Journal of Business Management and Economics 05: 12 December (2017).

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JOURNAL OF BUSINESS MANAGEMENT AND ECONOMICS

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Firm and Borrower Characteristics for Performance of Micro and Small Enterprises
(MSEs): Evidence from Micro Finance Institutions (MFIs) in Uganda.
Mr. Wilfred Kokas Aupal1*, Ms. Thamara Gunasekare2
1
Mbarara University of Science & Technology/Uganda Technology and Management University. C/O Makerere University/
Regional Centre for Quality of Health Care (RCQHC) P.O Box 29140, Kampala, Uganda
2
University of Kelaniya, Sri Lanka. Senior Lecturer Faculty of Commerce and Management Studies, Department of Accountancy,
DOI: http://dx.doi.org/10.15520/jbme.2017.vol5.iss12.277.pp24-27
Abstract: Most SMEs lack collateral security which is required by commercial banks to access credit and as a result, they end up borrowing
from MFIs. The study aimed to identify to what extent firm and borrower characteristics influence business performance of Micro and Small
Enterprises (MSEs), with evidence from MFIs in Uganda. Ex-facto design was used, where 174 MSEs were included in the sample which was
drawn randomly from the lists of borrowers collected from MFIs in the districts of Soroti and Kumi in Eastern Uganda. Using a self-
administrated questionnaire the data was collected from owners of MSEs with 100% response rate. Data was analyzed using the (SPSS), and a
number of statistical techniques through descriptive statistics, arithmetic means, standard deviations and percentages. Correlation analysis was
used to test the hypothesis, while regression analysis was use to assess the influence of the predictors on the outcome. The study found that there
was a significant positive relation between borrower’s characteristics and performance, and similarly, there existed a significant positive
relationship between business characteristics and performance. The study concluded that for Micro Finance Institutions (MFIs) to realize
reasonable profits, great efforts need to be channeled towards efficient and effective consideration of loan terms, borrower’s characteristics and
business characteristics.

Key Words: Firm, Borrower, Characteristics, Performance, SMEs, MFIs Uganda

INTRODUCTION the time provision of MFIs loans is associated with the

It has been estimated that there are about 769,468 Micro and
Small Enterprises (MSEs) in Uganda, and out of these, 80%
are found in rural areas and the balance of 20% found in
large towns (Impact Associates, 1995). More over Micro
and Small scale Enterprises (MSEs) contribute about 20% of
Uganda’s Gross Domestic Product (GDP) and it was further
estimated that micro and small scale enterprises in Uganda
employ about 29% of the labour force, with 60% of the
entrepreneurs depending on their enterprises for at least a
half of their household income requirements. However,
despite the importance of micro and small-scale enterprises
(MSEs) they do not lack only investment capital, but also
operational capital and collateral security to be able to get
credit from commercial banks which has made them to
secure funding from MFIs (Mc Cromic & Penderson, 1996).
MSEs are mostly owned by the rural poor, they do not have
collateral and cannot access credit from formal financial
institution such as commercial banks (Wright etal, 1999) In
Uganda, most commercial banks are concentrated in
Kampala which is the capital city and fewer than 100
branches operate elsewhere in the country (Mustesasira et al,
1999).Most of the MSEs in Uganda are in commerce/ trade
sector with a percentage of 49, few are found in
manufacturing and service sector being the least employing
about 6.5% of labour force (Impact Associates, 1995). In the
same debate, (Wabwire, 1996) noted that most entrepreneur
activities in Uganda are based on the processing of agro-
based commodities. In the rural areas and Uganda as a
whole about 80% of the population is engaged in
agricultural production with its associated vagaries. Most of
characteristics of the business in which the finances are
invested.
The Ugandan economy has been growing at an average rate
of about 6% per year, but the benefits of growth were not
trickling down to the poor (Yates, 2002). Although the
number of Micro Finance Institutions (MFIs) has grown to
1,500 with a growth rate of 70% per annum since the year
1998, their desired effects of providing required financial
support to MSEs and to improve the level of their income
has not materialized in the way expected by policy makers.
The majority of Ugandans about 77% still have an annual
income of less than $419 and only 1% earns more than
$5,814 (Walter et al., 2004). To overcome this condition
MSEs can play a big role, yet the needs of MSEs have not
been met considerably. There are numerous problems
associated with the state in which the SMEs operate such as
ability to secure credit, management of the firm and it is not
given significant consideration by the responsible parties.
From the MSEs’ point of view, the set up cost or the
investment capital is still the key constrain and it doubles
the burden, since the difficulty in accessing loans from
MFIs, coupled with unfavorable loan terms. In improving
the living standards of the country, the role MSEs is
significant and thus this reason attract the attention of policy
makers and researchers to inquire more about improving
performance of the MSEs. This creates the motivation for
this study and further it justifies the contemporariness of this
effort.
Performance outcomes of both small and medium-scale
enterprises represent ultimate results and they are measured

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 Wilfred Kokas Aupal et al, Journal of Business Management and Economics, 5 (12), December, 2017
both in economic and financial terms (K’obonyo, 1999).
The performance objective on the supply side includes
growth in sales, profitability employment and capitalization.
In general a firm’s financial performance is measured using
ratios derived from financial statements mainly the balance
sheet and the income statements or stock market prices
(Beger et al., 2002). These ratios give an indication of
whether the firm is achieving owner’s objectives and
comparing performance trends over time. Both the nature of
the firm and the characteristics of the borrower are quite
crucial since they constitute firm characteristics which could
tremendously affect the overall success of a firm. It is
therefore critical to investigate the influence of firm
characteristics and borrower characteristics on firm
performance.
The study was guided by the hypothesis H0: There is no
relationship between firm, borrower characteristics and
performance of MSEs
LITERATURE REVIEW
Quite a number of studies have been carried out to examine
the relationship between firm characteristic and firm
activities. Mohomed (2005) asserted that firm characteristics
seem to play a critical role in determining the overall
performance of the firm. Findings of a study carried out by
Wiklund and Shepherd (2005) indicated that firms that are
able to align firm attributes with the characteristics of the
environment outperform other firms. Dean, Bülent and
Christopher (2000) documented that firm characteristics as
essential determinants of firm performance and success. In
searching of determinants of firm performance, firm
characteristics are found to be more significant and
specifically literature suggests that firm size and the location
are most influencing characteristics for its performamce
(Wiklund & Shepherd, 2005).
Characteristics of borrowers also influence performance of
their business. This mainly includes culture, gender,
management experience and marital status of the borrowers.
Byabashaija, (1997), pointed out that small business
community does not possess advance marketing skills nor
does it have the sophistication approach of handling
strategic planning. This is further strengthened by
Balunywa, (1999) who observed that one of the challenges
faced by MSEs is lack of managerial skills. In the early
stages of formation, the owner is able to run the business but
as it grows, the need for advanced management techniques
arises which in most cases is lacking within SMEs.
Thus this study tries to understand how the firm
characteristics and borrowers’ characteristics behave with
the dependent variable of firm performance. Since literature
states that the business characteristics and borrower
characteristics determines the business performance, this
study explores the strength and the direction of said
relationship further in Ugandan context. The firm
characteristics are measured in terms of size of the firm and
the location. The borrower characteristics are measured in
terms of gender, age, management experience and level of
income. The firm performance is measured through
profitability and business growth rate. It is significant to
identify the relations hip of firm characteristics and
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borrower characteristics with firm performance of MSEs,
since the findings will guide the MFIs to handle their loans
to MSEs in a better way and the borrowers also would be
beneficial to make accurate business decisions. Furthermore
this study certainly strengthens the knowledge and literature
relating to micro finance and SME. In formation of policies
on micro finance, respective parties will make use of these
findings towards good direction.
The conceptual model illustrating variables of the study can
be established as follows; the combination of the two
independent variables (firm and borrower characteristic)
leads to the performance of SMEs. Similarly each of the two
independent variables individually leads to performance of
SMEs.
Figure 1: Conceptual framework showing the study variables.
METHODS
Quantitative research approach was used in the study.
Studying Micro Finance Institutions loans and performance
of Micro enterprises would call for a longitudinal design,
which will take too long to be completed. Ex-facto design is
therefore the hybrid of cross sectional design and
longitudinal design. A total of 174 MSEs were included in
the sample and sample was drawn randomly from the lists of
borrowers collected from MFIs in two districts Soroti and
Kumi in Uganda. Using a self-administrated questionnaire
the data was collected from owners of MSE. In that, the size
of the firm and the location were measured to reflect firm
characteristics. Borrowers’ characteristics were measured by
the extent to which gender, age, and management
experience and level of income enables MSEs to manage
borrowed funds. Performance was measured by profitability
and business growth of MSEs. The analysis was done to
establish the relationship between Firm characteristics and
borrower characteristics and performance of MSEs.
Spearman’s correlation analysis, multiple linear regression
analysis, and coefficient of determination were used to
establish the relationship between micro finance institutions
loans and performance
RESULTS AND DISCUSSION
Firm Size:
Firm size refers the scale of the firm either it is a small scale
or medium scale. In this study size is measured by the
number of employees in the firm. In defining small scale,
firms which have less than 10 employees and medium scale
was having represents the was in term of size of the
business.
 Wilfred Kokas Aupal et al, Journal of Business Management and Economics, 5 (12), December, 2017

Table 1: Business Size Table 4 Age distribution of the borrowers

Size of Business Frequency Percent Age Category Total Percent
Small scale 109 62.65
Medium Scale 65 37.35 20-35 yrs 77 44
Total 174 100 36-50 yrs 82 47
Source: Primary Data.
Above 50 yrs 15 9
Business Location: Total 174 100
Business location is influenced by many factors especially
nearness to the market. This section explains where most of Source: Primary Data.
the MSEs are located. This implies that MFIs are very critical about the age of the
Table 2: Business Location. borrowers such that, there were only 6.8% of those above 50
years. MFIs could be looking at this age as unproductive or
Location of Frequency Percent Valid
Business Percent not hard working, which may lead to failure of recovering
Valid Urban 74 42.5 42.5 the loans given out.
Rural 100 57.5 57.5
Total 174 100.0 100.0 Management Experience:
Managerial experience of the borrowers worked as
Source: Primary Data. managers or any decision making capacity was considered
From table 2 results indicate that 42.5% of the businesses as managerial experience. Accordingto Mutandwa et al,
are located in the urban centers while, 57.5% are located in (2015) the decision making experience of the borrowers is
the rural areas, the implication could be that most clients to significant in determining the firms viability and success.
MFIs are the people to live in the rural villages. This may Since their experience caused the effective decisions and it
imply that since most of the SMEs are engaged in affect the firms’ final performance. The experience is
agricultural related businesses the choice of being located in accounted by years.
the rural area is because of availability of land for Table 5: Experience of the borrowers
cultivation.
Experience Category Total
Borrower Characteristics: Less than one year 14
1 year -3 years 32
Gender: 3year -5 years 58
More than 5 years 70
Studies shows that gender of the borrower significantly
Raw Total 174
influence the recoverability of the loans. The findings of a
global study covering 350 Microfinance institutions (MFIs) Source: Primary Data.
in 70 countries indicate that morewomen clients is This data shows that the sample consisted of more
significantly associated with lowerportfolio-at-risk and experienced people as borrowers. More than 50% of the
lower portfolio write-offs, after properly controlling for a sample is having more than 3 years managerial experience.
number of MFI-specific factors as well as institutional
factors. The gender-effects, which are not only Level of Income:
statisticallysignificant, but are also economically relevant, Level of income of the borrower is another important factor
indicate that women in general are indeed a better credit risk which is given more attention by the MFIs. Due to it reflects
for the MFI. This may also imply that men are the majority the financial strength of the firm and the repayment
of house heads and they dominate property in the home capability of the borrowers’ income is regarded as a primary
which can be used as collateral. indicator of the performance.
Table 3: Gender of the borrowers. Correlation Analysis:
Male Female Total Spearman’s Rank correlation analysis was used to determine
Frequency 112 62 174 the relationship between variables. The findings in the table
Percent 64.4% 35.6% 100.0%
below answer the objectives of the study; hence, the
Source: Primary Data. findings below have been presented following the study
Age: objectives, which include the relationship between
borrowers characteristics and performance and business
According to the sample the age of the borrowers distributed characteristics and performance.
from age 20-age 67. The most of the borrowers are younger
and most of them have just finished their school studies. The Table 6: Spearman’s Rank Correlation
age is a significant factor in studying the borrowers since it Correlations 1 2 3
influences the firms operations and finally the performance Borrowers Characteristics (1) 1
which will significantly influence the lending decisions of Firm/Business Characteristics (2) .927** 1
Business Performance (3) .910** .931** 1
the MFIs. This may also imply that the young borrowers are
energetic and productive enough to generate income to pay Source: Primary Data.
back their loans.
The findings from Table 6 show that, there is a significant
positive relation (r = 0.910, p < 0.01) between borrowers
characteristics and performance. The findings also show
that, there is a significant positive relationship (r = 0.931, p
< 0.01) between firm/business characteristics and
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 Wilfred Kokas Aupal et al, Journal of Business Management and Economics, 5 (12), December, 2017

performance. This implies that if the MFIs loans are to Regression Analysis:
benefit MSEs, the borrowers should adjust their business The regression analysis was used to determine the predictive
management behaviors and the type of business needs to be power of loan terms, borrowers’ characteristics and
analyzed. From the findings in Table 6, the null hypothesis business/firm characteristics.
(Ho) that, “there is no relationship between firm and
borrower characteristics and performance of MSEs” is
rejected and the alternate hypothesis accepted.
Table 7: Predictive Power of Loan Terms
Coefficients (a) Un standardized Standardized t Sig. Dependent:
Coefficients Coefficients Firm Performance
Model Beta Std. Error Beta

(Constant) 1.880 .091 .021 .984

E-03 R Square .886
Borrower Characteristics .232 .094 .215 2.483 .014 F Change 397.754

Firm/Business .540 .074 .554 7.310 .000 Sig. F Change .000

Characteristics
Source: Primary Data.

From the results indicate in Table 7, the predicators (i.e

Borrowers Characteristics and Business Characteristics)
were observed to explain 88.46% of the overall loan
performance (R Square = 0.884886). In otherwise if MFIs
realize a profit of $1000, $884 would be as a result of efforts
channeled towards efficient and effective consideration of
Loan Terms, Borrowers Characteristics and Business
Characteristics. Results show that Business Characteristics
(Beta = 0.554), Sig = 0.000) were observed to be a better
predictor of Loan Performance than Loan Terms (Beta =
0.197, Sig = 0.008) and the Borrowers Characteristics (Beta
= 0.215, Sig = 0.014). The regression model was valid Sig.
= 0.000.
CONCLUSIONS AND RECOMMENDATIONS
The study findings are coherent with the earlier studies
pointed out in the literature review that, borrowers and firm
characteristics play a great role in the performance of SMEs.
This is exhibited by significant positive relationship between
borrowers and firm characteristics, and performance of
SMEs. The null hypothesis (Ho) that, “there is no
relationship between firm and borrower characteristics and
performance of MSEs” is rejected and the alternate
hypothesis accepted. The regression model points out that
the profits realised by MFIs is based on the emphasis of
scrutinising the borrowers characteristics and firm
characteristics. It is also worthy to note that the majority of
the businesses favoured by the MFIs are small scale, young
borrowers dominate the loans and many of them are male.
It is therefore recommended in this paper that to enable
performance of SMEs, and profitability of MFIs, more
systems should be put in place to assess the borrowers and
firm characteristics. Given the fact that women in general
are a better credit risk for the MFIs, mechanisms should be
put in place to attract more women borrowers.
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