The importance of small and medium-sized enterprises (SMEs) to the Cameroonian economy as well as other economies around the globe needs no further proof. Their contribution to GDP, employment, economic stability, and wealth distribution is considerable. However, their limited access to formal financing has been reported to constitute a significant limitation to their survival and growth. Given the documented reduced access of SMEs to financing from formal financial institutions due to information asymmetry, this study seeks to investigate if the cashflow visibility of SMEs is statistically meaningful to the willingness of banks and microfinance to provide loans to SMEs in Cameroon. Primary data was collected from 232 bank and microfinance employees through a pretested questionnaire. The results from the ANOVA analysis revealed a statistically significant difference in the willingness of financial institutions to provide loans to SMEs whose cash flows are visible to financial institutions compared to those SMEs whose cash flow is not visible (or opaque) to the financial institution. It is thus recommended that SMEs in Cameroon ensure considerable cashflow visibility to financial institutions to enhance their chances of obtaining formal financing. In addition, measures could be taken for e-cash providers or mobile money services provided to share information with lending institutions to enhance the cash flow visibility of SMEs.
The issue of SME access to formal financing remains a considerable concern in multiple economies and is still a central preoccupation for multiple studies (Yao & Yang, 2022; Paola et al., 2021; Lu et al., 2020; Ndindah et al., 2023; Ogujiuba, 2023). Angeles et al. (2019) in their study posit that any company regardless of its size needs financial resources to develop. While SME contribution to the economy is considerable (Bunyaminu et al., 2019; Civelek, 2021; Gyimah, et al., 2019; Leboea, 2017; Lu et al., 2020; Shakeyev et al., 2021), financial institutions, especially commercial banks remain highly unwilling to provide them with the financing they need to run and grow their business (Ndindah, 2022; Schammo, 2019; Gyimah et al., 2019; Wasiuzzaman & Nurdin, 2019; Wang et al., 2019). This then leaves this category of businesses highly dependent on informal financing which is generally insufficient (Bunyaminu et al., 2019; Archer et al., 2020; Moulick et al., 2020; Ullah et al., 2020). This configuration is quite tragic and multiple studies are reporting that this limited access to formal financing is hindering SME growth and contributing significantly to the failure of SMEs (Wang et al., 2019; Wasiuz-zaman & Nurdin, 2019, Khan, 2021; El-Sady, 2022).
The case is Cameroon as well as the other developing economies is no different. This category of business defined by law 2010/001 of April 13, 2010, to be those with not more than the 100 employees and an annual turnover of not more than one billion XAF still experience considerable difficulties accessing formal financing (Kabange, & Simatele, 2022; Ndindah et al., 2023; Njanbou, 2023). In fact, according to the World Bank Group (2019), this category of the businesses experiences considerable difficulties accessing formal capital with about 88% of SMEs not being able to obtain formal financing in certain parts of Africa. This report also points out that this difficulty is not limited to informal SMEs as formally registered SMEs equally experience considerable difficulties accessing formal financing. Cameroon, being a developing economy is in a similar situation. In fact, according to the Chamber of Commerce Industry, Mines and Crafts, (2017) only 22% of registered SMEs have access to the formal financing. If informal SMEs which constitute the larger population of SMEs in Cameroon (Mbodiam, 2021; Raoul & Zenabou, 2020) were to be factored in, this percentage would drop considerably. This situa-tion is a serious cause for concern given the relevance of the SMEs to the Cameroonian economy. Such businesses amount to 99% of all business; employ up to 61% of working Cameroonians and accounts for about 36% of the GDP (Tsambou, & Fomba, 2017).
Given this situation, multiple studies on factors that hinder SMEs from accessing formal financing have been the carried out (Wasiuzzaman and Nurdin, 2019; Khan, 2021; El-Sady, 2022; Ndindah et al., 2022; Bunyaminu et al., 2019). Amongst others, the issue of information asymmetry has been pointed out as a considerable barrier to SME access to capital from formal financial institutions (Wang et al., 2019; Lu et al., 2021; Wasiuzzaman et al., 2020; Liu & You, 2023; Ndindah, 2022). Information asymmetry which is a situation in which interacting actors are not at the same level of information is highly pronounced in the SME-financial institution relationships. The Ndindah (2022), posits that this is principally caused by poor financial record keeping on the part of SMEs and the fact that financial statements from SMEs are not trustworthy since they are generally not certified by the credible auditing agencies. This therefore renders the opera-tions of this category of businesses opaque (Amadasun and Mutezo, 2023; Yu & Zhu, 2023). Worse still, though not properly documented, SMEs in Cameroon tend to carry out most of their operations in cash: meaning, cash received during sales is used to obtain supplies without passing through the banks. This then renders the cash flow of the business almost invisible to the financial institution. The lack of the cash flow visibility limits the amount of trustworthy information available to the financial institution to make informed decisions when it comes to providing loans to SMEs.
Problem Statement
As indicated above, the visibility of SME cash flow in Cameroon is relatively limited since SMEs tend to the carry out operations in cash. This limited exposure to financial institutions contributes to keeping financial intuitions in the dark. Thereby cutting them from the trustworthy information relevant to decision-making when it comes to providing loans. The problem that calls for research then is: does the cash flow visibility have a statistically significant impact on the decision to provide loans to SMEs in Cameroon?
While this issue is quite relevant, studies on cash flow visibility in Cameroon are almost nonexistent, hence the need for research.
Purpose Statement
Given the above, it is the purpose of this quantitative study to investigate whether or not the visibility of the SME cash flow to financial institutions has a statis-tically significant effect on the decision to provide loans to SMEs in Cameroon.
Review of Literature
Information Asymmetry and SME financing
The issue of information asymmetry has been declared by multiple studies as a considerable inhibitor of SME financing (Wang et al., 2019; Lu et al., 2021; Wasi-uzzaman et al., 2020; Liu & You, 2023; Ndindah, 2022). In that light Zinman, (2014) as well as Wahidi and Paturel, (2016) posit that the reluctance on the part of financial institutions to finance SMEs is due to their high degree of informality, the lack of guarantees, and the smallness of their credit. These authors conclude that these characteristics associated with an environ-ment of asymmetric information in which the SMEs operate only increase the reticence of financial institu-tions to provide loans to micro-enterprises. In that same light, Amadasun and Mutezo, (2023) point out that according to the finance gap theory: information asymmetry is among the major barriers to the SME financing. The term information asymmetry which refers to a configuration in which interacting actors are not at the same level of information turns out to be highly pronounced in the SME-financial institution relationships (Ndindah, 2022; Mendes-Da-Silva and Ermel, 2022; Li et al., 2023). This situation generally results from the inability and/or unwillingness of SME owners and managers who know their businesses quite well to the effectively transmit such information to financial institutions (Ndindah, 2022). Though infor-mation asymmetry is reported to be present and the playing a limiting role in the interactions between SMEs and other stakeholders like suppliers (Mendes-Da-Silva & Ermel, 2022; Li et al., 2023; Cheng et al., 2023) it is quite pronounced and sensitive when it comes to the domain of the finance (Ndindah, 2022). Amadasun and Mutezo, (2023) argue that due to the increased uncertainty that arises due to information asymmetry, financial institutions view SMEs as high-risk segments and are therefore unwilling to provide financing to them.
SMEs in Cameroon are no exception to this issue. Several studies have pointed to information asymmetry as a considerable inhibitor to the SME financing in Cameroon (Ngongang, 2012; Nguena, 2013; Kabange and Simatele, 2022; Njanbou, 2023). This may be because existing information transmission mechanisms do not work quite well for SMEs in the Cameroon. In Cameroon, just like in the multiple other economies, financial reporting activities of businesses that are classified as SMEs are not mandatory and/or regulated as those classified as big business. As a result, SMEs are less inclined to rigorously ensure proper financial reporting (Berthelo & Roger, 2019; Wangmo, 2015). This then renders the financial statements produced by SMEs less trustworthy. Therefore, while big business-ses can make use of such financial statements as the leverage or to effectively communicate the status of their businesses to the financial institutions (Civelek, 2021), SMEs ability to do so is quite limited. Worse still it is reported by multiple studies that SMEs tend to adopt poor record-keeping behaviors (Majadibodu, 2023; Amoah-Mensah, 2023; Hasanah et al., 2018).
They tend to be carried away by daily activities so much so that recordkeeping is viewed as too bureau-cratic (Ajibade & Khayundi, 2017; Hasanah et al., 2018). It is equally reported that the financial state-ments of SMEs can be altered based on the purpose for which the SME intends to use them, such as tax returns (Wangmo, 2015). It is therefore obvious that the financial statements as well as tax return records from such organizations are not quite trustworthy in the eyes of financial institutions. Given this situation, the visibility of the cash flow in the bank account of the SME becomes a credible source of information on how well the business is fairing. Since such information is stored within the financial institution, it is therefore credible to them and can constitute a trustworthy source of information for decision-making when it comes to providing loans to SMEs. Given the above, this study sets off by assuming that the cashflow visibility of the SMEs has a significant effect on the decision to provide loans to SMEs in Cameroon.
Unbanked Business Activities
Most developing countries like the Cameroon have a considerable part of their populations that are still unbanked (Radwa, 2023). In fact, according to the World Bank, (2029) about 1.7 billion adults on the planet are unbanked. According to Mensah, (2023) close to 350 million adult Africans are unbanked. This represents close to half the adult population of Africa given that about 50% of Africans are below the age of 20 (World Bank, 2029). As for Cameroon, only about 12% of adults are bank (Kouam & Mokam, 2022).
With the limited banked population, businesses tend to carry out operations more in cash. They get supplies in cash and sell in cash, thereby keeping banks and other financial institutions in the dark. In addition to the above, the advent of mobile money which considerably reduces the inconveniences associated with cash trans-actions reduces the incentive to carry out operations through the banks. Robertson and Frank Sylvio, (2020), in their study on mobile money adoption by SMEs in the economic capital city of Cameroon, revealed that the extensive usage of mobile money by SMEs was due to the fact that it is accessibility, safety, and convenience. They add that SMEs make consider-able use of mobile money to obtain payments from clients as well as purchase supplies. Avom et al. (2021), on their part, report a widespread adoption of mobile money services across the major cities of Cameroon. Mvogo and Christèle, (2022) report similar findings in Cameroon. Despite its wide usage, mobile money services in Cameroon are principally electronic cash services (Mvogo & Christèle, 2022; Avom et al., 2021; Robertson & Frank Sylvio, 2020) which are mainly run without the involvement of banks and other financial institutions. However Kabange and Simatele, (2022) while pointing out the information opaqueness in the interaction between financial institutions and SMEs point out that there is a possibility of tracking the cash flow of SMEs through mobile money and that this could reduce information opacity. Despite this possibility, banks are still largely excluded from the day-to-day operations of the SMEs and information asymmetry remains quite high.
SME Financing in Cameroon
The issue of the SME finance is of the considerable importance in most developing economies. In fact, according to the IFC (World Bank, 2019) only about 40% of the loan needs of SMEs are met in developing economies. The IFC (World Bank, 2019) estimates the borrowing needs of SMEs in such economies to be about $ 5.2 trillion annually. This amount is 140% of the amount of actual loans accorded to SMEs. In the same light, the Centre for Strategic and International Studies reported that just 20% to 33.3% of SMEs in Sub-Saharan Africa have bank loans or credit lines (Rude et al., 2021). Lu et al. (2020) equally point out that the issue of SME financing is much more considerable in developing economies compared to developed economies. In Africa, reports from multiple economies are indicating very low levels of SME financing (Osano and Languitone, 2016; Thompson Agyapong et al., 2017). As for Cameroon, Multiple measures have been taken by the government. How-ever, the level of SME finance is still considerably low. The Chamber of Commerce Industry, Mines and Crafts, (2017) reported that only about 22% of SMEs obtain loans from financial institutions. This reported percentage is exclusively for registered SMEs.
If informal SMEs were to be the considered, this percentage would drop considerably. In Cameroon, while this category of the businesses experiences the considerable difficulties accessing formal financing, it is reported that banks have the high liquidity levels (Njimanted et al., 2017; Kamta et al., 2020). They, however, are less inclined to provide loans to SMEs as they maintain their long-lasting preference for dealing with big and well-established organizations (Agye-mang & Ansong, 2017; Akinboade, 2015; Ibrahim & Ibrahim, 2015). Unfortunately, it is being reported that this limited access to formal capital is affecting SME performance, growth, & survival negatively (Ndindah, 2023; St. Pierre et al., 2015; Tsambou and Fomba, 2017; Akter, 2020)).
Sampling and Data Collection.
Data for this investigation was obtained through the use of a pretested questionnaire which was admin-istered to a randomly selected sample of 240 emp-loyees of commercial banks and microfinances across Cameroon. All participants had a minimum of 2 years of experience in the financial sector at the time of data collection and had loan processing experience. The research instrument was administered on a face-to-face basis and online. Before the analysis, consistency checks were conducted after which 232 questionnaires were retained for analysis.
Variables and Measurement
The inclination of banks and micro finances to provide loans to the SMEs whose cash flow is visible to the financial institution and SMEs whose cash flow is not visible to the financial institution was measured using a Likert scale.
Data Analysis
Due to the nature of the data collected, the One-Way ANOVA analysis in SPSS was employed to analyze and bring out meaning from the raw data.
The results of the analysis are as follows.
Table 1: ANOVA.The willingness of financial institutions to provide loans based on Cash flow visibility.
Interpretation
The Table 1 displays the results from the ANOVA analysis. Here, the mean willingness of financial institutions to provide SMEs with cashflow visibility is compared with the mean willingness of financial institutions to provide loans to the SMEs with limited cashflow visibility. The F statistic on this is 59.239 resulting from this analysis as statistically significant (p = 0.000 < 0.05). This implies that the cash flow visibility is statistically meaningful to the willingness of financial institutions to provide loans to SMEs. Table 2 displays the results of two robust tests which serve as confirmation of the ANOVA analysis. the Brown-Forsythe test and the Welch test which are similar to the ANOVA but which do not consider the assumption of homogeneity of variance and equal sample size both reveal statistical significance for their respective F statistics (p = 0.000 < 0.05). This there-fore confirms the results of the ANOVA analysis. Therefore, the cash flow visibility of the SMEs is meaningful to the willingness of financial institutions to provide loans to SMEs in Cameroon.
From the above, the visibility of the cash flow of the SMEs is statistically meaningful to the willingness of financial instructions to provide loans to SMEs in the Cameroonian economy. It therefore follows logically that greater visibility of the cash flow of SMEs will contribute considerably to improving SME access to finance in the aforementioned economy. This result goes in line with the reports from multiple studies that have pointed out the issue of information asymmetry as a considerable barrier to SME access to financing (Wang et al., 2019; Lu et al., 2021; Wasiuzzaman et al., 2020; Liu and You, 2023; Ndindah, 2022). Not offering financial institutions the chance to get a clear view into the financial operations of the SME will impact the decision to provide loans. Amadasun and Mutezo, (2023) in this light disclose the finance gap theory as they declare that information asymmetry is counted among the major barriers to SME financing. This implies that the perpetuation of the tradition by SMEs to carry out unbanked financial transactions, thereby keeping financial institutions in the dark contributes to the information asymmetry which then negatively affects the willingness of banks to provide them with loans. Worse still the advent of the mobile money which according to the Robertson and Frank Sylvio, (2020) greatly reduces the constraints involved in cash operations further consolidates SMEs in their habit of carrying out financial transactions without the involvement of the financial institutions. Given the convince of mobile money which in Cameroon is essentially electronic cash Avom et al. (2021) as well as Mvogo and Christèle, (2022) from their studies firmly declare that there is extensive adoption of mobile money services in Cameroon and that it is being used considerably by SMEs in this economy. While this mobile money or electronic cash system is highly advantageous as it is reported by Cameroonian SMEs to be accessible, safe, & convenient (Robertson & Frank Sylvio, 2020) unless the organizations that offer these services, share the information with the financial institutions, and banks visibility of SME financial operation will stay considerably opaque.
Limitation
This research is crossectional, implying that, unlike longitudinal studies, changes that occur the over time might not be captured by the research. More to that, this research might be considered early research since studies on the visibility of SME cash flow are almost nonexistent in the Cameroonian economy. It is an early study that makes use of the quantitative approach. This implies the likelihood of some ground realities not being captured by the research.
Given the documented reduced access of SMEs to financing from formal financial institutions due to the information asymmetry (Wang et al., 2019; Lu et al., 2021; Wasiuzzaman et al., 2020; Liu & You, 2023; Ndindah, 2022) and the impact of limited access to formal financing on the wellbeing of SEMs (Ndindah, 2023; St. Pierre et al., 2015; Tsambou and Fomba, 2017), this research seeks to investigate if the cashflow visibility of SMEs is statistically relevant to the wiliness of banks and microfinance to provide loans to SMEs in Cameroon. Data collected from 232 bank/ microfinance employees through a pretested question-naire was used for this purpose. The results from the ANOVA analysis revealed a statistically significant difference in the willingness of financial institutions to provide loans to SMEs whose cash flow is visible to them compared to those SMEs whose cash flow is opaque to the financial institution. It is thus recom-mended SMEs in Cameroon ensure considerable cash-flow visibility to financial institutions to improve their chances of the obtaining formal financing. It flows logically from this study that SMEs in Cameroon need to render their cash flow as visible as possible to financial institutions so as to enhance the willingness of financial institutions to provide them with loans. It can also be recommended that a means be found to share information from mobile money or electronic cash service providers with financial institutions in order to improve the visibility of the cash operations of SMEs to the financial institutions. In addition, it is recommended that the government as well as other relevant actors take meaningful actions to reduce information asymmetry between SMEs and financial institutions. As for future research, it is recommended that the wider issue of information asymmetry be addressed & models be proposed on how the infor-mation gap between SMEs and financial institutions can be reduced.
The authors of this paper are thankful to the employees of financial institutions in Cameroon who provided adequate data for this study. They equally acknow-ledge the efforts of research assistants who assisted in the data collection process. Finally, the authors are grateful to the Unicaf University for providing high-quality, accessible higher education to the multiple Africans, thus contributing the meaningfully to their development.
This study declares no conflict of interest
Academic Editor
Dr. Doaa Wafik Nada, Associate Professor, School of Business and Economics, Badr University in Cairo (BUC), Cairo, Egypt.
Program Leader of the PhD in Business in Business Program, School of Doctoral Studies, Unicaf University, Larnaca , Cyprus.
Ndifor CN, Musonda N, and Rizkallahi S. (2023). The effect of cashflow visibility on the willingness of financial institutions finance SMEs in Cameroon, Int. J. Manag. Account. 5(5), 89-98. https://doi.org/10.34104/ijma.023.0089098