ISSN: 2276-7827 ICV 2012: 6.

03

Submission Date: 21/10/013 Accepted: 19/06/014 Published: 14/08/014

(DOI: http://dx.doi.org/10.15580/GJBMS.2014.4.102113910)

Challenges Faced by
Small to Medium Scale
Enterprises: A Case
Study of Chitungwiza,
Zimbabwe
By

Gombarume Fungai Brian

Mavhundutse Shingirayi
Greener Journal of Business and Management Studies ISSN: 2276-7827 ICV 2012: 6.03 Vol. 4 (4), pp. 103-107, August 2014.

Research Article - (DOI: http://dx.doi.org/10.15580/GJBMS.2014.4.102113910)

Challenges Faced by Small to Medium Scale

Enterprises: A Case Study of Chitungwiza, Zimbabwe
*1Gombarume Fungai Brian and 2Mavhundutse Shingirayi
1
Lecturer in Department of Intelligence and Security, Bindura University.
2
Former Student in Department of Intelligence and Security, Department of Intelligence and Security Studies,
Bindura University of Science Education, P Bag 1020 Bindura, Zimbabwe.

*Corresponding Author’s Email: [email protected], Tel: 263-71-7531-6, 7621-4,

Fax: 263-71-7534, Cell: 0772 929 778

ABSTRACT

The study sought to assess the challenges faced by Small to Medium scale Enterprises (SMEs) in Chitungwiza,
Zimbabwe using data from 2010-2012.The other objectives were to discover whether SMEs were getting loans from
financial institutions, to examine the impact of government policies on SMEs and to come up with strategies that lead to
a vibrant SMEs sector. The descriptive survey method was used to elicit information from the respondents and a case
study approach was used. The study was confined to Chitungwiza area where a sample of 100 SMEs was adopted. Data
was obtained through interviews and distribution of questionnaires. From the research findings, it emerged that SMEs
are not getting enough financial support from financial institutions. The study also revealed that an unstable
macroeconomic environment was hindering SMEs sector growth. The study recommended that the government should
set up a loan guarantee scheme and SMEs should formalize their activities to get financial support from the financial
institutions.

Keywords: SMEs, Financial Institutions, Chitungwiza.

Since 2008 general elections, the Zimbabwean economy has been very unstable due to a number of factors, among
them political instability. This political instability deteriorated further after parties to the inclusive government ruling in
Zimbabwe called for an early general election in 2009 to be held by 2013.The resulting political uncertainty resulted
in financial institutions being reluctant to extend loans to SMEs. The economic environment has been characterized
by shortage of hard currency as the economy has struggled to match imports with exports in an economy that has no
currency of its own, relying on the South African Rand, Botswana Pula and the United States of America Dollar as
the medium of exchange. The resultant liquidity crunch in the financial sector meant SMEs regarded as risky and
less attractive to lend to, were worst affected.
Resultantly, SMEs have been struggling to overcome the effects of currency change or dollarization of the
economy (Mambo, 2010). Zimbabwean financial institutions now regarding lending to SMEs in a volatile
economy as business suicide have not helped either (Makina, 2009). This is so, despite the fact that SMEs are now
driving the Zimbabwean economy in a country with unemployment estimated to be over 70%.
Koushi (2008) identifies three reasons as to the significance of SMEs. Koushi (Ibid) points out enhancement
of competition and entrepreneurship which brings about external benefits to the economy as a whole in terms of
efficiency, innovation and productivity growth. Secondly, SMEs are more productive than large enterprises. Finally
SMEs boost employment creation as they are labor intensive. Beck et al. (2005) argues that a robust SMEs sector is
positively correlated to economic growth in an economy. Ayyagari (2005) opined that formal SMEs contribute about
50% of gross domestic product (GDP) on average in high- income countries.
On the backdrop of this, the government of Zimbabwe has put in place a whole ministry of Medium to Small
Scale Enterprises Development (MSED) to spearhead the growth of SMEs. SMEs in Chitungwiza mainly concentrate
in furniture making, manufacturing, food processing, garment making and welding.

Research Question

The study sought to answer the following questions

1. What are SMEs and how are these SMEs financed?

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2. How effective are government policies in enhancing the SMEs sector development?
3. What other factors are hindering SMEs sector development in Chitungwiza?

Literature Review

Remenyi (2001) states the purpose of literature review as to establish the area of study, establish a theoretical
framework for the subject area of study and to identify studies, models and cases supporting research topic. The
researcher studied past work on the subject matter to appreciate what other scholars discovered.

SMEs

Beaver and Ross (2002) observes that it is easier to describe than to define a small business. Appleby (1999)
states that a small business is independently owned and operated, has a capital contribution from a limited number
of individuals, would operate in a local area and is probably not dominant in its field of operation. The European
Union defines micro enterprise as employing 0-9, small enterprise 10-99 and medium enterprise employing 100-499
people. Storey (1994) sums up the danger of defining SMEs by size stating that in some sectors, all firms may be
regarded as small while in some sectors, no firm will be regarded as small. SEDCO observes that SMEs employs up
to 75 people and has a turn- over of up to 3 million USD. On the other hand ADB (2004) opines that an SME
employs less than 50 people.

Characteristics and Roles of SMEs

Du Toit and Motlatla (2001) observes that in developing countries with capital shortages and growing labour
surpluses, SMEs are generally more labor intensive than larger businesses and on average generate more
employment opportunities per unit of capital employed. Cook and Nixon (2000) states that not withstanding the
importance of SMEs in the economies of third world countries, the SMEs still face serious financial constrains. Ross
(2005) points out that SMEs are usually self- financed as they find it difficult to meet stringent demands set by
financial lenders who often demand collateral security which SMEs do not readily have.
Nyoni (2010) opined that SMES help in employment creation, poverty alleviation and contributes significantly
to the GDP of an economy. The Reserve Bank on Zimbabwe (2007) indicated that SMEs employed 61% of the labor
force in Zimbabwe. RBZ (ibid) further states that SMEs are contributing over 50% of GDP in Zimbabwe. Lall (2001)
found out that most SMEs are small and argued that smallness is dangerous just like in the animal kingdom where
small animals are easy prey for predators. SMEs are usually financially weak in the developing world mainly due to
lack of access to loans.

Other Constraints

Arinaitwe (2006) states that despite the potential for growth shown by SMEs in the developing world, a number of
militating factors have had a negative impact on their growth performance resulting in most of them failing. These
factors include unfavorable economic conditions, gross under-capitalization, poor infrastructure, high operating costs,
corruption and lack of government support. SMEs sector development is hampered by lack of managerial skills,
equipment, technology and access to international market (Gockel and Akoena, 2002). According to Lall (2001)
SMEs in general tend to face three sets of competitive challenges and these are related to their size, distortions in
markets and government policy interventions. Abor and Quartey (2010) observe that in most cases SMEs acquire
foreign licenses thereby increasing operational costs in the process.
Lewis Paul Jnr (2008) postulates that management mistakes accounted for 88.7% of SMEs failures such as
being in business for the wrong reasons. Lack of adequate managerial skills has been associated with new business
failure (Shane and Stuart, 2002). Inkoun (2003) discovered that SMEs performance is closely linked to the
entrepreneurial skills of the proprietor. He further argues that those entrepreneurs with a management qualification
have a 30% better chance for survival in business compared to those with none.
Katindi et al. (2007) reckons that unviable business information provided by SMEs to potential funders for
analysis before making a decision whether to fund a certain project or not is a cause for concern. Business
information reduces information asymmetry. As a result, a comprehensive business plan reduces risk perception and
the likelihood of obtaining capital increases. A negative perception by potential lenders has negatively impacted on
the growth of SMEs (Green et al., 2002). Beck et al. (2005) argues that although business environment indicators
refers to business, previous research has shown that financial and institutional underdevelopment constraints SMEs
significantly more in their operation and growth than larger firms. This has mainly been attributed to lack of
networking in the developing world (Atieno, 2009; Coulth and Loos, 2007, Nyoni, 2010).

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Djankov et al. (2002) opined that high entry costs prevents informal SMEs to turn formal whilst Nyoni (2004)
observed that in Zimbabwe in particular, bad publicity of the country impacted negatively on the SMEs development.

Government Policy and Support

Ramis (2002) discovered that SMEs faced with stiff competition are three times more prone to failure than those
without competition. There is need for government policies that protect SMEs from both internal competition (from
large corporate) and from external competition. Kaufman et al (2003) opined that in Africa, SMEs are weak because
of very difficult business conditions, which include cumbersome official procedures and unattractive tax regimes.
Imports competition is negatively impacting on SMEs (Koush, 2008). Regulatory constrains also pose a serious
threat to SMEs. These include start up points and licensing and regulatory requirements. World Bank (2004a) states
that in Zimbabwe for example, it takes 952 days to deal with licensing issues. It is recognized that although various
initiatives have been put in place to support the SMEs sector there is need for an integrated and coherent policy and
strategy for the development of the SMEs sector in Zimbabwe (Nyoni, 2008).

RESEARCH METHODOLOGY

In this study, a case study approach was applied to carry-out an in-depth analysis of challenges faced by SMEs
using case study of Chitungwiza covering the period 2011-2012. Saunders et al (2003) defines a case study as the
development of intensive knowledge about a single case or a small number of related cases. The case study is
appropriate for research because of the accessibility of the SMEs in Chitungwiza which will provide the researcher
with the understanding of the SMEs needed to make an analysis of the study findings to make recommendations for
further research. The research targeted the whole SMEs in Chitungwiza as the population. A sample of 100 SMEs
was chosen using simple random sampling.

DATA PRESENTATION AND DISCUSSION

Sources of funds for SMEs

The study sought to identify major sources of funding for SMEs in Chitungwiza. From the findings, 40% of the
respondents indicated that they were self financing their operations. A further 34% indicated that they were getting
financial assistance from various financial institutions while the remaining 26% got assistance from their families and
friends. This view supports the observations made by Green et al. (2002); ADB (2009) and Lall (2001). Interviewed
respondents indicated that the cost of borrowing funds, terms and conditions of borrowing coupled with a
cumbersome process to be followed in applying for financial assistance was one of the reasons why they were failing
to get financial assistance from financial institutions. This view is supported by Nyoni (2010) who postulates that it is
common for entrepreneurs to depend on personal savings, friends and relatives to prop up their business. Ross
(2005) shares the same view. Daniels and Ngwira (1993) opined that financial challenges handicapped the
operations of SMEs.

Government Policy

From the findings, 53% of the respondents indicated that they had benefited from government policies such as black
empowerment programmes resulting in them accessing loans from the Ministry of Small to Medium Scale
Enterprises. A further 47% of respondents said they had not benefitted in any way from government policy on SMEs.
This observation is similar to that of Kaufman et al (2003) who opined that cumbersome legal procedures and
unattractive tax regimes militates against the operations of SMEs in Africa. Respondents interviewed felt that the
government was not doing enough to protect SMEs from cheap imports crowding them out of business in the
process. Pack (1993) is of similar view. Ramis (2002) observed that SMEs exposed to stiff competition from within
and without the country’s borders are three times more likely to collapse than those protected from competition.

Management Skills and Competition

The study showed that 45% of the respondents felt that they had no requisite skills in management of business, while
a further 15% were indifferent. The remaining 15% indicated that they believed they had what it takes to manage
their SME skills wisely . Katindi et al . ( 2007 ) concurs as they say business management information

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reduces information asymmetry and a comprehensive business plan reduces risk perception and increases the
likelihood of getting loans. Shane and Stuart (2002) argue that inadequate managerial skills are associated with
small business venture failure. The respondents without management skills indicated that it had negatively impacted
on their businesses. Loos (ibid) shares the same view.

RECOMMENDATIONS

In light of the above findings, the researchers proposed the following recommendations:

SMEs should engage government to formulate policies that enhance their business operations.
Entrepreneurs should undertake business management courses so that they will appreciate the concept of running a
viable business entity.
The SMEs must keep proper accounting records so that when they approach financial institutions seeking loans,
they will be evaluated against their past performance enhancing their chances of securing a loan.
SMEs should network and pooling their resources together as a way of circumventing the financial resource gap.
SMEs to improve on the quality of their products so as to penetrate new markets to make up for lost market to cheap
imported products.

CONCLUSIONS

The responses indicate that SMEs were getting little financial assistance from financial institutions. The study
revealed that there is management deficiency in the SMEs which results in their collapse mainly due to poor decision
making. The study further revealed that government policies were not clearly spelt out so as to enhance the
performance of SMEs. The current tax regimes and regulatory framework is making business by SMEs difficult.
Competition from imports and larger corporations coupled with shortage of raw materials compounded the operations
of SMEs. The study concludes that a coherent SMEs policy, sound business management and availability of financial
resources to SMEs by the financial services sector will be a welcome relief to the challenges faced by SMEs in
Chitungwiza.

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Cite this Article: Gombarume FB and Mavhundutse S, 2014. Challenges Faced by Small to Medium Scale
Enterprises: A Case Study of Chitungwiza, Zimbabwe. Greener Journal of Business and Management Studies.
4(4):103-107, http://dx.doi.org/10.15580/GJBMS.2014.4.102113910

www.gjournals.org 107