital needs of SMEs to finance the level of their planned and desired operations. The
results show that entrepreneurs conceive great business ideas beyond their capacity to finance and most of them
require financial support from outside their entities. This is supported by the fact that 61.84% of the respondents
agree to the stamen. 13.6% somehow agree and only 25% disagree.
Statement 12: We have been able to obtain finance from private lending institutions. Other than from within the
business itself, SMEs can obtain finance for operations or growth from commercial banks or from government
agencies. This statement intends to test if SMEs are able to obtain finance from such lending institutions,
especially the private commercial banks. The results show that very few SMEs are able to access finance from
these institutions with only 31.58% agreeing with the statement while a majority of 68.42% disagrees.
Statement 13: We have been able to obtain finance through government lending agencies. 18.42% of the
respondents agree with this statement while 81.58% disagrees. SMEs fail to obtain finance from the government
lending agencies due to among others the fact that they are very few in Malawi; and that most of them are used
for political reasons and hence they support only those with allegiance to the ruling party (Amundsen, 2007).
This problem, coupled with corruption is mostly associated with developing countries.
Statement 14: The lending rate and conditions deter us from borrowing for expansion. By the end of 2014, the
bank lending rates in Malawi were hovering around 40% per annum and in addition to this, banks impose some
conditions which include collateral, sound business plans, substantial loan application charges, etc. This
statement was intended to test whether SMEs failed to access finance from commercial banks due to these
factors. 84.21% of the respondents agree to this statement implying that the borrowing rate and other associated
conditions are a great hindrance to SMEs accessing finance.
Statement 15: There is need for the existence of an SME financing institution with soft rates and conditions.
Respondents who agreed with statement 14 were asked a follow up question which intended to find out if SMEs
needed a special establishment to assist them financially. 97.62% agreed to the view of having an institution
which could offer soft rates and conditions to SMEs. As highlighted in Ayadi & Thyri (2015).
Statement 16: We understand the laws applicable in doing business in Malawi. As one of the hypothesis to the
study, the researcher included the legal and regulatory environment as a factor affecting growth of SMEs. This
question was intended to test if the entrepreneurs do understand the business laws and regulations controlling the
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environment they trade in. the results show that a majority of them understand the environment they operate in.
74.99% agreed that they understand their business and legal environment while only 25.01 disagreed with the
statement.
Statement 17: Overall, the laws are a stumbling block to our expansion drive. The respondents were then asked
to assess the impact of the laws and regulations on their operations, that is, if they affect their growth potential.
Only 17.11% of them agree to the statement while a majority of 51.31 disagreed and 31.58% somehow agreed
with the statement.
The analysis of the 17 statements which made the core theme of the survey is summarised in Table 3 below:
Table 3: Statistical summary of the univariate analysis on the questionnaire statements
Rating scale %
Statement Total Mean
SD D SHA A SA µ
1. We formally are equipped with
business management skills 2.64 3.95 23.68 30.26 39.47 100 4.00
2. We expose ourselves competitively
on the advertising spaces 10.52 26.32 18.42 19.74 25.00 100 3.22
3. Our key positions are held by
relations with requisite skills 14.47 25.00 31.58 18.42 10.53 100 2.85
4. Our key positions are held by
relations regardless of skills 9.21 19.74 21.05 28.95 21.04 100 3.32
5. Our key positions are held by any
individuals with requisite skills 21.05 11.84 32.89 23.68 10.53 100 2.91
6. We maintain a proper accounts
recording system 13.16 17.11 23.68 26.32 19.74 100 3.22
7. Our operations are automated 25.00 14.47 26.32 25.00 9.21 100 2.79
8. Our machine model has been updated
at least 4 times since our inception 42.11 18.42 7.89 22.37 9.21 100 2.38
9. We have been able to respond to the
changes in the machine model we use 19.74 18.42 22.37 14.47 25.00 100 3.07
10. Our competitors have been able to
respond and update their models as well 18.42 15.79 14.47 23.68 27.63 100 3.26
11. More than 50% of our capital
Requirement is from external sources 15.79 9.21 13.60 40.79 21.05 100 3.42
12. We have been able to obtain finance
from private lending institutions 30.26 38.16 13.16 11.84 6.58 100 2.26
13. We have been able to obtain finance
through government lending agencies 46.05 35.53 14.47 3.95 0.00 100 1.76
14. The lending rate and conditions deter
us from borrowing for expansion 5.26 10.53 23.68 17.11 43.42 100 3.83
15. There is need for the existence of an
SME financing institution with soft
rates and conditions 0.00 2.63 22.37 50.00 25.00 100 3.97
16. We understand the laws applicable
in doing business in Malawi 10.53 14.47 21.05 5.26 48.68 100 3.67
17. Overall, the laws are a stumbling
block to our expansion drive 27.63 23.68 31.58 17.11 0.00 100 2.38
N = 76
Key:
SD: Strongly Disagree (Ranking 1) D: Disagree (Ranking 2)
SHA: Some How Agree (Ranking 3) A: Agree (Ranking 4)
SA: Strongly Agree (Ranking 5)
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The Table 3 above indicates that Statement 1: “We formally are equipped with business management skills” has
the highest mean (µ =4.00) on the response ratings seconded by Statements 15 and then by statement 14: “There
is need for the existence of an SME financing institution with soft rates and conditions”; and “The lending rate
and conditions deter us from borrowing for expansion”, with means of 3.97 and 3.83 respectively.
Overall, ten statements (hypotheses), which are 1, 15,14, 16,11, 4, 10, 6, 2, and 9 show means that are above
average >3.0) signifying the above-average rankings that in the statements’ intention, the hypothesis cab be
accepted without making a significant error (Field, 2000).
6. Summary and Conclusion
Business failure has been associated with a lot of factors both in the developed and the developing countries.
SMEs have as well been a subject of these collapses especially at their earlier stages. As SMEs contribute greatly
to the sustainable economic growth of any country, the fall of an SME could translate to grave effects on the
economy as a whole and therefore SME survival and growth must be at the heart of the entrepreneurs
themselves, policy makers as well as players in the financial sector. The results of this survey have shown that,
besides the fact that entrepreneurs hire anyone to do some technical tasks as long as they are their relations, the
main culprit of SME stunted growth and failure in the developing countries is the issue of financing. The results
show that most financial institutions operating in the developing countries set conditions which are usually
beyond the reach of the SMEs especially when they are at their youngest stages. The conditions mostly favour
the large entities which already enjoy economies of scale and their affinity for finance may not be as high as that
of the SMEs. Availing finance to SMEs with softer conditions, therefore, would help revamp the operations of
SMEs. Due to their positive impact on the national economies, policy makers may assist SMEs by considering
establishment of other financing avenues with tailor made products for SMEs as a long term policy independent
of political influence.
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