Academic journal article American Journal of Entrepreneurship

Rethinking Micro-Entrepreneurs Financing by MFIs in Cameroon: Human OR Economic Capital?

Academic journal article American Journal of Entrepreneurship

Rethinking Micro-Entrepreneurs Financing by MFIs in Cameroon: Human OR Economic Capital?

Article excerpt

(ProQuest: ... denotes formulae omitted.)


Finances have been an acute problem for entrepreneurship development in developing countries, mostly in Africa (Warmer, 1993; Daglish, 2008, p.55) and specifically for micro-businesses. Empirical studies have shown that most microentrepreneurs are excluded from traditional sources of financing. It is either because of the nature of their business considered as very risky (Armendariz de Aghion, 2005) or because they cannot provide the required collaterals needed for financing.

In Cameroon, the economic crisis of the mid 1980s and early 1990s led to the collapse of many traditional banks and specialized financial institutions in charge of the financing of micro-entrepreneurs. This raises a problem of financing of micro-businesses creation and development in Cameroon. These micro -businesses are mostly found in the informal sector. The informal sector is the largest employment sector in Cameroon. It employs 90% of the working population (National Institute of Statistics [INS], 2006).The population is made up of informal micro-entrepreneurs. Most of these people were not employed in the formal sector, neither the public nor private sectors. Micro-entrepreneurs are also in micro-businesses to fight poverty. In 2007, the monetary poverty in Cameroon was affecting 39.7% of the total population (Households Cameroon Survey 3 [ECAM 3], 2007).

Most micro-entrepreneurs in Cameroon finance their business activities through informal sources of finance such as Rotative Savings Credit Associations (ROSCAs), friends, family and personal savings (Warmer, 1993). The negative effect of the informal finance is that it increases the cost of production or the operating cost of microentrepreneurs with high interest rates paid to informal lenders. Micro-entrepreneurs are excluded from the traditional banks' financing because they cannot provide collaterals, registration and administrative charges needed for credit.

The crisis of the traditional financial system provided an alternative source of financing to micro-entrepreneurs. This led to the development of micro finance in 1990. Cameroon authorities are also used microfinance as a strategy to finance microentrepreneurs, to alleviate poverty and to reduce underemployment (Growth and Employment Strategic Paper, [DSCE], 2010). Microfinance Institutions (MFIs) as any other type of lender always assess the borrower before granting the credit. They use a set of the borrowers' characteristics to take the decision of financing. As far as the financing of micro-entrepreneurs is concerned, these characteristics can be related to their human capital (personalities) or economic capital (business activities and assets). This raises eyebrows as to which of the characteristics affect the Microfinance Institutions' lending to micro-entrepreneurs in Cameroon.

The objective of this study is to examine the economic and the human characteristics of micro-entrepreneurs affecting the lending of Microfinance Institutions in Cameroon. The paper is divided into sections. The further sections present the theoretical framework, the empirical framework, the research hypotheses, the methodology, the results, the interpretation and discussion of results and the concluding remarks and recommendations.


The terms of the lending contract are made up of interest rate charged to the borrower, the amount of the loan and the value of the collaterals (Stiglitz and Weiss 1981). The interest rate charged to the borrower reflects the level of risk bearing by the project financed by the lender. An increase in the interest rate affects the return of the project. Higher interest rate induces firms to undertake projects with lower probability to success, but higher payoffs when successful (Stiglitz and Weiss, 1981).

Stiglitz and Weiss (1981) consider borrowers who want to pay an interest rate above the average interest rate charged by the institution to borrowers as risky borrowers. …

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