EXAMINING AND EVALUATING THE FINANCIAL CONSTRAINTS ON THE

GROWTH OF SMALL AND MEDIUM SIZE ENTERPRISES IN SOUTH SUDAN

BY

DENIAL CHOL MATIOP

2019-MBA-2092

SUPERVISOR

MR. PAREK TOBBY MADUOT

A RESEARCH PROPOSAL SUBMITTED TO THE POST GRAUDUATE SCHOOL AS

PARTAL REQUIREMENT FOR THE AWARD OF MASTERS OF BUSINESS
ADMINISTRATION IN FINANCE UNIVERSITY OF JUBA

JUNE 2022
 CHAPTER ONE

1.1 Introduction

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

1.2 Background of the study

SMEs comprise an important share of economic activity in advanced economies. In the non-
government sectors of advanced economies, SMEs account for over 95% of the total number of
enterprises, 60% of total employment and over 50% of value added. The SME sector is often
considered an important engine of economic growth (Helfand et al, 2007; de Kok et al, 2011).
However, recent academic research has identified that young rather than small firms are the main
contributors to employment growth (Haltiwanger et al 2010; Dixon and Rollin, 2012; Lawless,
2013; Criscuolo et. 2014). These studies show that, because young firms also tend to be small,
there is a mistaken perception that small rather than young firms are the drivers of growth

The advent of Small and Medium scale Enterprises (SMEs) throughout the world is noticeable
and has received international attention. This is partly because SMEs play a critical role in
employment creation, innovation, advancement and sustainable development. According to the
World Bank (2010), micro, small and medium-sized enterprises are socially and economically
important as they represent 99 per cent of an estimated 19.3 million enterprises in the EU and
provide around 65 million jobs representing two-thirds of all employment. In Africa, SMEs form
a greater majority of businesses and employ a significant portion of the population.

The role of small and medium scale enterprises (SMEs) in national economic development
cannot be overemphasized especially in income generation and distribution, capital
accumulation, employment generation, poverty reduction and the empowerment of people
especially women (Edward, 2015). SMEs help in creating a new class of small entrepreneurs
leading to the expansion of the middle class and a wider distribution of income. Small firms can
survive in rural areas of the country because of their location flexibility, their lower requirement
of infrastructure, their nature to serve small geographic markets and their firm commitment to
local development (Edward, 2015).
1.3 Statement of the problem

Despite the role of SMEs in the south Sudan economy, the financial constraints they face in their
operations are very serious and daunting to their business which had a negative impact on their
development and also limited their potential to drive the national economy as expected.

This is worrying for a developing economy without the requisite infrastructure and technology to
attract big businesses in large numbers. Most SMEs in the country lack the capacity in terms of
qualified personnel to manage their activities. As a result, they are unable to publish the same
quality of financial information compared to the big firms and as such are not able to provide
audited financial statement, which is one of the essential requirements in accessing financial
assistances from the financial institution.

Further more private firms do not publish the same quantity or quality of financial information
that publicly held firms are required to produce. As a result, information on their financial
condition, earnings, and earnings prospect may be incomplete or inaccurate. Faced with this type
of uncertainty, a lender may deny credit, sometimes to the firms that are credit worthy but unable
to report their results (Coleman, 2000).

Inadequate capital base of most SMEs in the within the country to meet the collateral
requirement by the banks before credit is given out also is major financing constraint facing the
small business. In the situation where some SMEs are able to provide collateral, they often end
up being inadequate for the amount they needed to embark on their projects as SMEs assets-
backed collateral are usually rated at ‘carcass value’ to ensure that the loan is realistically
covered in the case of default due to the uncertainty surrounding the survival and growth of
SMEs (Binks et al., 1992).

These are some of the constraints already acknowledged by some researchers as impacting most
SMEs in carrying out their business activities within the country. Therefore this research work
comes handy in examining and evaluating the financial constraints affecting small and medium
scale business in juba, south Sudan
1.4 Objective of the study

1.4.1 General objective

Generally, the study shall examine and evaluate financial constraints affecting the growth of
small and medium size (SMEs) in south Sudan

1.4.2 Specific objectives

1. To find out the financial obstacles to SMEs business growth in juba, south Sudan
2. To find out how SMEs access financial services
3. To know challenges encountered by SMEs and how counter them

1.5 Research questions

1. What are the financial constraints affecting the growth of small and medium scale size
business in juba, south Sudan?
2. What kind of financial services do the SMEs get from the financial institution?
3. What challenges are there for SMEs and how can they strengthen to enhance their
growth?

1.6 scope of the study

1.6.1 Time scope

This research study on examining and evaluating the financial constraints on the growth of SMEs
shall be for three months. It shall use primary data collected during the study and secondary data
related to the study in the last ten years.

1.6.2 Geographical scope

Geographical this study shall be carried from Juba, The capital of central Equatoria state and the
national capital city for south Sudan.

1.7 Significance of the study

The researcher believes by studying the financial constraints to SMEs in Juba south Sudan, he
would present the problem from the perspective of the SMEs thereby making it a base line study
for policy interventions by state agencies, development partners and non-governmental
organization with missions to develop the SME sector.

1.8 Organization of the research

This research proposal has three chapters.

Chapter one consists of background, statement of the problem, research objectives, research
questions, scope and the significance of the research

Chapter two is the literature review; it consists of a thorough analysis of the writings of other
researchers in relation to the financial constraints on the growth of small and medium size
business.

Chapter three, This chapter describes the research design, area of study, study population
sample size sampling technique, data collection methods and instruments, research procedures ,
data processing and analysis and ethical considerations to be taken while carrying out the
research.
 CHAPTER TWO: LITERATURE REVIEW

2.0 Introduction

The literature review describes aspects connected to the study of the constraints to the growth of
small and medium scale enterprise. It therefore follows a particular layout. First, some
definitions relating to SMEs are given, which is followed by looking at the characteristics of the
SMEs. This paves the way for the discussion of their contribution to the economic development
and growth and also looked at literatures on the constraints SMEs faced in accessing financial
services.

2.1 Definitions of small and medium scale enterprise (SMEs)

According to Ward (2005) there is no universal definition for SMEs since the definition depends
on who is defining it and where it is being defined. For example, in Canada SME is defined as an
enterprise that has fewer than 500 employees and small enterprise as one that 8 has less than 100
employees. On the other hand, the World Bank defines SMEs as having no more than 500
employees. SMEs can be defined in two ways: based on the number of employees in an
enterprise and/or the enterprises fixed assets. According to Boon (1989), the size of the
enterprises employment is the most important criterion used. But one must be cautious when
defining SMEs based on fixed assets because of the continuous depreciation in the exchange
rates, which often makes such definition out-dated. UNIDO defines SMEs in developing
countries based on the number of employees in an enterprise. A small enterprise has between 5
and 19 workers and takes the example of the ubiquitous small shops in the cities such as hair
dressing saloons and chop bars. A medium enterprise has 20 to 99 workers and these include
manufacturing firm and exporting companies.

For the purpose of this research, the Venture Capital Trust Fund (VCTF) Act 2004 (Act 680
section 28) definition of SMEs will be used since it’s a more recent definition. SMEs are defined
by the VCTF as “an industry, project, undertaking or economic activity which employs not more
than 100 persons and whose total asset base, excluding land and building, does not exceed the
cedi equivalent of US$1 million in value”.
2.2 Characteristics of SMEs

A distinguishing feature of SMEs from larger firms is that the latter have direct access to
international and local capital markets whereas the former are excluded because of the higher
intermediation costs of smaller projects. In addition, SMEs face the same fixed cost as Large 9
Scale Enterprises in complying with regulations but have limited capacity to market product
abroad (Kayanula & Quartey, 2000). SMEs in south Sudan can be categorized into urban and
rural enterprises. The former can be subdivided into ‘organized’ and ‘unorganized’ enterprises.
Organized ones tend to have employees with a registered office and are mostly solely owned by
an individual whereas the unorganized ones are mainly made up of artisans who work in open
spaces, temporary wooden structures or at home and employ little or in some case no salaried
workers. They rely mostly on family members or apprentices. Rural enterprises are largely made
up of family groups, individual artisans, women engaged in food production from local crops.
The major activities within this sector include: soap and detergents, fabrics, clothing and
tailoring, textile and leather, village blacksmiths, timber and mining, bricks and cement,
beverages, food processing, wood furniture, electronic assembly, agro processing, chemical
based products and mechanics (Liedholm & Mead, 1987; Osei et al., 1993) as cited by (Kayanula
& Quartey, 2000) This sector is characterized by low levels of education and training of the self
employed. They are mostly family owned businesses and there is little separation of the business
finances from that of the owners even to the point that the owners or operators personal account
is the same as that of the business. SMEs in South Sudan are heterogeneous group- ranging from
small workshops making furniture, metal parts and clothing to medium-sized manufactures of
machinery as well as service providers such as restaurants, consulting and computer software
firms. Some are traditional ‘livelihood’ enterprises that are satisfied to remain small; others are
growth-oriented and innovative.

2.3 SMEs Contribution to Economic Development and Growth

“The private sector is the engine of growth of the economy therefore they must be given the
necessary tools to increase their growth”.(Anyima-Ackah, 2006) Economic development is a
process of economic transition involving the structural transformation of an economy through
industrialization, rising GNP, and income per head. Economic growth on the other hand,
contributes to the prosperity of the economy and is desirable because it enables the economy to
consume and contribute to more goods and services by increasing investment, increase in labour
force, efficient use of inputs to expand output, and technological progressiveness. Any nation
that experiences economic development and growth will benefit from improvement in the living
standards especially if the Government can assist in growth by implementing complementary and
growth-enhancing monetary and fiscal policies (Pass et al. 1993)

The SME sector is considered very important in many economies because they provide job, pay
taxes, are innovative and very instrumental in countries participations in the global market. Beck
and Kunt (2004) state that SME activity and economic growth are important because of the
relatively large share of the SME sector in most developing nations and the substantial
international resources from sources like the World Bank group, that have been channeled into
the SME sector of these nations. SMEs account for nearly 90% of the registered businesses in
South Sudan 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. Kayanula and Quartey (2000) recognize them
as the engines through which the growth objectives of developing countries can be achieved and
are potential sources of employment and income in many developing countries. Mensah (2005)
makes the analogy that SMEs act like sponges by soaking up surplus labour to provide a large
share of employment and income for the country.

Many researchers have observed that SMEs enhances competition and entrepreneurship therefore
they suggest that direct government support can boost economic growth and development. Also
SMEs growth boost employment more than large firm because they are labour intensive and
make better use of scarce resources with very small amount of capital.

Hellberg (2000) also states that developing countries should be interested in SMEs because they
account for large share of firms and development in these countries. Young (1994) contended
that SMEs are not only important because they are a source of employment but also because they
are a source of efficiency, growth and economic decentralization.

Finally, they are very important in the fight against poverty as they help in the poverty reduction
strategy for most government especially those in the developing countries were poverty is most
severe. Since they employ poor and low income workers and are sometimes the only source of
employment in the rural area, their contribution cannot be overlooked.

2.4 financial Constraints Faced by SMEs

Cuevas et al. (1993) indicates that access to financial services by SMEs has been an issue
repeatedly raised by numerous studies as a major constraint to industrial growth. A common
explanation for the alleged lack of access to bank loan by SMEs is their inability to pledge
acceptable collateral. In their view the current system of land ownership and transfer regulations
clearly retards and to some extend limits access to formal credit. First, due to lack of clear title to
much usable land in Juba, south Sudan, there is a limited amount of real property that can be put
up as collateral.

Aryeetey et al. (1993) supported the view of Cuevas et al. (1993) that from the view point of
private sector, problems related to finance dominate all other constraint to expansion (p 50).
They claimed that the available of collateral plays a significant role in the readiness of banks to
meet the demand of the private sector. Collateral provides an incentive to repay and offset losses
in case of default. Thus collateral was required of nearly 75 percent of sample firms that need
loans under a study, which they conducted on the demand supply of finance for small enterprises
(p 19). The study also indicated that 65 percent of the total sample firm had at various times
applied for bank loans for their business. Nevertheless a large proportion of the firm had their
application rejected by banks. For firms that put in loans applications there was almost 2:1
probability that the application would be rejected. Firms receive loans for much less than they
requested for. Among firms that had their applications rejected, lack of adequate collateral
(usually in the form of landed property) was the main reason given by banks.

Aryeetey et al. (1994) suggest that banks can offer alternative to property as collateral such as
guarantors, sales contract and liens on equipment financed. The above was also corroborated by
Dr. Kwadwo Ansah Ofei (JEL: G21, I30, N27). In his view small and medium enterprises are
unable to assess financial services because of the conditions attached to the banking
methodologies. This he grouped into two: Formal bank methodologies: These consist of several
techniques to pre-screen clients and concentrate on relatively few large transactions. They
include; feasibility studies, collateral, track record and minimum deposits. Informal banking
methodologies include: personal relations family connections and knowledge business relations.
Also it is contained in Dr. Ansah Ofei’s Journal that the fear of risk, especially the loss of their
(SME operators) wealth prevented them from pursuing a financial services.

SMEs face more challenges in doing business than large enterprises because of the difficulties in
financing start-up and expansion. Schiffer and Weder (1991) found that small firms tend to
experience more difficulties than medium-sized firms, which also experience more difficulties
than large firms. In most countries, especially developing nations, lending to small businesses
and entrepreneurs remain limited because financial intermediaries are apprehensive about
supplying credit to businesses due to their high risk, small portfolios, and high transaction cost.
According to Cuevas et al. (2013) cost of transaction contributes to the inability of the SMEs to
access finance. They are of the opinion that “if transaction cost of lending are high the net
margin banks expect from loans operation do not compare favorably against safe investment
represented by treasury bonds”.

Aryeetey et al. (2013) also shares the same view that if a lender face information asymmetry, the
issue often becomes somewhat persuasive authority he or she holds in ensuring repayment.
These push up transaction cost as the probability of default is assumed to be high and has to be
contained. Thus lenders may avoid lending to smaller or lesser known clients or impose strict
collateral requirements when they do. They may perceive clients in ways that would overcome
the latter own perception of the difficulty in obtaining formal finance.

In investigating “whether lending to SMEs was more expensive that lending to larger enterprise
in terms of loan screening, loan monitoring and contract enforcement, banks estimate that
screening to gather information about the applicant and project, review the feasibility study, do
the credit analysis and make a decision, an average of 16 man days for large scale applicant and
that of small scale applicants takes 24 man days.

Similar results obtained for loan monitoring and contract enforcement suggest that the
transaction cost of SME lending were higher than those for large enterprise per loan though a
similar study undertaken in 1992 by Aryeetey and Seini on the transaction cost of lending
covering sixty bank branches in Ghana suggested that there was no statistically significant
difference in the cost of administering loans to smaller and larger enterprises”. They further state
that the internal organization of most banks is such that SMEs applying for loans deal with
branch staffs that have little say in the decision, whereas major decisions are taken at the head
office of official who know little about the enterprise.

This arrangement ensures that many potential SME borrowers do not have the chance to interact
with the few trained project personnel before applications are made. There is a high probability
that many potential good project are turned down because distant credit officers lack enough
undocumented information to form an opinion on the projects and especially on entrepreneurs.
Despite SMEs strong interest in credit, commercial banks profits orientation may deter them
from supplying credit to SMEs because of the higher transaction cost and risk involved. First,
SMEs loan requirement are small so the cost of processing the loan tend to be high relative to the
loan amounts. Second, it is difficult for financial institutions to obtain the information necessary
to assess the risk of new unproven ventures especially because of the success of small firms often
depends heavily on the ability of the entrepreneur. Third, the probability of failure for new small
ventures is considered to be high (Ibid pp 24-27) Cuevas et al (1993) however indicates that
other alternatives to loans secured by real and movable property have practical constraints. For
example, it is possible to take security interest in liquid assets, the foreclosure upon which is
much quicker than that for real and movable property. However many debtors especially traders
are not in the habit of saving money in liquid accounts, rather they turn to either move it into the
informal economy or reinvest in their business. Another alternative would be for the banks to
accept the assignment of contractual benefits from borrowers.
 CHAPTER THREE:
METHODOLOGY
3.1 Introduction
This chapter highlights on the research methods used in gathering information, the research
design used, the population, sample size, data collection tools and the data analysis process.

3.2 Research design

A descriptive research design shall be used in the study. The descriptive research involves both
quantitative and qualitative. It involves collections of quantitative information that is tabulated
along a continuum in numerical form or described categories of information. Descriptive
research involves gathering data that shall describe events and organize, tabulate, depict, and
describe the data collection. It employs the use of visual aids such as graphs and charts to aid in
understanding the data distribution.
3.3 Area of study
The study shall be conducted Juba city, central Equatoria State, South Sudan.
The researcher chose the above location because it’s the business hub of south Sudan, having
different kind of business ranging from small scale to medium and large enterprise; therefore
they are handy in giving the rightful desired information on SMEs since it’s the main study topic
in this research.
3.4 Target Population
The study population/respondents shall mainly consist of direct employees and owners of these
small and medium scale business within juba. because they are the ones who the study shall
focus on their daily ativities These shall give adequate data on the study variables.
3.5 Sample size Determination
The sample size shall be determined using Solvin’s formula of 1960

n= N/(1+N (e2)

Where n is sample size,

 N = Total population,
 e=marginal error or level of significance and it usually ranges from 1%-5% which is 0.01-0.05.
 The marginal error is considered because it’s hard to get the exact population figure of a given
area.
Taking a marginal error of 5% which is 0.05
Therefore, the sample size shall be determined as below

Therefore, the sample size shall be 50 participants

3.6 Sampling Technique
The researcher shall use purposive sampling. Under this method, the researcher shall use a type
of non-probability sampling because the respondents shall be chosen because they possess
unique qualities which shall be required by the researcher since he shall consciously select
particular elements or subjects to be included in a study to make sure the elements have certain
characteristics pertinent to the study.

3.7 Data collection Methods

3.7.1 Questionnaire Survey Method
Questionnaires shall be designed and used to collect data from the field. Questions in this case
shall comprise of closed and open ended questions that shall trigger people’s responses. This
shall be used because questionnaires generate more reliable data as respondents shall give their
views without being intimidated by the researcher’s presence.

3.7.2 Interview
This method of data collection shall be used whereby the researcher shall come face to face and
ask the respondents different questions about the research problem. Here the interviewer shall
ask questions regarding the study problem. This method shall be good in the way that more
information shall be obtained and in greater depth and even non response cases shall generally be
low since the two parties shall participate actively at the same time.

3.7.3 Documentary evidence

The researcher shall critically analyze several records like the business journals, newspapers
report and local information’s from the business community, this shall aid in making a valued
data collection hence making better recommendations,
3.7.4 Observation
The researcher shall use observation methods whereby he shall use his naked eyes to observe the
financial constraint affecting the growth of SMEs in the country.
3.8 Data collection instruments
3.8.1 Interview guide
This tool shall assist the researcher to ask face to face questions to the respondents. This shall be
used because interviews shall help to collect immediate data as respondents shall give instant
responses.
3.8.2 Questionnaires
A questionnaire is a prearranged written set of questions used to obtain data from the
respondents by having the responses in writing (Jensen, 2003). The researcher shall use
questionnaires in order to gather quantitative data from all the categories of respondents.
Questionnaires shall be preferred in the study because they are a convenient method since
respondents shall give their views without being frightened by the researcher’s presence.

3.8.1 Observation Checklist

An observation checklist is where the researcher shall record all the aspects related to the study
problem during data collection.

3.9 Research Procedure

The researcher shall get a letter of introduction from university of Juba South Sudan which shall
be presented to these SME businesses requesting for permission to carry out research within their
premises. After permission is granted, the researcher shall carry out a pilot study to test the
validity and reliability of data collection instruments. The researcher shall move on to collect
data from the area of study.

3.10 Data Presentation and Analysis

Data shall be presented using tables, charts and graphs. Data analysis and interpretation shall
involve the use of percentages and frequency distribution to break down the raw data for easy
interpretation.
3.11 Ethical Considerations
The researcher shall treat respondents and their views with a lot of respect and confidentiality.
He shall inform participants about the purpose of the research, expected duration and procedures,
participants' rights to decline to participate and to withdraw from the research once it had started,
as any prospective research benefits and limits of confidentiality, such as data coding, disposal,
sharing and archiving, and when confidentiality is to be broken.
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 University of Juba

School of business and management

Department of Accounting and Finance

This questionnaire is to gather information about the financial constraints affecting the growth
Small and Medium scale Enterprises (SMEs) in South Sudan. This study is being conducted in
partial fulfillment of the requirements for the award of a Master’s degree in accounting and
finance from the School of Management University of Juba.

Answers given by respondents will be treated with confidentiality and used solely for academic
purposes

BACKGROUND INFORMATIONS

1. Name of the business …………………………………………..

2. Nature of the business …………………………………………..

3. Tick the form of ownership Sole proprietor ( ) Partnership ( ) Company ( ) other specify

4. Location of business …………………………………..

5. When was the business established? ……………………….

7. What is the main objective of your business? …………………………………………………………….

GROWTH

1. How is your business financed? Tick in the appropriate box

i) MFI (loan) ( ) ii) Business Income ( ) iii) Friends and Relatives ( ) iv) Others (Specify) ( )

2. What is the value of your business of total assets?

3. How much savings have you made from the last one year………………………..

4. What is the average monthly sales ……………………………………………….

5. How many full time employees do you have? ……………………………………

6. How many temporary/casuals employees do you have? …………………………..

7. Has your company experienced growth in terms of sales, assets, new branches, size etc in the last two
years? Yes ( ) No ( )
Please indicate the percentage of growth if any in each of the following areas Area of Growth Last 2 years
last year Last 6 months Sales Employment New branches/business Technology improvement

Area of growth Last 2 years Last year Last six months

sales
Employment
New branches/business
Technology
improvement
Skills improvement

8. What attributed to the growth above, tick as appropriate Loans ( ) New markets ( ) New products ( )
Re-investment of profit ( ) Technology ( ) Other Specify

9. Please indicate the extent to which the following constraints affected the growth of your business
enterprise starting with the most important as 1 to the least important as 5.

Factor 1 2 3 4 5
Cost
Lack of access to capital market
Collateral requirement
Managerial experience
Cost of registration
Capital access

10.(i) Have you disposed any assets in the last Six months Yes ( ) No ( )

(ii) What was the proportion of asset disposed One year Yes ( ) No ( )

(iii) What was the proportion of asset disposed Two years Yes ( ) No ( )

(iv) What was the proportion of asset disposed?

10. Income from business enterprise Item Last 2 years Last 1 year Per month How much sales do you
make How do you spend on inputs How much do you spend on salaries How much on rent How much on
telephone How much on transport Total cost Estimated profits

11. How did you use the profits for the last two years?

Activity Yes No
Purchased land
Saved
Business expansion
Used as working capital
Started another business
Others (specify)
What attributed to the growth above?

Loans Yes No
New markets
New products
re-investments
Technology
Others (specify)

Financial constraints

To extent do the following financial constraints affect the growth of the SMEs into a larger business?

Factor Very high high medium low No effect

Capital market
Information
access
Collateral
requirement
Capital
management
Cost of
registration

In your own opinion, what would you recommend to be done in order to eliminate constraints to
graduating into large business?

THANK YOU FOR YOUR RESPONSES