SMMEs have the potential to make a significant contribution to overcoming chal- lenges faced by developing countries. Some of these challenges include high levels of poverty, severely skewed distribution of income, and high levels of unemploy- ment. However, despite the noted contribution of SMMEs, in many countries they face serious constraints, often resulting in firm failure. According to Brink and Michael (2003), in South Africa the estimation of SMMEs failure rate is
1. Introduction and background to the study 27
between 70% and 80%. As a result of resource constraints, many SMMEs do not achieve their full potential and are unable to grow, causing a reduction in jobs and wealth for the area in which they are based. Sha (2006) notes that to understand the failure rate it is essential to study the factors that are required to enable the SMMEs to survive.
Although the constraints, and economic environment have significant and un- equal effects on organizations in different industries, and in different locations (Olawale and Garwe 2010), it remains unclear which constraints have effects and how SMMEs can overcome particular constraints. Therefore, this study explores and investigates how SMMEs should overcome constraints to growth.
In the South African context, SMMEs suffer from poor performance, low growth rates and high failure rates. These challenges are particularly prevalent amongst historically disadvantaged SMME owners, as a direct consequence of the past apartheid government policy. As a result, many of the SMMEs constrained by, lack of skilled employees (Saigosoom 2012), competition (Ibidunni and Ogundele 2013), corruption (Nkonoki 2010), lack of clear business plans (Tushabomwe- Kazooba 2006), government rules and regulations (Rankhumise and Rugimbana 2010), and a lack of government support (Madrid-guijarro, Garcia and Auken 2009). These constraints are referred to in this study as business constraints. SMMEs are also constrained by other factors referred to as financial constraints, such as lack of professional financial advisors (Agaje 2004), lack of access to fi- nance (Abor and Quartey 2010;Krasniqi 2007) and lack of awareness of financial services and assistance (Magesa, Shimba and Magombola 2013).
SMMEs need access to financial resources to finance their operations and in- vestments. Microfinance has been identified as one of the ways to overcome financial constraints to poor household and small business (Babandi 2011). Mi- crofinance is a strategy aimed at the development and technical assistance of the poor and small entrepreneurs through training, funding and consulting to create self-employment and income generating activities (Brau, Hiatt and Woodworth 2009). Thus this context provides a good setting to examine the effects of con- straints on SMME growth, and to investigate how SMMEs should overcome these constraints, in particularly financial constraints.
1.7
Objectives
The primary objective of this study is to explore, and investigate the factors act- ing as constraints to SMME growth. The study empirically examines the moder- ating effect of microfinance on overcoming, avoiding or mitigating the financial constraints to SMME growth in South Africa, particularly in the province of the Western Cape. In order to assess these factors, the following secondary objectives are pursued:
1. To investigate literature on the constraints to SMME growth;
2. To determine the factors that acting as constraints to SMME growth;
3. To examine the effect of constraints on SMME growth in terms of an increase in employees;
4. To perform an empirical investigation on the ways to overcome, avoid or mitigate the financial constraints to SMME growth; and
5. To present recommendations to SMMEs on how to manage their business functions to survive and grow.
1.8
Hypotheses
In order to meet the research objectives set out in this study, hypotheses need to be formulated and tested. There are seven hypotheses used in this study to examine the effect of constraints on SMME growth, and to investigate the moderating effect of microfinance on overcoming financial constraints. The hy- potheses are:
(H1) There is a significant relationship between the demographic characteristics of an SMME owner/manager namely: gender, age and education level, and SMME growth.
(H2) There is a significant influence of SMME characteristics (namely: business size, business age, business sector and ownership type) on SMME growth.
(H3) There is a significant relationship between the types of customers (namely: government contracts, sub-contracting from large firms, overseas customers, general public customers and other SMMEs) and SMME growth.
1. Introduction and background to the study 29
(H4) There is a significant influence of government initiatives and programs on SMME growth.
(H5) There is a significant relationship between sources of financing SMME cap- ital structure (namely: own equity, family or friends, commercial banks, combination, microfinance) and SMME growth.
(H6) Constraints to growth have a significant effect on SMME growth. SMMEs with constraints will have limited capability to expand, employ good tech- nologies and search for new ideas. Accordingly, SMMEs constrained by conditions, which could be specified as follows:
(H6)A Lack of skilled employees has a negative effect on SMME growth;
(H6)B Lack of clear business plans has a negative effect on SMME growth;
(H6)C Lack of government support has a negative effect on SMME growth;
(H6)D Government regulations have a negative effect on SMME growth;
(H6)E Competition has a negative effect on SMME growth;
(H6)F Corruption has a negative effect on SMME growth.
(H6)G Lack of professional financial advisors has a negative effect on SMME growth;
(H6)H Lack of access to finance has a negative effect on SMME growth;
(H6)I Lack of awareness of financial services and assistance has a negative effect on SMME growth.
(H7) Microfinance is a positive moderator of the relationship between financial constraints and SMME growth. Accordingly, the moderating effect of microfinance could be hypothesized as follows:
(H7)A Microfinance is a moderator of the relationship between the lack of professional financial advisors and SMME growth. The negative effect of the lack of professional financial advisors is reduced when SMMEs use microfinance.
(H7)B Microfinance is a moderator of the relationship between lack of access to finance and SMME growth. The negative effect of the lack of access to finance is reduced when SMMEs use microfinance.
(H7)C Microfinance is a moderator of the relationship between the lack of
awareness of financial services and assistance and SMME growth. The negative effect of the lack of awareness of financial services and assistance is reduced when SMMEs use microfinance