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Original Article | Open Access | Int. J. Manag. Account. 2022; 4(3), 59-68 | doi: 10.34104/ijma.022.00590068

Rotating Savings and Credit Associations, An Alternative Source of SME Financing: The Case of the Inhabitants of the Western Region of Cameroon

Ndindah Ndifor Clement* Mail Img Orcid Img

Abstract

The relevance of SMEs to the economy is a globally accepted truth. These small actors generally constitute the largest category of businesses and contribute significantly to vital economic indicators. Despite their relevance, this category of businesses experiences considerable challenges obtaining financing: especially formal financing. This limited access to capital has been reported to constitute a major cause of high SME failure rates. This is mainly because these businesses lack the collateral necessary to access formal financing. Despite the above literature, it is reported that inhabitants of the Western Region of Cameroon, also referred to as the Bamelikes make extensive use of Rotating Savings and Credit Associations (ROSCA) for business financing and that this is partly responsible for their increased success in entrepreneurial activities. However, empirical studies establishing the impact of the usage of ROSCAs on SME access to capital in this region are almost inexistent. Given the above, it is the aim of this study to investigate and empirically establish whether the usage of ROSCAs significantly impacts SME access to capital in the Western Region of Cameroon. Using stratified random sampling, 500 participants from the major settlements of the Western Region of Cameroon were selected for this study. The questionnaire for the study was administered to these participants. 414 questionnaires were returned and after consistency verification, data from 401 respondents were retained for this study. The data was analyzed using the One-Way ANOVA analytical tool in the IBM SPSS software (version 21). The finding disclosed that ROSCAs usage has a statistically significant impact on SMEs access to capital in the Western Region of Cameroon. It is therefore recommended that SME owners/managers join such associations or come together to create such associations to improve their access to capital. In addition to that, since these organizations are widely spread across Africa and developing economies, they could be repurposed for business financing reasons instead of consumption. 

INTRODUCTION

The social and economic relevance of SMEs is a globally accepted truth. These small actors generally constitute the largest category of businesses and con- tribute significantly to vital economic indicators (Cive- lek, 2021; Lu et al., 2020; Shakeyev et al., 2021; Leboea, 2017; Gyimah et al., 2019; Bunyaminu et al., 2019). In Cameroon, SMEs constitute 99% of all business; account for 61% of employment, and generate 36% of the countrys GDP (Tsambou & Fomba, 2017). This is not unique to Cameroon since, in Africa, they cons-titute 90% of all businesses, generate half of Africas GDP, and account for half the overall employment in the continent (Akinboade, 2015; Akter, 2020; and Muriithi, 2017).

Despite their relevance, this category of businesses experiences considerable difficulties in accessing fin-ancing, reported by multiple studies as a major cause of high SME failure rates (Wang, Lin, & Luo, 2019; Wasiuzzaman, & Nurdin, 2019, Schammo, 2019; Gyi-mah, Marom, & Lussier, 2019; Akinboade, 2015, Bunyaminu et al., 2019). Multiple reports blame this limited access to capital on the principles that govern the formal financial system. These principles to a significant extent disfavor SMEs and low-income ear-ners (Schammo, 2019; Gyimah et al, 2019; Hamza oui & Bousalam, 2015). SMEs generally lack the colla-teral security required by such institutions (especi ally commercial banks) to provide loans (Wang, Lin, & Luo, 2019; Rade et al., 2014). African economies are no exception when it comes to this issue. In Moza-mbique for example, only about 5% of SMEs access formal financing meanwhile this category of bus-inesses constitute 98% of businesses in that economy (Osano, & Languitone, 2016). In the same light, Thom- pson Agyapong, et al. (2017), point out the issue of access to formal financing for Ghanaian SMEs. As for Cameroon, despite multiple efforts on the part of the government to improve SME financing, only 22% of SMEs access formal financing (Chamber of Comme-rce Industry, Mines and Crafts, 2017). This confi-guration then leaves SMEs considerably dependent on informal financing like personal savings, and assis-tance from families and friends to start and run businesses (Akinboade, 2015, Bunyaminu et al., 2019). Informal financing is limited thereby leaving such businesses underfinanced, hence increasing their cha-nces of failure.

Despite the above, it is observed and documented that natives of the Western Region of Cameroon, also known as the Bamelikes make extensive use of Rotat-ing Savings and Credit Associations (ROSCA), locally called “tontines” or “njangi” for business financing (Kamdem, 2001; Carr & Chen, 2004; Kemayou et al, 2011; Nomoto, 2004; Henry, 2003; Clement & Tri-pathi, 2022). The inhabitants of this region are equally known for their distinctive success in entrepreneurial activities (Hogenboom & Jilberto, 2007; Arriola, 2012; Nomoto, 2004; Clement & Tripathi, 2022). Komo and Takor, (2019) call their business success an “economic miracle”.

Problem statement  

Though SMEs suffer significantly from insufficient financing (Wang et al., 2019; Wasiuzzaman & Nurdin, 2019, Schammo, 2019; Gyimah et al., 2019), it is documented that natives of the Western Region of Cameroon make significant usage of ROSCA for busi-ness financing (Kamdem, 2001; Carr & Chen, 2004; Kemayou et al, 2011; Nomoto, 2004; Henry, 2003; Clement & Tripathi, 2022; Tchuindjo, 1999). Some reports even accounttheir outstanding success in entre-preneurial activities on the use of these associations (Clement, & Tripathi, 2022; Nomoto, 2004; Henry, 2003). Given that multiple studies have reported in-sufficient capital as a significant inhibitor to the performance and survival of SMEs (Wanget al., 2019; Wasiuzzaman & Nurdin, 2019, Schammo, 2019; Gyi-mah et al., 2019), the question that follows logically is: does the use of ROSCAs significantly enhance access to capital? Alhough this issue is of considerable importance, given the extensive use of these asso-ciations, empirical studies that establish whether or not ROSCAs usage significantly improves SME access to capital in the Western Region of Cameroon are almost inexistent.

Purpose Statement. 

In view of the above, the purpose of this research effort aims to investigate and empirically establish whether or not the usage of these ROSCAs signify-cantly impacts SME access to capital in the Western Region of Cameroon.That is: in this region, is there a statistically significant difference in the access to capital for SMEs that use ROSCAs compared to those that do not?

Review of Literature 

Rotating Savings and credit association (ROSCA).

As brought out above, there exist documented studies that attest to the extensive usage of ROSCAs by natives of the Western Region of Cameroon (Kam-dem, 2001; Carr & Chen, 2004; Kemayou et al, 2011; Nomoto, 2004; Henry, 2003; Clement & Tripathi, 2022). It is equally suspected that ROSCAs constitute a significant source of informal financing for entre-preneurs in this region (Henry, 2003; Clement & Tri-pathi, 2022; Tchuindjo, 1999). Given the relevance of access to capital for SMEs (Ibrahim & Ibrahim, 2015; Petković et al., 2016; Agyemang & Ansong, 2017; Akinboade, 2015), it is relevant for this study to take a close look at these associations. 

Ajija and Siddiqui, (2021) declared that a ROSCA is an organization of self-selected persons. Participants in the ROSCA usually share the same network which can be the same neighborhood, workplace, religious or ethnic group. In these organizations, participants usual ly meet regularly and each contributed a chosen amount. The chosen amount is contributed by each participant is affordable for everyone in the associat-ion. The collected contributions are handed to one or more participants depending on the internal organ-ization. The person(s) receiving the fund chooses to do what he or she wishes with the money. After each participant in the group  receives,  contributions are either stopped or a new rotation is started (Gugerty, 2007). ROSCAs, therefore, constitutean informal yet highly organized association that pulls a fixed amount of financial resources from all participants at regular intervals and makes the collected finances available to all participants at a given interval. Onda, (2021) in describing the ROSCA refers to it as a mutual help network. Anderson and Baland, (2002) on their part argue that finances from these associations are gene-rally used for consumption.

While ROSCAs generally function as described above, vibration in their organizationis also reported (Ham-zaoui & Bousalam, 2015). For instance, though not documented, it is observed that in some ROSCAs of the Western Region of Cameroon, participants collec-tively oblige themselves to use collected funds exclu-sively for business purposes. For instance, the group may choose to use collected funds to be receiv ed by the participants to secure business supplies or even set up a business for that participant.

These associations are not only limited to this eco-nomy; reports declare that they are present in multiple economies around the globe (Onda, 2021; Ajija & Siddiqui 2021). According Sadr, (2017) ROS-CAs are present in three continents on the planet: namely Asia, Africa, and Latin America. He posits that about 50% to 95% of the adult population of most African coun-tries take part  in ROSCAs. In the 1970s, about 10% of the Ethiopian GDP originatedfrom ROSCA parti-cipation. It is equally used extensively amongst the rural population of Africa, especially in Nigeria, Cam-eroon, Congo, Liberia, Togo, and Ivory Coast, where more than half of the rural population partake in ROSCAs. Sadr, (2017) also reports some outstanding cases in Asia: in Bangladesh about 70 % of people who share the same neighborhood or work-space take part in ROSCAs; in Taiwan, about 20% of the popu-lation do participate in ROSCA. Onda, (2021), on his part, declares that these associations are highly present in East Asian countries and take on different names in thesecountries. Ajija and Siddiqui, (2021) declare that these associations are extensively present in low-in-come countries, especially in cases where there is limited access to formal capital. Hamzaoui and Bou-salam, (2015), go further by declaring that these in-formal finance associations have gained so much ground in low-income countries because formal ban-king services have not been customized or tailored to meet the financing need of these low-income earners. 

A report from the World Bank, (2019) attests to this as it declares that despite the advent of mobile banking, about 1.7 billion adults on the planet do not use ban-king services. This is especially pronounced among low-income earners like small traders and farmers.

While ROSCAs are used extensively in these low-income economies, it is usually difficult to measure the extent and impact of these organizations. This is because financial transactions within these informal organizations aregenerallynot reported outside the group (Hamzaoui & Bousalam, 2015). It is therefore difficult to have exact measures of the overall effect ROSCAs have on the economy (Hamzaoui & Bousa-lam, 2015). That notwithstanding, the importance of these associations to the economy cannot be denied, particularly in low-income economies, where formal financing is not quite accessible to a considerable part of the population (Hamzaoui & Bousalam, 2015). This difficulty in measuring the extent and impact of ROS-CAs might explain why though they are extensively used in the Western Region of Cameroon, empirical studies on their usage are almost inexistent.

SME access to formal financing in Cameroon and Developing Economies 

As stated above, accessing financing remains a con-siderable challenge for SMEs. According to the World Bank, (2019), SME access to loans is significantly low when compared to big businesses. The International Financial Corporation (in World Bank, 2019) declared that the borrowing need of about 40% (that is about 65 million businesses) of SMEs in developing economies is not met. This amount is currently estimated at about 5.2 trillion dollars annually and is 1.4 times higher than the total amount of loans provided to SMEs in such economies. They equally state in Eastern Asia, the gap between SME financing needs and actual loans provided to SMEs by banks is approximately of 46%. In Europe and Central Asia: which are mostly developed economies, the gap is only about 15%. 

Figures on the Middle East as well as the African con-tinent are the most elevated on the planet. According to this report, the average gap between SME demand for financing and the actual supply of financing here ranges from 87% to 89% (World Bank, 2019). This declaration can be triangulated with that reported by the Centre for Strategic and International Studies which declared that only about one-fifth to one-third of SMEs in Sub-Saharan Africa have bank loans or credit lines (Rude et al., 2021).  

Moreover, Lu et al. (2020) state clearly that the issue of reduced SME access to financing is much more severe in developing economies compared to develop-ed economies. Multiple studies on SMEs in economies across Africa report highly limited access to capital.  In Mozambique for example, only about 5% of SMEs obtain financing from banks and other formal finan-cing institutions declares Osano, and Languitone, (2016) whereas SMEs constitute more than 98% of businesses in that economy. In the same light, Thom-pson Agyapong et al. (2017), point out the issue of access to formal financing for Ghanaian SMEs. As for Cameroon, despite multiple efforts on the part of the government to improve SME financing, only 22% of SMEs access formal financing (Chamber of Com-merce Industry, Mines and Crafts, 2017). While these statistics in Cameroon are alarming, it is reported that banks operating in Cameroon possess surplus liquidity (Njimanted et al., 2017; Kamta et al., 2020). However, their willingness to provide loans to SMEs is quite low as they maintain their old preference of working with big businesses and well-established organizations (St. Pierre et al., 2015).

Access to loans is just one of themultiple issues with SME financing. The cost of loans from formal intuit-ions are also reported to be a considerable issue in Sub-Saharan Africa (Rude et al., 2021; Sulistya & Darwanto, 2016). Cameroon is not an exception to this widespread problem on the high cost of financing for SMEs. The cost of financing in this continent is con-siderably high and the financing need of SMEs is far from being met (World bank, 2019; Rude et al., 2021). In Cameroon, the interest rates of commercial banks loans fluctuate around 15%. This compound with the high cost of processing the loans (Sulistya & Dar-wanto, 2016) makes financing from such struc-tures highly inconvenient for SMEs. It is equally worth mentioning that the financial market in this economy is highly dominated by huge international banks (St. Pierre et al., 2015). As declared by Lu et al. (2020), in such configurations, SMEs suffer considerable dis-crimination. 

While these mega financial institutions dominate this market, the presence of microfinance in the economy is quite considerable (Messomo Elle, 2017; Ofeh & Jeanne, 2017). Althoughthese small banking organ-izations provide smaller loans to individuals and bus-inesses that are otherwise neglected by the mainstream banking system (OgechukwuObokoh et al., 2016; Awuah & Addaney 2016; Geoffrey & Emenike, 2018; Moussa, 2020), interest rates on such loans can get quite high as the interest range for loans from such organization is usually quite large (Rude et al., 2021). In Cameroon, the interest rate on loans from micro finances ranges from 6% to 33% per year (Ofeh & Jeanne, 2017). In addition to that, Bika et al. (2021) argue that small financial organizationsencourage sub-sistence and are not stimulatorsof meaningful change. They posit that these organizations simply make pro-fits from very low-income earners and small busi-nesses without really enabling substantial growth or significant change in their situation. These might then contribute to leaving Cameroonian SMEs and those other developing economies highly dependent on in-formal business financing.

ROSCAs Vs Formal Financial Institutions  

ROSCAs are special in that, unlike banks and micro-finance, no interest rates are usually associated with funds received by participants. ROSCAs, therefore, constitute a unique form of informal microfinancial organizations in which networks can be leveraged for funding void of interest. They create informal savings and credit systems based entirely on trust within the network, thereby overcoming the lack of collateral which is a significant barrier to accessing formal finan cing (Ibrahim & Ibrahim, 2015; Agyemang & Ansong, 2017; Akinboade, 2015). However, in some ROSCAs, apart from the rotating funds, participants with extra funds can make them available to other part icipants for highly reduced interest rates. In addition to the fact that neither interest rates nor collaterals are associated with funds from these organ izations, information asymmetry is highly limited, since participants in the ROSCA generally share a common network (Ander-son & Baland, 2002; Gugerty, 2007). Information asy-mmetry has been documented as a significant inhi-bitor to SME access to financing banks (Wang et al., 2019). Information asymmetry, which is a situation in which two interacting parties are not at the same level of information is especially pronounced when it comes to the relationship between banks and SMEs. This is because although the owner/manager has very good knowledge about their small businesses, they gene-rally have poor record-keeping habits (Ajibade & Khayundi, 2017; Hasanah et al., 2018) and are there-fore unable to provide trustworthy or certified finan-cial statements for bank and other financial institu-tions to make informed lending decisions. They are thusviewed by such institutions as opaque and risky (Wangmo, 2015; Wasiuzzaman et-Nurdin, 2019) since banks are not at the same level of information as small business owners. This then renders them reticent to provide financing for such businesses (Wangmo, 2015; Wasiuzzaman & Nurdin, 2019). However, the common network shared by participants in ROSCA enablesthem overcome this problem as participants get sufficient or almost sufficient information to assess the trustworthiness of one another thanks to the informal flow of information within the ROSCA. This thus eli-minates information asymmetry which has been repor- ted as a significant inhibitor of SME access to formal financing (Wang et al., 2019).  

Furthermore, ROSCAs financing does not involve transaction or administrative expenses. It is document-ed by multiple studies that transactional cost asso-ciated with processing loans from formal financial institutions is considerable and places a non-negligible burden on SMEs that seek to obtain financing from these institutions (Bechri et al., 2001; Sulistya & Darw anto, 2016; Ramlee, & Berma, 2013). Sulistya and Darwanto, (2016) posit that the obtention of a loan has transactional costs which may include: the cost of ap-plication, the cost associated with document prepara-tion, security cost, cost of ensuring the guarantee, monitoring,and control cost as well as other costs. The borrower who in this case is the SME must compens-ate the lender for the cost of time and finances require-ed to process the loan, thereby placing an additional financial burden on the SME. Given the highly infor-mal nature of ROSCAs, these costs are not necessary and are therefore inexistent. As brought out above, in these organizations, the collected funds are simply handed over to persons whose turn it is to receive. This configuration then presents relief for SMEs and renders financing from the ROSCAs more adequate and attractive.

METHODOLOGY

Sampling and Data Collection 

Using an adequately developed questionnaire, primary data was collected from SME owners/ managers in the Western Region of Cameroon. Prior to the actual study, to ensure internal validity and limit the likely-hood of misrepresentation, a pilot study was conduc-ted. 

For the study proper, the research instrument was ad-ministered to 500 participants randomly selected parti-cipants from major settlements of the Western Region of Cameroon, using the stratified random sampling technique. 414 questionnaires were returned by the participants. After consistency verification, data from 401 respondents were retained for this study. Parti-cipants in this study were recruited from both the formal and informal sectors. The questionnaire was administered face-to-face.

Data Analysis

TheOne-Way ANOVA analytical tool in the IBM SPSS softwarewas used to analyze the collected data.

RESULTS

Findings from the analysis are as follows:

Table 1: ANOVA

Interpretation 

Table 1 displays results of the ANOVA analysis which is an analysis of variance or differences in means. It displays an “F” value of 49.071 with a significance level of 0.000 which is less than .05. The difference in the mean access to capital for SMEs that make use of ROSCAs and the mean access to capital for SMEs which do not make use of ROSCAs is statistically significant (p = 0.000 < 0.05). 

Table 2 displays the results of the Robust Test of Eq-uality of Means. This table shows the Welch Test which analyses the means while accounting for hete-rogeneous variances and unequal sample sizes. It also displays the Brown-Forsythe Test which is similar to the Welch test but ensures that non-normally distri-buted data in the dependent variable does not impact the results. Both Robust tests indicate statistically significant results of 0.000 and 0.000. This, therefore, confirms that the difference in the mean access to capital for SMEs which make use of ROSCAs and the mean access to capital for SMEs which do not make use of ROSCAs is statistically significant. Given the above, one canstatethatthe use of ROSCA signi-ficantly impacts access to capital in the Western Region of Cameroon.

DISCUSSION

 The analysis reveals that the usage of ROSCAs signi-ficantly impacts access to capital for SMEs in the Western Region of Cameroon. This implies that SMEs in this region can improve their access to capital through the use of ROSCAs. Whilst these findings are generalizable to SMEs in the aforementioned region of Cameroon, ROSCAs are present in multiple sub-Saha-ran African and Developing countries (Onda, 2021; Sadr, 2017). The pull of financialresources generated by these associations creates a greater source of infor-mal financing when comparedwith other informal sou-rces of financing likepersonal savings and aid from family and friends. Instead of using these associations for consumption, entrepreneurs in this region and other parts of Sub-Saharan Africa where such asso-ciations are present could tap from them to get con-siderable financing. In these associations, the amount of finances contributedis dependent only on its mem-bers financial capabilities. This implies ROSCAs can start offquite small and grow as the members busi-nesses develop, thereby providing growing amountsof financial resources to participants. This significant growth potential allows these associations to grow to extents where they are able of providing loans of mag-nitude that could rival those provided by banks and microfinances. Such finances, void of constraints asso-ciated with formal financing provide considerable funds to meet the financing for this vital category of businesses, thereby contributing to increasing their performance and success rates.

Recommendation 

From the above, it is recommended that SMEs in this region make more use of such associations to improve their access to financing. Moreover, instead of using finances from these associations for consumption, they could be used for business or income-generating pur-poses which willthen grow alongside these associ-ations. As for future studies, given the potential of such associations, it is recommended that multiple studies be conducted on ROSCA asan alternative sou-rce of financing for SMEs to triangulate and promote their usage for business purposes. More to that, with increasing globalization, instead of remaining limited to local networks, ROSCAs couldgo international. New models incorporating cross-border ROSCA acti-vities which can bring together participants who do not necessarily meet physically or share other com-mon networks are needed.   

Limitation

The scope of the researchis relatively limited. Given that ROSCAs are present in multiple African and Asian countries, the scope could be widened to imp-rove generalizability. Moreover, this research is a quantitative study. This implies some risk of misre-presentation as this approach is not designed to cap-ture in-depth realities (Amina & Rosman, 2015; Alvi, 2016; Yilmaz, 2013; Tuli, 2010). Nevertheless, in this study, this risk is mitigated by a pilot study conducted prior to the actual study. 

CONCLUSION

Given the extensive use of ROSCAs in the Western Region of Cameroon for business purposes, this study seeks to investigate if ROSCA significantly impacts SME access to finance in this region. This issue is judged relevant because access to financing is exten-sively reported to be one major challenge faced by SMEs contributingto high failure rates in this category of business. After the analysis of data provided by 401 SME owners/managers, it is observed that the usage of ROSCAs significantly impacts SME access to capital in this region. It follows logically that SMEs in this region should make more use of such associations to improve their access to finances. Since these organi-zations are present in multiple African and Asian countries, it can be suggested that they should be used in such economies to contribute in meeting the finan-cing needs of this vital category of business. 

ACKNOWLEDGEMENT

The author is grateful to the participants for providing the data needed for this study. The hard work of the research assistants who collected the data is also highly acknowledged. Finally, the author is thankful to Unicaf University for providing world-class higher education and scholarships to many Africans which contributes significantly to improve the lives of many across this continent.

CONFLICT OF INTEREST

 This study declares no conflict of interest. 

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Article Info:

Academic Editor

Dr. Liiza Gie, Head of the Department, Human Resources Management, Cape Peninsula University of Technology, Cape Town, South Africa.

Received

May 13, 2022

Accepted

June 21, 2022

Published

June 30, 2022

Article DOI: 10.34104/ijma.022.00590068

Corresponding author

Ndindah Ndifor Clement*

School of Business, Unicaf University, Cameroon.

Cite this article

Clement NN. (2022). Rotating savings and credit associations, an alternative source of SME financing: The case of the inhabitants of the Western region of Cameroon, Int. J. Manag. Account4(3), 59-68. https://doi.org/10.34104/ijma.022.0059006 

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