Microfinance Institutions and Economic Growth of Small & Micro-Enterprises

(Smes)
MICROFINANCE INSTITUTIONS AND ECONOMIC GROWTH OF SMALL & MICROENTERPRISES (SMES)
ACASE STUDY OF (UWMFO) MICRO FINANCE INSTITUTION
BY
HENRY EGYEYU
DEDICATION
To the memory of my grand father
Daniel Egeyu
Whose love & enthusiasm for academia first kindled mine?
ABSTRACT
This research study investigates the impact of microfinance institutions on entrepreneurial
development of Small & Micro-enterprises (SMEs) that are craving for growth and development
in a war revived district called Gulu. The researcher used questionnaire as an instrument of
primary data collection. Tables and simple percentages were used in data presentation. For clear
analysis, the study centers on two broad variables; the dependent variable which is
entrepreneurial development and the independent variable which is microfinance institutions.
Three different hypotheses were formulated and tested using various statistical tools such as chisquare test, analysis of variance and simple regression analysis. The study reveals that (i) there is
a significant difference in the number of entrepreneurs who used microfinance institutions and
those who do not use them; (ii) there is a significant effect of microfinance institutions activities
in predicting entrepreneurial productivity; and (iii) that there is no significant effect of
microfinance institutions activities in predicting entrepreneurial development. The researcher
concludes that microfinance institutions world over and especially in Gulu are identified to be
one of the key players in the financial industry that have positively affected individuals, business
organizations, other financial institutions, the local government and the economy at large through
the services they offer and the functions they perform in the economy.
CHAPTER ONE
INTRODUCTION AND BACKGROUND
1.1 Introduction

In this chapter, several sub themes have been covered and it basically lays down the draft to
guide this study which is designed to establish the relationship between micro finance
institutions and the economic growth of Small & Micro-enterprises (SMEs) in Gulu taking
UWMFO as a case study. This particular theme covers; the Background to the study, Problem
statement; the Research objectives, research questions, scope of the study and significant of the
study.
1.2 Background of the study
According to the Savings Promotion and Enhancement of Enterprise Development (2006), it is
noted that by providing small loans and savings facilities to people who are excluded from
commercial financial services, microfinance institutions has become a strategy for reducing
poverty in virtually all communities in the world. Access to credit and deposit services is a way
to provide poor women and men with opportunities to take an active role in their respective
economies through entrepreneurs and building income, bargaining power, and social growth.
The early years of the 1970s and 1980s witnessed the rapid search for ways by the International
Development Organizations on how the poorer members of the Community who have been
under looked by the commercial institutions could get access to credit facilities. The result of this
was the emergence of Micro finance Institutions (MFIs) Microfinance institutions Competence
Centre, (2001).
A Micro finance Institution is an organization that offers financial services to low income
populations. Almost all of these other micro credit institutions can only take small amounts of
savings from their own borrowers not from the general public, Microfinance institutions Forum,
and (2001).
Microfinance institutions refers to all types of financial intermediation services (savings, credit
funds transfer, insurance, pension remittances, etc.) provided to low-income households and
entrepreneurs in both urban and rural areas, including residents in the public and private sectors
and the self-employed. Robinson M, (2003). Effective, long-term provision of these services
occurs through microfinance institutions that adhere to the key principles endorsed by the
Consultative Group to Assist the Poorest (CGAP) and its 28 member donors, which were further
endorsed by the Group of Eight leaders at a Summit on June 10, 2004. The fourth key
microfinance institutions principle states that Microfinance institutions can pay for its self, and
must do so if it is to reach very large numbers of poor people (www.cgap.org).
The rhetoric surrounding Microfinance institutions remains extraordinary and almost shameless.
For years (and indeed, in many cases, until now) programmes blithely asserted that they were
serving the poorest of the poor and has empowered the local community more especially the
local women entrepreneurs whom in most cases are taken to fall in the lower precedents when it
comes to financial issues. But evidence indicates that this is not the case. In Uganda for example,
while the PEAP policy document assumes that the poor who do not have access to formal
financial services was targeted by the microfinance institutions MFPED, (2001).

In Uganda today, practitioners and donors are increasingly focusing on extending financial
services to the poor in frontier markets and on the integration of microfinance institutions in
financial systems development. The recent introduction by some donors of financial system
approach in microfinance institutions which emphasizes favorable policy environment and
institution - building has improved the overall effectiveness of microfinance institutions and
other frontier markets, PEAP (2001).
Microfinance institutions (MFIs) are considered crucial in serving the rural markets which
formal financial institutions may not find commercially viable to serve. This is because of their
simple and cost effective organizational structures and ability to respond to clients needs since
they are member owned, governed, and used. However, MFIs in Uganda are faced with a
number of constraints that make them risky providers of financial services. They have weak
governance structures, lack of capacity to effectively manage the institutions, lack of regulation,
and inadequate supervision. This has led to the problem of loss to both members and nonmember deposits and share contributions in MFIs, and some MFIs are operating outside the
Cooperative Act and bylaws. Since 2005, the Government of Uganda has focused its support on
the microfinance institutions sector in a bid to increase outreach to rural areas.
As an effective financial tool for socio-economic development, today microfinance institutions
has gained enormous success in tackling poverty on a global scale and helping various
governmental and non-governmental actors to achieve their Millennium Development Goals
(MDGs 2005 Report). Given the positive impact of microfinance institutions on small business,
agriculture, education, health, and other indicators of development, the practice of micro-credit is
crucial to poverty alleviation, which is a key feature of many African government agenda and
Micro credit Association/groups aspirations.
UWMFO is a micro finance service company incorporated in March 2002.With the aim of
providing micro credit services to the poor communities at a favorable interest rate, the
organization is currently operating in war affected, high-density urban areas of Gulu district
located in Northern Uganda. The business is operated under the name UWMFO.
The micro Finance institution is dedicated to providing financial services to low-income people
and medium business entrepreneurs hence helping them to obtain business products and services
they need. UWMFO offers financial assistance to small and medium size businesses in a way
that adds value to all stakeholders by delighting its customers, improving on their know-how and
network of business contacts, hence saving the clients money and time by allowing money
lending professional to handle their business needs. It should be noted that Very few moneylending institutions possess all the services and products that most businesses require for all of
their businesses. They rely on the moneylenders that can provide one-stop financing for all
business services, at a reasonable interest rate, while overseeing the loan process to ensure the
highest benefit possible.
UWMFO is such a money lender whose core goal is to give its clients the financial support they
need, with maximum efficiency and reliability and this is enhanced By providing fast response,
expertise, and high-quality solutions to their businesses, UWMFO generates satisfied repeated

customers services and This provides a stable retainer base that creates consistent profits and
guaranteed poverty reduction amongst the local population.
Today, the micro industry and the greater development community share the view that
permanent poverty reduction in various parts of the country and Gulu inclusive requires
addressing the multiple dimensions of poverty within an individual scope to the wider spectrum
of both the informal and formal women and men association or groups involved in micro, small
and medium scale business entrepreneurs by empowering them financially through the
provisions of the diverse services being offered by the various micro finance institutions. Its
therefore upon such a background that the researcher would like to assess the contribution of
Microfinance institutions in empowering women entrepreneurs in Gulu taking a case study of
UWMFO.
1.3 Problem Statement
According to (FinScope2007), in Uganda, lack of access to financial services is one of the
biggest obstacles to development. This is especially true for the rural and peri-urban population,
particularly women and small scale farmers, as growth in the financial sector has tended to
concentrate on the densely populated urban areas. Only 38% of Ugandans have access to
financial services; people living in rural and peri-urban areas are more likely not to be served
(65%) than those living in urban areas (52%); and women (66%) are more likely not to be served
than men (58%).
Association of Microfinance institutions of Uganda (AMFIU) (2002); Reports shows that though
several attempts have been put in place to increase the accessibility of the micro finance
institutions services to empower the local population, significant challenges still impedes the
efforts as has been observed in the low turn up ratio of the institution to the demand of the local
poor for the various services offered by the institution due to the numerous obstacles both within
and outside the micro finance industry and its upon such a back ground that this research is
designed to establish the relationship between micro finance institutions and the economic
growth of Small & Micro-enterprises(SMEs) in Gulu taking UWMFO as a case study.
1.4 Purpose of the study
The overall objective of the study is to establish the relationship between microfinance
institutions and Economic Growth of Small & Micro-enterprises (SMEs) in Gulu taking
UWMFO as a case study.
1.5 Objectives of the study
i. To find out the challenges faced by microfinance institutions in Gulu.
ii. To find out the level of economic growth of Small & Micro-enterprises (SMEs) in Gulu.
iii. To establish the relationship between microfinance institutions and Economic Growth of
Small & Micro-enterprises (SMEs) in Gulu?

1.6 The Research Questions

i. What are the challenges faced by Microfinance institutions in Gulu?
ii. What is the impact of microfinance institutions on Economic Growth of Small & Microenterprises (SMEs) in Gulu?
iii. What is the relationship between Microfinance institutions institution and Economic Growth
of Small & Micro-enterprises (SMEs) in Gulu?
1.7.0 The Scope of the study
For purposes of clarity the scope of the study has been broken in to three which includes;
1.7.1 Content scope
Here, the study will focus contextually on establishing the relationship between microfinance
institutions and the economic growth of Small & Micro-enterprises (SMEs) in Gulu taking
UWMFO as a case study.
1.7.2 Geographical scope
This particular research was conducted in the geographical area of Gulu that is, the four divisions
of Pece, Layibi, Laroo, and Bardege with critical focus on a selective parishes to gain a
representative sample area.
1.7.3 Time scope
The researcher will take seven months while conducting the study and its believed to commence
from January 2012 and ended in July 2012.
1.8 Significance of the Study
The research will enable the researcher to acquire a bachelors degree in business administration
of Gulu University.
The study findings will enable the community to use the information so as to have positive
feelings towards MFIs and make proper use of the services offered by MFIs so as to reduce
poverty.
The research Report that was written could benefit a number of stakeholders especially the
community, the local leaders, MFIs and the government in including those that make a collective
attempt to bring about changes in certain social Institutions or create an entirely new order for
the better merit of the rural population.

The study findings could be useful to the MFIs since it formed baseline recommendations, their
planning and setting up policy measures upon the likely problems/challenges that were realized
through this study.
The study was of paramount importance to the government whose ultimate goal is poverty
eradication through the establishment and concerted contributions of MFIs in the socio-economic
arena and to tackle poverty using a bottom-up approach.
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
This section of the study seeks to find out what others have written about the subject matter. The
section primarily deals with what other authors have done in regard to this subject matter.
2.2Microfinance Services
2.2.1 Definitions
Microfinance today can be defined as the range of small-scale financial services that are
provided to disadvantaged persons with the aim to improve their capacity to take their
development in their own hands. The microfinance industry can be characterized by its clients,
their specific needs and the alternatives they have in access to financial services.
Microfinance clients are typically low-income persons, who are self-employed or salaried, such
as factory workers. In rural areas they may generate some income from farming, food processing
or trading at the local markets, whereas in urban areas they tend to be shop keepers, street
vendors, entrepreneurs, service providers, craftsmen, etc. They generally have numerous income
generating activities that are somewhat unpredictable and may be seasonal but appear more or
less stable. It has increasingly been recognized that not all people may be helped with microcredit but that all are deposit worthy and need to make payments.
Microfinance services are characterized by the fact that they are tailor made for this target group
and that the financial services take into account the needs and restrictions of these people. The
perception of these needs within the microfinance business has evolved over time. Whereas in
the beginning microfinance was considered as micro-credit, in recent years microfinance
providers have come to appreciate the needs of poorer households to have access to other
financial services, such as savings, insurance and payments. The financial services provided to
low-income households need to take into account some basic aspects that characterize these
people such as irregular income flows from numerous activities in some cases seasonal, activities
of an informal nature, a lack of collateral and low basic reading and writing skills.
Partly due to these reasons, in emerging and developing economies there is a tendency not to
cater for such disadvantaged persons in the formal financial sector. That is to say, where

conventional financial institutions impose conditions on the provision of their services that are
unlikely to be met by poorer households, financial exclusion arises. The consequence is that most
low-income people therefore obtain financial services through informal arrangements in the
market that are generally expensive, not so safe or unsustainable in the long run.
Recognizing the evolution of financial exclusion, many institutions have started to provide
microfinance services, be it out of a development consideration or a business opportunity or a
combination of both. It is difficult to classify microfinance providers. Operating in the domain of
microfinance are grass root organizations, financial NGOs, non-bank financial institutions, credit
unions, co-operatives, private commercial banks and state-owned banks. And among these, are
the savings and retail banks that are affiliated to the World Saving Banks Institute. Each
institution may differ in objectives, focus on financial services, business orientation, target group
within the microfinance segment, ownership structure, capacity to mobilize savings, or
regulation etc, but all share the same commitment to providing services to an otherwise
unbanked population.
In fact in recent years, we have witnessed a broadening and deepening of the microfinance
industry deepened, because several traditional and commercial banks, recognizing the market
opportunities have started to downscale their operations to target low-income customers
broadened, because several institutions that formally only offered a limited range of financial
services, mainly credit, are expanding their operations by providing other banking services such
as the collection of savings. Parallel to this some typical deposit-taking institutions such as postal
savings banks are experiencing a similar trend in the other direction. Some of them are
diversifying into micro-credit and other financial services.
2.2.2 Savings banks providing microfinance services
What distinguishes savings banks from other microfinance providers in developing and emerging
economies is that they are all formal financial institutions that are in the first instance committed
to the mobilization of savings. Typically, clients of savings and retail banks are households,
microenterprises and Small & Micro-enterprises (SMEs).
As demonstrated by the cases studies in this paper, the ownership structure of these savings and
retail banks varies. Some are privately owned, others state-owned. There are postal savings
banks, savings banks owned by municipalities, and financial institutions with a more cooperative ownership structure. As with other formal financial institutions, they are regulated as
opposed to most microfinance providers that operate as informal institutions. This informal
character does provide a sense of security for low-income clients. The fact that banks are
regulated and supervised by Government agencies and have to comply with financial prudential
rules, increases the stability of the financial sector. As with other banks savings and retail banks
contribute when it exists, to a deposit guarantee scheme that protects the small savings.
In most countries savings and retail banks have built up a reputation as solid institutions that
have also proven effective in times of crisis. Confidence in well-established savings and retail
banks is therefore relatively high in many economies. Savings banks are characterized by large
distribution networks to reach out to the clients nationwide. They are often known as proximity

banks a concept that was further developed in the following chapter. Thanks to their
decentralized nature they can address the needs of the local people and use mobilized resources
to invest in the local economy. Savings banks are committed to regional economic development
and often have a social mandate within their charter.
2.2.3. Financial services provided to those with low-incomes
In a broad spectrum, we can reasonably identify four pillars in microfinance. Within this view,
microfinance means the provision of financial services; mainly savings, credit, insurance and
payments services to individuals as well as micro and small enterprises. Savings mobilization is
often referred to as the forgotten half of rural finance, but the microfinance community has
become increasingly aware of the importance to mobilize small savings. Learning from field
experiences, academics and practitioners are now going beyond savings and credit services to
recommend an extension of micro-insurance services to the most vulnerable groups. Indeed, the
poor are more exposed to risky situations (droughts, floods, etc.) that can severely affect their
livelihoods. Seibel (1997) even claimed that micro-insurance has been the forgotten third of
microfinance. Finally, those with low incomes also need to have access to convenient payment
services. They might have to issue money orders or money transfers for business purposes. They
also receive money from relatives living in urban centers or abroad.
2.2.3.1. Savings mobilization
The lack of savings has usually been raised to explain weak economic growth in developing
countries. Savings is low said the vicious cycle theory because personal incomes are too low
and because of that investment levels are also too low, leading to low production level and low
incomes. This is what is often called the poverty trap. The lack of savings also explains and
justifies why external funds are needed and helpful for poor economies to trigger economic
growth and achieve poverty reduction. The lack of savings in poor countries has become a
controversial assumption since various studies indicate that savings exist but are rather held
outside the banking system.
2.2.3.2. Lending services
Access to finance and in particular, credit is one of the most often quoted constraints to business
development by the self-employed and micro-entrepreneurs. The definition of micro-credit has
evolved over the years and its interpretation is still wide ranging across countries and
institutions. In some countries, where the microfinance industry has grown into a competitive
business, central banks have established a definition of what can be considered as a micro-credit
taking into account the borrower (e.g. size of enterprise in terms of turnover, assets, employees,
etc.) and characteristics of the debt (size of loan, number of loans, etc.).
Some definitions are rather narrow and strict and only consider a micro-credit when it is a loan
invested in an entrepreneurial activity. In other circumstances and more often it is accepted that
the money lent is fungible and that it can be invested to respond to any need the household might
have. In this case the level of income of the borrower or average loan size is more determining
for whether a loan is a micro-loan or rather a typical retail loan. Considering the different

interpretations of micro-credit that exist, we have relied on the definitions as used by each
savings bank when presenting figures and analysis.
Although some postal savings banks are prohibited from lending, in general savings banks are
characterized by the fact that they offer a whole range of lending products and that these
products are segmented depending on the customer group and the investment purpose. The
exception to this may be the postal savings banks that are often restricted by law in their lending
operations. In general, micro lending programmes are included within regular retail banking
operations, but may operate as separate programmes, cost centers or even subsidiaries such as is
the case for UWMFO, with specific methodologies adapted to the micro-credit operations.
Savings banks apply diverse methodologies for administering their micro lending programmes.
Most apply individual lending methodology as an extension of their mainstream retail lending
business. Evidence from the case studies indicates that only Tanzania Postal Bank applies a pure
group lending methodology. In the case of the People bank project of Government Savings Bank
(GSB), the loans are extended to individuals who are required to be in a group of three (3)
members with two of them guaranteeing the borrower. No methodology is by itself a guarantee
for success and can therefore preferable. Each institution has to design and administer its
programme according to their domestic economic, social and cultural context.
2.2.3.3. Insurance services
Micro insurance has emerged as the third pillar in the range of microfinance services and
relevant tools to address the vulnerability of less affluent people. It can be defined as the
protection of low-income people against specific perils in exchange for premium payments
proportionate to the likelihood and cost of the risk involved Access to small credits does not
significantly reduce the vulnerability of micro entrepreneurs and low-income. Micro insurance
may help soften the adverse impact of various risks, which can jeopardize their income streams.
In practice, micro insurance products take different forms. Here we will divide them in 3 groups:
- Insurance policies linked to credit products
- Insurance policies linked to savings products including life insurances
- Insurance policies covering risks other than death and permanent invalidity, but people and
their properties in general
For banks or microfinance providers in general, micro insurance schemes can help mitigate the
negative effects of bad debts on the quality of the loan portfolio since death and illness generally
result in outstanding payments. A step further is offering insurance to low-income people to
protect them from risks and vulnerabilities other than death and invalidity, such as health,
education or fire with no specific link to a credit or savings product.
2.2.3.4. Payments facilities for less affluent people

Payment services are increasingly recognized as an essential component of the whole package of
financial services that are required by those on a low-income. Like all customers, they need to
pay bills and transfer money. These interests are principle no different from those of the typical
retail client apart from the fact that their accessibility needs to take into account issues such as
standards of education and client location. Low-income customers generally require payment
services that are low cost, secure and fast, convenient and easy to use.
2.3 Economic Growth of Small & Micro-enterprises (SMEs)
In recent years interest in the linkages between small and medium sized enterprises (SMEs)) and
economic growth has been attracting increasing attention. However, there is a paucity of studies
examining the importance of Small & Micro-enterprises (SMEs) for economic growth in
developing countries.
This is surprising given that the SME sector is the target of international and national aid
agencies. Indeed, in 2003 the World Bank approved US$ 1.3 billion in SME support programs
(Beck et al. 2005).
Studies that have examined the impact of Small & Micro-enterprises (SMEs) on economic
growth include the seminal study by Beck et al. 2005 who estimate an amended standard growth
regression that includes the relative size of SME sector for a cross-section of countries. A similar
approach is also employed in Audretsch and Keilback (2004) and Muller (2007) to evaluate the
impact of entrepreneurship on economic growth in developed countries. Whilst studies that focus
on a cross-section of countries suggest a negative or neutral impact of Small & Micro-enterprises
(SMEs) and entrepreneurship on economic growth, those studies examining developed countries
suggest a positive impact. Summarizing the results of empirical studies, Van Stel et al. (2005)
and Wennekers et al. (2005) provide evidence that suggests a positive impact of entrepreneurship
on growth for developed countries and the converse result for developing countries. Acs et al.
(2008) has attributed these differences in empirical results to different entrepreneurship
responses to institutional arrangements. Moreover, heterogeneity in institutional arrangements
and human capital levels across countries and regions are likely to provide deferent incentives to
rent-seeking activities (see, for example, Dias and McDermott 2006; Baumol 1990).
A limitation of the empirical literature to date is the relatively little attention devoted to study
Small & Micro-enterprises(SMEs) and entrepreneurship in the developing countries relative to
developed countries. The aim of this paper is to address this gap in the literature by providing an
analysis of the importance of Small & Micro-enterprises (SMEs) for regional economic growth
in Uganda for an annual panel of states from 1985 to 2004. Uganda provides an interesting case
study because the Ugandan SME support service (SEBRAE) provided US$ 1.1 billion financial
support for Small & Micro-enterprises (SMEs) in 2007 and the SME sector employs the majority
of the labor force in Uganda.
This paper draws on Beck et al. (2005) and uses growth regressions to encompass the importance
of the relative size of the SME sector into the growth analysis. Secondly, it provides an extended
analysis of the relationship between SME and growth by focusing on the stock of Small &
Micro-enterprises (SMEs) human capital, measured by a newly constructed variable for the

average years of schooling in Small & Micro-enterprises (SMEs). The relative employment size
of the SME sector alone might not be informative about its interaction with growth and so the
inclusion of the level of Small & Micro-enterprises (SMEs) human capital can add another
dimension of SME activity to the analysis. The remainder of the paper is as follows. Section 2
discusses the importance of Small & Micro-enterprises (SMEs) as a determinant to economic
growth. Section 3 presents the growth framework and the model speciation. Section 4 presents
the data and methods of estimation. Section 5 presents and discusses the results and Section 6
concludes.
2.3.1 Small & Micro-enterprises (SMEs) as Determinants to Economic Growth
Audretsch and Keilbach (2004) and Audretsch (2007) have argued that entrepreneurship and
small firms are an important determinant of economic growth, but note that they have been
omitted in the neoclassical growth framework. Moreover, Solow (2007) recognizes
entrepreneurship as an important activity that drives a wedge between knowledge and total factor
productivity by bridging the gap between specific pieces of technological knowledge and
innovations through the creation of new firms. Therefore, explaining how Small & Microenterprises (SMEs) impact on growth can add to the explanatory power of traditional growth
theory.
According to Beck et al. (2005), the pro-SME policy view as embraced by the World
Bank, for example, is based on the argument that the SME sector brings social benefits that stem
from greater competition and are therefore (potentially) more productive than large firms,
however, financial markets and other institutional failures impede the development and growth
of SME activity. The argument that institutional arrangements are important for entrepreneurship
and growth is put forward in Baumol (1990). Baumol argues that while the total supply of
entrepreneurs differs across economies, the productive contribution of the societys
entrepreneurial activities varies much more due to their allocation between productive and
unproductive activities. Therefore, policy makers should be concerned about the allocation of
entrepreneurship by providing an institutional arrangement that promotes productive
entrepreneurship at the expense of rent seeking2.
Similarly, Baumol (2008) argues that institutions are important to entice entrepreneurs away
from their previous unproductive activities and lead them into innovative productive
undertakings.
Institutions are also important to stimulate human capital formation for productive entrepreneurs.
Dias and McDermott (2006) develop a model where structural changes towards a modern
economy depend on the role of entrepreneurs, human capital and institutions. In this setting,
entrepreneurs come from a pool of individuals that belong to the managerial class, which is
specialized in two activities: rent-seeking and entrepreneurship. Importantly, more (productive)
entrepreneurs lead to more human capital formation. Workers will seek education in order to
need a more productive job (i.e. that requires a higher level of human capital) covered by the
entrepreneurs. Therefore, a policy response is to remove barriers that prevent productive
entrepreneurship to develop and better institutions are required to create more productive

entrepreneurs and entice human capital formation. If unproductive entrepreneurship dominates,

educational improvement was neutralized and will have little long-run effect.
The importance of institutions for entrepreneurship is assessed by Nystrom (2008) for a panel of
23 OECD countries over the period 1972-2002. Nystrom uses self-employment as a proxy for
entrepreneurship and includes measures of economic freedom (size of the government, legal
structure, access for money, freedom to trade and regulation of credit) to account for the
institutional quality in the growth regressions. Nystrom results support the argument that
institutional quality is important for the entrepreneurial activity.
Therefore, if institutions fail, it is likely the performance of Small & Micro-enterprises (SMEs)
will also fail. Further- more, Beck et al. (2005) argue that institutional failure in the form of
financial constraints prevents Small & Micro-enterprises (SMEs) to fully develop and can be a
burden to their capacity of generating economic growth. Similarly, Michelacci and Silva (2007)
provide evidence that financial markets are a constraint to local entrepreneurship.
In the context of developed countries, Audretsch and Thurik (2001) argue that an entrepreneurial
economy based on small rams has emerged as a result of the telecommunication, microprocessor
revolution, and of the advent of low-cost but highly skilled competition (mainly) in Eastern
Europe and Asia. As a result the comparative advantage of high-wage economies is no longer
compatible with routine economic activity. Maintenance of high wages requires a knowledgebased economic activity that cannot be costless disused across geographic space and the shift
towards small .rams is fundamental in this process. In developed countries, Small & Microenterprises (SMEs) could be a sign of a dynamic economy that sustains economic growth based
on new technologies. For example, Audretsch and Keilbach (2004) and Muller (2007) measure
entrepreneurship using start-up rates and need a positive effect of entrepreneurship capital on
growth in Germany.
Nevertheless, due to differences in institutions, human capital and rent-seeking levels, the
presence of Small & Micro-enterprises (SMEs) in a developing economy probably does not have
the same implications as it has in a knowledge-based economy3. In a cross-country analysis, Van
Stel et al. (2005) found a negative effect of entrepreneurship on growth for developing countries
and the opposite result to developed ones. As entrepreneurship seems to have a different impact
on economic performance according to the level of economic and institutional development
(ACS Et Al. 2008), the presence of Small & Micro-enterprises (SMEs) alone is problematic to
interpret.
Differences in the level of economic and institutional development provide diverse incentives to
productive entrepreneurship and consequently we do not know whether the effect of Small &
Micro-enterprises (SMEs) on growth comes from the structure itself or from another factor
related to Small & Micro-enterprises (SMEs), such as the level of human capital.
Importantly, the size of the SME sector does not take into account the level of Small & Microenterprises (SMEs) human capital. In Nelson and Phelps (1966), the rate of increase in
technology level is an increasing function of educational attainment; education speeds up the

adoption and discussion on product and process innovations. Similarly, Barro (2001) argues that
human capital facilitates the absorption of superior technologies and generates growth.
Complementary, human capital can also encourage growth by stimulating the process of
innovation. Grith et al. (2004) argue that R&D has two faces and stimulates growth directly
through innovation and indirectly through facilitating the imitation process. They found evidence
that educational attainment have an important role in stimulating both, the absorption of superior
technologies (absorptive capacity) and innovation. We apply these arguments to the SME sector
and argue that the absorptive capacity of the SME sector is an important factor to be considered
when studying the relationship between
Small & Micro-enterprises (SMEs) and growth Therefore, a SME proxy that encompasses
human capital can shed additional light on the relationship between Small & Micro-enterprises
(SMEs) and growth once it can encompass the ability of the SME to appropriate knowledge from
more productive firms If the SME sector improves its productivity, through innovation or
imitation, a positive effect on growth is expected from the Small & Micro-enterprises (SMEs)
human capital level.
2.4 Relationship between microfinance services and economic growth of Small & Microenterprises (SMEs)
An important research development of the last decade has been the affirmation of a strong link
between the financial system of a nation and the performance of that nations economy. Starting
with King and Levine (1993), the research has generally found that countries with better
financial systems tend to have faster economic growth. However, this research has not come to
consensus regarding exactly which dimensions of the financial system matter most the size,
efficiency, competitiveness, and regulation of banks; the roles of nonbank financial institutions,
such as finance companies, buyout funds, venture capital funds, and insurance companies; the
scale and liquidity of public debt and equity markets; the legal rights of shareholders and
creditors; and so forth. As well, the exact transmission mechanism from the financial system to
real activity is less than perfectly transparent from the research results. It is not completely clear
the extent to which a better financial system improves economic growth primarily through higher
levels of investment, or primarily through targeting investments to more productive uses.
Focusing on one dimension of the financial system and how its effects may be transmitted into
economic growth. Specifically, we test hypotheses about how the health of community banks
relative to other banks affects a nations economy. We hypothesize that relatively large market
shares and relatively high efficiency for community banks may promote economic growth. One
transmission mechanism may be through improved financing opportunities for small and
medium enterprises (Small & Micro-enterprises (SMEs)). Community banks may provide more
credit to Small & Micro-enterprises (SMEs) and may target their credit toward more productive
Small & Micro-enterprises (SMEs), given the advantages that community banks may have in this
type of lending. A stronger SME sector may, in turn, be an engine of economic growth through
enhanced entrepreneurship and risk-taking, increased private ownership of businesses,
potentially high productivity of these firms, and/or increased competition that reduces the market
power of entrenched large firms and stimulates their productivity. A second mode of

transmission may be through greater overall flows of bank credit. Healthier community banks
may not only provide greater credit flows from their own portfolios, but might also compete
more effectively with the rest of the banking industry and reduce the market power of other
banks, encouraging them to reduce prices and expand lending.
The hypotheses using data on 49 nations from 1993-2000, representing a rich mixture of
economic conditions, market structures, and degrees of development. Our key exogenous
variables measuring the relative health of community banks are the total market shares of
community banks (defined in various ways), and their weighted-average efficiency ranks
estimated using cost and profit functions for the banks in each nation in each year. Importantly,
these variables measure the health of community banks relative to other banks within the same
nation, rather than comparisons of individual banks across nations that operate under very
different conditions. As a consequence, these relative health variables are reasonably comparable
across nations. We run three sets of tests separately for 21 developed nations and for the 28
developing nations. First, the reduced-form regressions of gross domestic product (GDP) growth
on the relative health of community banks, controlling for other dimensions of the financial
system (public debt and equity markets, regulation, legal rights, bank competition) identified in
the finance-growth literature. This allows us to test whether the relative health of community
banks affects economic growth.
Second, try adding measures of the SME employment share and the ratio of overall bank lending
to GDP as additional repressors to these GDP growth equations to test the transmission
mechanisms. In a recursive model of the transmission mechanisms, community bank health
would directly affect one or both of these intermediate variables and then these variables would
directly affect economic growth. Thus, to the extent that improved SME financing is an
important mechanism through which relatively strong community banks improve economic
growth, then we may expect a positive measured effect of the SME employment share on GDP
growth, and a substantial diminishment of the measured effects of community bank health on
GDP growth when the SME employment share is controlled for in the regressions. Similarly, if
greater overall flows of bank credit are a key transmission mechanism, then we may expect a
positive measured effect of the overall-bank-lending-to-GDP ratio and substantial diminishment
of the measured effects of the relative health of community banks on GDP growth when the
overall bank lending variable is included in the regressions. Third, regression analysis ran on
SME employment share and bank lending to GDP ratio on the relative health of community
banks and the control variables. We test whether community bank health has positive effects on
the SME sector and on overall bank lending, as predicted by the two transmission mechanisms.
In addition to trying to contribute to the finance-growth literature, we try to add to the
community banking literature in several ways. First, we examine the effects of community banks
on overall economic performance. Community banking studies often focus on flows of credit to
Small & Micro-enterprises(SMEs), but generally do not examine the consequences of this flow
for the national economy.2 Even if healthy community banks tend to channel more credit to
Small & Micro-enterprises(SMEs), this may not translate into higher economic growth if the
credit flows to Small & Micro-enterprises(SMEs) are ineffective, or if there are significant
adverse consequences of the relatively poor health of other (non-community) banks. Second, our
international orientation and application too many developed and developing nations differs from

the traditional focus of community banking studies on a single developed nation. We

acknowledge that as in any study involving international comparisons, some rather heroic
assumptions are needed, because one cannot control for the many differences in culture, markets,
regulatory structures, and data collection standards across nations. We try to mitigate these
problems through the means noted above 1) analyzing developed and developing nations
separately, 2) using measures of community banking health relative to other banks within the
same nation, and 3) including controls for other important national differences. Third, we allow
for different potential definitions of community banks in our empirical analysis, rather than
defining them one way. For developed nations, we use the conventional definition small,
private, domestically-owned institutions based on the research that suggests that these banks
have comparative advantages in lending to Small & Micro-enterprises (SMEs), a core function of
community banks. For developing nations, we allow for the possibility that state-owned banks
and foreign-owned banks may also function as community banks when small, private,
domestically-owned banks have difficulty providing sufficient credit. The market penetrations of
state owned and foreign-owned banks are substantial in many countries around the world, and
there are often large differences in the shares of these banks across countries within the same
region. For example, assets at state owned banks are 52% of the total in Uganda versus 12% in
Chile, whereas foreign-owned banking assets are only 17% of the total in Uganda versus 32% in
Chile (Barth, Caprio, and Levine 2001). As discussed below, state owned and foreign-owned
institutions may be able to overcome some of their disadvantages in SME lending by using
government subsidies, by organizing in a decentralized fashion, or by using superior
technologies. Finally, we include the average efficiency ranks of community banks as well as the
market shares of these institutions. Community banking research often focuses on the share or
quantity effect of these banks without considering their efficiency or quality. A relatively high
share for community banks may not have favorable economic effects if these banks are poorly
managed. It seems more likely that community banks were effective if these institutions are also
relatively efficient. We also include the interaction between market shares and efficiency ranks,
with the expectation of a positive interaction effect. That is, we expect the marginal benefit of an
increase in market share for community banks to be greater; the more efficient are these banks.
By way of preview, the data from both developed and developing nations are consistent with the
hypotheses that greater market shares and higher weighted-average efficiency ranks of small,
private, domestically-owned banks are associated with faster GDP growth. The coefficients on
the interaction terms between market shares and efficiency ranks are also positive, consistent
with the hypothesis that the marginal benefits of higher shares for community banks are greater
when these banks are more efficient. The data provide only mixed support for the two
hypothesized transmission mechanisms from the relative health of community banks to
economic growth through improved financing opportunities for Small & Micro-enterprises
(SMEs) or through greater overall flows of bank credit. For developing nations, the data are also
consistent with favorable economic effects from larger market shares for foreign-owned banks,
but the converse holds for larger shares for state-owned banks.
2.5 conclusions
The literature reviewed in this section provided supplementary information regarding
microfinance institutions and Economic Growth of Small & Micro-enterprises (SMEs) trends in

Gulu and around the world. Additionally, it provided commentary on the findings of other
related microfinance institutions studies and how these surveys reflected the institutional inputs
associated with enterprise growth in Gulu.
The findings of this literature research were used to guide the selection of the most significant
variables for determining entrepreneurial spirit in a predictive context. The review also provided
an understanding of the definitions of microfinance institutions.
The relevance of the review of the empirical studies was twofold: first it provided a brief
summary of the understanding of Micro and small businesses and second by reporting the
institutional ideology used in these models (where available), it provided a guide on the
significance of the Institutional framework for the promotion of Micro and small businesses
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction
This chapter presents the methods and ways through which the study was carried out. It clearly
shows the different types of research design used, study population, sample size, sampling design
and procedures, source of data, data collection, instruments that were used and ways of data
analysis. Finally, the chapter highlights the limitations that the researcher encountered during the
study.
3.2 Research design
The researcher used descriptive research, case study analysis and analytical tools to assess the
record management system of the organization and to establish the quality of financial Reports.
Statistical methods of frequencies, percentages and correlation coefficient were used to establish
the relationship between Microfinance institutions and Economic Growth of Small & Microenterprises (SMEs)
3.3 Study population
The population included residents of Gulu which comprised of 55 residents
Table 1: Sample Elements in Each Department
|Department |Population |Sample Targeted |
|Accounts |9 |6 |
|Administration |15 |12 |
|Internal Audit |12 |8 |

|Security |7 |5 |
|Front office |4 |3 |
|Maintenance |8 |6 |
|TOTAL |55 |40 |
Source: Primary Data
3.4- Sampling Technique and Procedures
A sample random design was used to select respondents so as to minimize bias. Purposive
sampling methods were used to enable the researcher achieve his purpose. The methods
manifested a great ease in terms of access, speed and less time being consumed.
3.5- Sample size and selection
From a population of 55 residents of Gulu district local government, samples of 40 respondents
were selected from all departments as summarized in the table below:
|Department |Population |Sample Targeted |
|Accounts |9 |6 |
|Administration |15 |12 |
|Internal Audit |12 |8 |
|Security |7 |5 |
|Front office |4 |3 |
|Maintenance |8 |6 |
|TOTAL |55 |40 |
Table 2: Sample Element in Each Department
Source: Primary Data
3.6- Data collection instrument
The researcher used questionnaires, case study analysis, observation and interview schedule to
collect the data from target staff. These questionnaires and interview schedule were close-ended.

3.6.1- Questionnaires
Under this, different categories of people were used in the research. They include human
resource manager, account Clark and some staffs. Written down questions were distributed to the
manager, the selected service providers and some beneficiaries where the respondents gave their
answers by filling in the boxes corresponding to a given question and there after questionnaire
were returned to the researcher. Questionnaire method was used to only the selected persons
above simply because they were educated. In other words, they could read and write hence
saving time.
3.6.2- Interview Guides
The researcher looked for the staff one by one where she would freely interact with the
respondents in both local language (Acholi) and English during data collection. The researcher
would ask them questions and answers would be recorded down by the researcher.
With the above method, the researcher used interview guides designed for the purpose of data
collection, this method of data collection was used simply because a few of the respondents were
not able to read and write therefore it became the appropriate way of data collection.
3.6.3- Observation
This involved viewing directly using the researchers own eyes and senses to obtain the data, it
produced on the impact of bias and the researcher was able to obtain the first hand information
for example looking at the performance appraisal, vouchers, receipt and final accounts.
3.6.4- Case Study Analysis
The case study methodology of data gathering was also used by the researcher in obtaining
relevant information pertaining the study. This prove the researcher with an easy way of
analyzing, sorting and interpreting the data that was obtain without any tedious processes
involved.
3.7- Source of Data
The basic source of data for the exercise was mainly primary and secondary data, though
conclusions were drawn based on primary data.
3.7.1- Primary Data
Here the researcher went directly to the field to obtain data from the respondents by using
methods like questionnaire, observation and interviews that enabled him to get reliable data (1st
hand information).
3.7.2- Secondary Data

This was source from approved literature in journals, manuals, business publication, newspaper
and other sources, this is expected to give reliable information about the research topic and
survey was done to source for secondary data related to the topic.
3.8- Data Presentation and Analysis
After collecting data from different sources, editing, sorting and summering was done to process
the data. Editing will improve on the accuracy, relevance and coding was done to match the data
according to the themes. Analysis will specially focus on the role of Training towards sale
performance.
3.9- Anticipated limitations to the study
i. Reluctance of respondents; this was mitigated by assuring respondents of confidentiality and
that the research is only for academic purpose.
ii. Financial constraints; this was mitigated by drawing up a budget and working within the
budget to ensure success of the research.
iii. Time Constraint; this was mitigated by setting a strict deadline and working within the
deadline to ensure the success of the research.
CHAPTER FOUR
PRESENTATION, INTERPRETATION AND ANALYSIS OF DATA
4.1- Introduction
This chapter deals with the analysis of the primary data obtained from the field using interview
questionnaires & Case study analysis in an attempt to find out the relationship between
Microfinance institutions and Economic Growth of Small & Micro-enterprises (SMEs) in Gulu
The findings in this chapter are consistent with the research objectives and research questions.
Basically, the data contained in the chapter consists of the demographic characteristics of the
respondents, and the analysis of the relationship between Microfinance institutions and
Economic Growth of Small & Micro-enterprises (SMEs)
The findings were as below;
4.2- Demographic data.
4.2.1- Respondents gender
This comprised both male and female respondents. Thus out of 40 respondents who attempted
the questionnaires, 30(95%) were female and 2(05%) were male as indicated in table 1 and
figure 1 below.

Table 1: showing the gender of the respondents

|Gender |Frequency |Percentage (%) |
|Male |02 |05% |
|Female |38 |95% |
|Total |40 |100% |
Source: primary data.
[pic]
Figure 1: gender of the respondents
From table 1 and figure 1 above, findings reveal that, the number of females who participated in
the survey were more than the males. The researcher found out that of the overall clients of
UWMFO Micro Finance, the females were more than the males; this was due to easy cooperation of women as opposed to their counterparts the male when it came especially, to
supervision at the work place. One of the male respondents stated that men were few due to the
fact that UWMFO Micro Finance Limited Uganda is an NGO established specifically to promote
and encourage women to involve in micro saving in order to reduce their dependence on their
husbands.
This finding is in line with that of the researcher who observed planning, directing, controlling,
organizing as roles that can be performed by women.
4.2.2- Respondents marital status
The data collected from all the 40 respondents showed that 11(28%) were not married, 20(50%)
were married, 5(13%) had divorced and finally 4(09%) were widows/widowers as shown in table
2 and figure 2 below;
Table 2: showing respondents marital status
|Marital Status |Frequency |Percentage (%) |
|Never married |11 |28% |
|Married |20 |50% |
|Separated |5 |13% |
|Widow/Widower |4 |09% |

|Total |40 |100% |

Source: primary data.
[pic]
Marital status
Figure 3: showing marital status
From table 3 and figure above, findings reveal that the highest numbers of respondents were
married followed by single, separated and lastly the widowed. According to the interview carried
out by the researcher, the highest numbers of respondents were married because they were ready
to get themselves involved in marital obligations as a result of the age racket which they are
currently in.
This finding is in line with that of the researcher through the study that was carried out at the
head offices of UWMFO Micro Finance Limited Uganda located in Gulu.
4.2.3 Level of education of respondents
The researcher categorized this under certificate, diploma, Degree and others, as illustrated in
table 3 and figure 3
Table 3: showing respondents education levels
|Response |Frequency |Percentage (%) |
|certificate |5 |12% |
|Diploma |9 |23% |
|Degree |10 |25% |
|Others |16 |40% |
|Total |40 |100% |
Source; primary data
[pic]
Figure 3 showing respondents educational level
In the above table and figure, 5(12%) of the respondents had at least attained certificate, 09(23%)
were diploma holders, 10(25%) of the respondents had degrees, and (16)40% respondents had

equivalent of certificates. This implies that most of the respondents were educated and were able
to give the required information sought by the researcher. Therefore, the finding in the table
agrees with that of the researcher according to the study carried out.
4.2.4- Time taken in present position
Table 4: Showing time taken by the respondents in their present positions
|Response |Frequency |Percentages (%) |
|Less than one year |06 |15% |
|1-2 years |25 |63% |
|2-3 years |4 |10% |
|More than 3 years |5 |12% |
|Total |40 |100% |
[pic]
Figure 4: showing time taken by respondents on their present positions
In the above table and figure, 6(15%) of the respondents had been in the organization for less
than one year, 25(63%) for one to two years, 4(10%) of the respondents had been in the
organization for two to three years, and 5(12%) respondents had been in the organization for
more than three years. This implies that most of the respondents were long time clients and
servants of the organization and were able to give the required information sought by the
researcher. Therefore, the finding in the table agrees with that of the researcher according to the
study carried out
4.3- Findings relating to objectives.
The findings of the study were analyzed based on the specific objectives. These findings are
presented in the tables as below.
Table 5: Is the perception of the people of Laroo towards UWMFO micro finance positive?
|Response |frequency |Percentages (%) |
|Agree |10 |25% |
|Strongly Agree |30 |75% |
|Disagree |- |- |

|Strongly Disagree |- |- |
|Total |40 |100% |
Source: primary data
From the above table, findings show that the highest number 30(75%) strongly agreed that the
perception of the people towards micro finance savings and credit facilities was positive. This
was because of the rapid growth in demand for loans by the beneficiaries and 10(25%) strongly
agreed to the same, this was because of the increasing demand by the beneficiaries in the need
for services provided by these financial institutions such as UWMFO Uganda.
This finding is in line with that of the global summit on microfinance institutions held in
Washington where a global target was set of covering over 100 million poor families with credit.
They further stated that poor families were ready to adopt micro finance as a method of poverty
eradication.
Table 6: Are the benefits of micro finance loans to the community being witnessed?
|Response |Frequency |Percentage (%) |
| Agree |25 |63% |
|Strongly Agree |10 |25% |
|Disagree |5 |12% |
|Strongly Disagree |- |- |
|Total |40 |100% |
Source: primary data
[pic] Figure 5: Showing benefits of micro finance loans to the different women groups in Laroo
division
In table 6 and figure 5 above, findings reveal that, 25(63%) of the respondents agreed that the
benefits of micro finance loans to the community were being witnessed. These was because of
the reduction in inequalities in income between the two gender based groups that was being
witnessed and 10(25%) strongly agreed to the same idea this was because of the increase in
savings by the local people who benefited from the loans that they borrowed. whereas 5(12%)
disagreed basing their opinion on the fact that, the beneficiaries were usually deprived off their
properties in case of default when the loan is not repaid by a member of the group.
This finding is in line with that of the researcher who observed that, there existed tight conditions
on the part of the beneficiary in order to access the loan from the institution. The researcher

further observed that micro finance loans had benefited this category of beneficiaries because
there was increase in their savings and thus investments were being observed to be rising.
Table 7: Are collateral securities required from the beneficiaries before accessing UWMFO
micro finance loans?
|Reponses |Frequency |Percentage (%) |
|Agree |15 |37% |
|Strongly Agree |25 |63% |
|Disagree |- |- |
|Strongly Disagree |- |- |
|Total |40 |100% |
Source: primary data
[pic] Figure 6: showing whether collateral securities are required
From table7 and figure 6 above, 15(37%) of the respondents agreed that collateral securities was
usually required from the beneficiaries before accessing micro finance loans and 25(63%)
strongly agreed to the same. These was because of the audit trail which was created as a spirit in
the minds of the staff that because of the efficiency and effectiveness in micro finance
management there was subsequent reaction on the other side which led to poverty reduction and
thus improvement in the standards of living of the beneficiaries.
The finding above is in line with that of the researcher. Where the researcher as a result of the
sensitivity analysis which was a part of a technique of linear programming found out that the
institution loans were being utilized at their optimal level despite the collateral securities that was
required by management.
Table 8: Are problems being experienced by both the beneficiaries and the institutions in
providing and accessing micro finance loans?
|Response |Frequency |Percentages (%) |
|Agree |10 |25% |
|Strongly Agree |22 |55% |
|Disagree |8 |20% |
|Strongly Disagree |- |- |

|Total |40 |100% |

Source: primary data
In the above table, 10(25%) agreed and 22(55%) strongly agreed to the same idea that, there
were problems being experienced by both the beneficiaries and the institutions in providing and
accessing UWMFO micro finance loans. This was because of lack of understanding of the
collateral requirements by the beneficiaries and bureaucracy on the part of the institution in
giving out the loans. Whereas, 8(20%) disagreed that no problems were being encountered by
both the beneficiaries and the institutions in providing and accessing micro finance loans arguing
that the loans were easily accessible by the clients provided the that all that is required of them is
fulfilled.
This finding is in line with that of the new vision September 2005, where it was observed that the
micro finance institutions were expanding rapidly with the government, donors and the private
sector through the implementation of the tripartite arrangements to develop sustainable micro
finance institutions to deliver the much needed financial services to the nee
Table 9: Are recommendations being sought by the institution towards policy change to improve
accessibility by the beneficiaries?
|Response |Frequency |Percentage (%) |
|Agree |25 |63% |
|Strongly Agree |10 |25% |
|Disagree |5 |12% |
|Strongly Disagree |- |- |
|Total |40 |100% |
Source: primary data
[pic] Figure 7:showing recommendations being sought by the institution
From table 9 and figure 7 above, 25(63%) of the respondents agreed that recommendations were
being sought by the institution towards policy change to improve accessibility by the
beneficiaries and 10(25%) strongly agreed to the idea. This was because of the setting of the
repayment period by the staff/management according to the amount of money borrowed by the
clients. While, 5(12%) disagreed. This was because they had no idea whatsoever on the type of
recommendations that was sought by the management. This view point contends with that of the
researcher through the study that was conducted at the head offices of UWMFO
Table 10: Does your organization segregate beneficiaries when giving out loans?

|Responses |Frequency |Percentages (%) |

|Agree |- |- |
|Strongly Agree |- |- |
|Disagree |25 |63% |
|Strongly Disagree |15 |37% |
|Total |40 |100% |
Source: primary data
Table 10 above shows that, the highest numbers of respondents 25(63%) disagreed that UWMFO
Gulu does not segregated beneficiaries when it came to giving out loans and 15(37%) strongly
disagreed to the same idea. This was because; the organization was giving out loans to all
categories of individual who are believed to be in groups
Table 11: Is transparency being observed by your institution?
|Responses |Frequency |Percentages (%) |
|Agree |22 |55% |
|Strongly Agree |18 |45% |
|Disagree |- |- |
|Strongly Disagree |- |- |
|Total |40 |100% |
Source: primary data
[pic]
Figure 8: showing level of transparency
From table11 and figure 8 above, 22(55%) of the respondents agreed that transparency was being
observed in the organization and18 (45%) strongly agreed to the same. This was because of the
openness to both the staff and the clienteles on what was required of them in order to access the
loans.
This finding was in line with that of the auditor which indicated that the organizations books of
accounts gave and reflects a true and fair view of state of affairs as at 31st December, 2009

Table 12: Does UWMFO Gulu give enough training to their clients before giving them the
loans?
|Responses |Frequency |Percentage (%) |
|Agree |24 |60% |
|Strongly Agree |16 |40% |
|Disagree |- |- |
|Strongly Disagree |- |- |
|Total |40 |100% |
Source: Primary Data
From the table above, 24(60%) of the respondents agreed that UWMFO Gulu normally gives
enough training to their clients before giving them the loans and 16(40%) strongly agreed. This
was because of the existence of an independent training committee whose work was to educate
the clients before they could grant them the loan
This finding is in line with that of the researcher who observed that, there existed an independent
committee which was appointed in conformity with the requirements prescribed in the human
resource manual and with the requirements of employment laws or regulations in force in the
country.
Table 13: Is loan recovery mode of UWMFO Gulu friendly in case of default?
|Response |Frequency |Percentage (%) |
|Agree |22 |55% |
|Strongly Agree |8 |20% |
|Disagree |10 |25% |
|Strongly Disagree |- |- |
|Total |40 |100% |
Source: primary data
[pic]
Figure 9: showing situation of loan recovery

From the table above, 22(55%) of the respondent agreed that loan recovery mode of UWMFO
Gulu is friendly in case of default and 8(20%) strongly agreed to the same idea. This was
because the clients were usually informed in advance when they are required to pay their
installments which could either be on monthly basis or weekly basis. While, 10(25%) disagreed
that UWMFO loan recovery mode is not friendly in case of default. This was because the clients
were usually deprived of their assets in case of default by a group member.
This finding is in line with that of the researcher through the study that was conducted by the
researcher at the head offices of UWMFO micro finance institution limited.
Table 14: Are responses by UWMFO Gulu to the clients request timely?
|Response |Frequency |Percentage (%) |
|Agree |9 |23% |
|Strongly Agree |11 |27% |
|Disagree |20 |50% |
|Strongly Disagree |- |- |
|Total |40 |100% |
Source: primary data.
From the table above, 20(50%) of the respondents disagreed that responses by the UWMFO
Gulu to their clients request was not timely. This was because of the bureaucratic abnormalities
within the organization which does not warrant loan requests by the clients to be processed on
time this in turn was a very clear indication as to why there was no transparency in the
organization in as far as the issuing of loans to the clients was concerned. On the other hand,
11(27%) strongly agreed, this was because of the quick process of issuing loans to the clients
which could take only few days. This in turn speeded the progress of the beneficiaries as was
suggested by one respondent by the title of being finance assistant and 9(23%) also agreed to the
same idea basing their view on quick access of the loans regardless of tribe, religion and race.
This finding is in line with that of the researcher where he observed that there was a lot of
bureaucracy in as far as granting of loans and other services was concerned and thus conclusions
were based on fair judgment by the researcher in the process of data collection.
Table 15: Does your institution offer a range of services to its clients?
|Response |Frequency |Percentage (%) |
|Agree |14 |35% |

|Strongly Agree |20 |50% |

|Disagree |6 |15% |
|Strongly Disagree |- |- |
|Total |40 |100% |
Source: primary data
[pic]
Figure 10: showingresponse on range of services offered by the firm
From table 15 and figure 10 above, findings reveal that 20(50%) of the respondents strongly
agreed that the institution offers a range of services to its clients and 14(35%) of the respondents
also agreed to the same idea. this was because there was training that was given to the clients
before and after they have received the loans and also advice that was given in form of
consultations which was sought by the clients in case there is need .While, 6(15%) disagreed to
the reason developed forward, this was because the training and the consultations given to the
clients were very limited and negligible.
This finding is in line with that of the researcher through the study that was conducted at the
head office of the UWMFO Gulu
CHAPTER FIVE
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1-Introduction
This chapter discusses the conclusions of the study, results on the findings in chapter four. It
gives a summary of findings, conclusions and recommendations made on the study in order to
establish the relationship between microfinance institutions and Economic Growth of Small &
Micro-enterprises (SMEs) in Gulu.
5.2-Summary of research findings
This research work has been able to identify the impact of microfinance institutions on
entrepreneurial development in Gulu. The analysis of data indicates that financial institutions are
not adequately financing small and medium entrepreneurs. The findings are as follows:
There is a significant difference in the number of entrepreneurs who used Microfinance
institutions and those who do not.

 There is a significant effect of microfinance institutions activities in predicting entrepreneurial

productivity.
There is no significant effect of microfinance institutions activities in predicting entrepreneurial
development.
Microfinance institutions are sustainable to the development of entrepreneurship activities in
Gulu.
People have access to capital for entrepreneurship development in Gulu through microfinance
institutions.
Microfinance institutions have affected entrepreneurship in the country positively.
Entrepreneurship development is vital to the industrialization process of the country.
The major contribution of microfinance institutions to the developing economy like that of Gulu
is its role in promoting entrepreneurship development in the nation. One of the goals of
entrepreneurship routed by successful Gulu government has been the reduction of unemployment
and poverty alleviation. A cordial thrust in public policy for the achievement of indigenous
entrepreneurship through the provision of long term loans and equity capital by banks for
enterprise. Given the gap between savings and invertible funds, the short fall is provided by
credit delivery. Many newly developed and developing countries have therefore made credit
delivery an endurable strategy in the development of entrepreneurship in both industry and
agriculture
5.3- Conclusions and implications
The review of several literature shows that the microfinance institutions are evident tools for
entrepreneurship development due to the various services they offer and the role they performs
towards the development of the economy. Not overlooking the various challenges that affects
microfinance institutions operations, the current institutional reforms introduced by the Bank of
Uganda governor is a welcome development as its employment is meaningfully to
entrepreneurship development in the country. Microfinance institutions world over and
especially in Gulu are identified to be one of the key players in the financial industry that have
positively affected individuals, business organizations, other financial institutions, the
government and the economy at large through the services they offer and the functions they
perform in the economy. It is expected that with the current reforms put in place by the Federal
Government through its regulatory authorities, microfinance institutions in Gulu was able to
compete favorably in the global market and gainfully increase entrepreneurship development in
Gulu. Microfinance institutions have positive relationship with the Gulu economy represented by
expanded GDP. Although, interest rate is not significantly influential, the results of findings of
this study can still be summarized that the microfinance institutions and their activities go a long
way in the determination of the pattern and level of economic activities and development in the
Gulu economy.

5.4-Recommendations
The financial institution need to put more effort in financing Small and medium entrepreneurs,
their role need to be felt by the Small and medium entrepreneurs in teams of growth and
development.
The financial institution whose role needs to be visible in promoting Small and medium
entrepreneurs growth and development is microfinance institutions. Small and medium
entrepreneurs themselves should be more receptive to new ideas and prepared to make financial
commitments to ensure growth.
This study recommends that guidelines by microfinance institutions to finance Small and
medium entrepreneurs need to be flexible to accommodate the Small and medium entrepreneurs
only when financial institutions appreciates and give technical assistant to the SME would be
contributing to the SMEEIS to ensure success in the SME sector.
It is the researcher hope that microfinance institutions in Gulu will develop more interest in
supporting the growth of Small and medium entrepreneurs.
5.6-Suggestions for Future Researches
This present study have assessed the impact of microfinance institutions on entrepreneurial
development and suggests that microfinance institutions can be a beneficial strategy especially as
regards its potential to contribute to entrepreneurial development, there are many acclaimed
benefits of microfinance institutions that are yet to be examined empirically.
One of such areas which require empirical investigation is the relationship between the level of
microfinance institutions commitment and the level of entrepreneurs satisfaction.
Second, this study focuses exclusively on industrial sector. There is a need to carry out
empirical studies to determine the extent to which microfinance institutions contributes to other
sectors of Gulu district. Thus, there is compelling need for future research efforts to focus on
these sectors in order to determine the attitude of the operators of these sectors to microfinance
institutions as well as its efficacy in the management of organizations that are prevalent in our
society.
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