MICROENTERPRISE PERFORMANCE

The major barrier to the development of micro enterprises is the access to credit.
Since commercial banks do not provide loans to micro entrepreneurs who usually lack
credit history or collateral, microfinance led the way for the solution of this preexisting
dilemma. Micro loans are provided by micro finance institutions with minimal collateral
requirements to small businesses for their startups or production and consumption
needs. Several studies around the world determined the impacts of micro credit on the
micro, small and medium enterprises profitability, growth and development.
Some studies indicate that use of microloans is associated with improvements in
employment and sales of small enterprises. Brown, Earle and Lup (2004), analyzed
small enterprises in Romania and found a strong indication that access to external
credit increases the growth of both employment and sales, while taxes appears as
constrain to growth. Moreover, they proposed that entrepreneurial skills have little
independent effect on growth, once demand conditions are taken into account. Also, a
wide variety of alternative measures of the business environment (contract
enforcement, property rights, and corruption) are tested, but none are found to have any
clear association with firm growth and profitability.
Microcredit also appeared to have positive impacts on enterprises fixed asset
accumulation, and transaction relationships. In Peru, Dunn and Arbuckle (2001) have
observed that the accumulation of fixed assets was more rapid in the industrial sector
than the commercial or service sectors. Also, they supported that microcredit helped
commercial entrepreneurs buy inputs in more advantageous ways like microcredit made
it possible for them to save money by buying inputs in bulk at lower prices. Use of
microcredit as a source of financing also appeared to help entrepreneurs gain
ownership of their business premises. This is considered a positive impact because, if a
premise is owned, the entrepreneur may have more incentive to improve it, does not
have to spend revenue on rent, and does not have to fear eviction. Lastly, they
concluded that microcredit have had positive impacts on microenterprise revenue. Both
old and new borrowers utilized the microcredit to increase combined profits from all

microenterprises in their household economic portfolios. The data from the case study
research indicate that the impacts occur through an increase in enterprise working
capital, so that entrepreneurs can buy more inventory, secure lower input prices, and
increase sales and profits.
Majority of the studies reported that microcredit has a positive impact on
profitability of SMEs. Gubert (2011) found on their study that there is evidence that small
informal enterprises are positively impacted by their access to micro loans. The
evaluation showed that small informal enterprises which have benefited from loans
record better performances on average than their matched counterparts. Idowu (2010)
on the other hand, conducted a study in Nigeria and his findings reveal that significant
number of the SMEs benefitted from the MFIs loans even though only few of them were
capable enough to secure the required amount needed. Majority of SMEs acknowledge
positive contributions of MFIs loans towards promoting their market share, product
innovation achieving market excellence and the overall economic company competitive
advantage.
In a study conducted in Bandung, Indonesia, Rahmat, Megananda, and Maulana
(2006) determined that there is a positive relationship between the micro and small
enterprises (MSE) performance, indicated by its sales, and the micro loan. Based on
their findings, they estimated that an average loan have a positive effect on the MSE
performance. The higher the loan, the better the MSE performance and vice versa. But
if the loan is increased in a double amount, then it will have a negative effect to the MSE
performance. The result concludes that the incremental of the loan will have an adverse
effect to the MSE performance.
Wanambisi (2013) conducted a survey of micro and small enterprises in Kitale
Municipality, Kenya on the effects of micro finance lending on business performance
and indicated that there is a strong positive relationship between the amount of loan and
performance of MSE. Majority of MSEs 44(88%) that accessed the loans reported
increase in sales and income and could repay loan and interest. 49(70%) of those
MSEs that didnt access loans did not realize increase in income. There was observed
significant difference between those who agreed and those who disagrees that amount

of loan increased income of MSE business activities. Further, larger loans are likely to
increase income of MSEs as supported by Makokha (2006) who found that larger loans
enable MSEs to graduate to medium enterprises.
Akisimire (2010) on the other hand, found that credit terms on micro loans have a
positive relationship with performance of small and medium enterprises (SMEs). This
implies that the more favorable the MFI credit terms are, the higher will be the
performance of SMEs. This finding is supported by Chowdhury (2002) also emphasized
that favorable credit terms such as adequate loan amounts, affordable interest rates
and flexible repayment schedules help SMEs keep enough finances to run their working
capital activities, it helps them improve their performance because they will always have
an opportunity cost of reinvesting their proceeds in order to generate more revenues
something that increases on their return on capital employed.
In Kenya, a study of the impacts of microfinance services on the growth of SMEs
supported that the services have assisted the enterprises to change their status through
growth in sales level from micro to small and from small to medium. Overall, its result is
that microfinance impact is favorable on the profitability and growth of the SMEs.
Rahmat, Megananda and Achmad Maulana (2006) identified several interesting
issues on their study on the impact of micro finance to micro and small enterprises
performance and the improvement of their business:
1. Micro finance has positive impact to improvement of MSEs performance
indicated by sales.
2. The difference of regional characteristic of MSE also plays a role in
determining its business scale.
3. Since doubling amount of loan has negative impact to the performance, its
very important to allocate the loan to the productive activities, such as
investment, in the way to improve the business opportunity.
A study on Impact Assessment of Microfinance Interventions was conducted by
Sam Afrane (2002) in Ghana and South Africa Synthesis of Major Impacts and Lessons.

The outcomes of the two case studies have established that microfinance interventions
have achieved significant improvements in terms of increased business incomes,
improved access to life-enhancing facilities, and empowerment of people, particularly
women. Also in Ghana, Bhasin (2001) indicated that the credit constraint and high cost
of capital facing micro enterprises in general, limit output growth through different
technological regimes and increases in input usage. On his study, business that
experiences credit and contact with micro lenders are positively related with the level of
their efficiency.
The effects of Microcredit Institution (MFIs) on the growth of Small and Medium
Scale Enterprises were examined by Quaye (2008), and it revealed that micro credit
institutions have a positive effect on the growth SMEs. In order to enhance a sustained
and accelerated growth in the operations of SMEs credits should be client-oriented and
not product- oriented. Proper and extensive monitoring activities should be provided for
clients who are granted loans..
In assessing the impact of micro finance loans on small informal enterprises in
Madagascar, Gubert (2011), determined that the enterprises are positively impacted by
their access to micro-loans. The evaluation showed that enterprises which have
benefited from loans record better performances on average than their matched
counterparts.
Microcredit is a financial capital meant to help young business owners to keep
their business going (Adebowale,2000). This is the extension of very small loans to the
unemployed, poor entrepreneurs and others living in poverty are considered not
bankable by the banks. Many large finance organizations started contemplating
microcredit projects as a source of future growth. Micro credit is much more than simply
an income generation tool. It has become one of the key driving mechanisms towards
meeting the Millennium Development Goals in India.

Many studies around the world supported and concluded that microcredit has
favorable effects on the profitability, growth and development of enterprises. However,
there were studies conducted that determined that financial capital has little or no
significant impact on the growth and profitability of micro and small enterprises.
The study led by Berge,Bjorvatn and Tungodden (2011) reported that human
capital intervention causes a substantial increase in profits of entrepreneurs and
financial capital intervention has no significant impact on business performance. This
provides evidence that human capital is more important than financial capital on the
growth and development of micro enterprises. The study has shown that human capital
intervention in the form of business training can have a powerful effect on business
performance of poor entrepreneurs while the financial capital has no effect on the
business. This suggests that human capital is a fundamental constraint on micro
enterprise development and more binding than financial capital constraint.
In a meta-analysis of impact of micro loans in poverty and microenterprises, Awaworyi
(n.d.) concluded that micro credit has no significant impact on micro enterprises. The
insignificance of impact could be due to long-repayment time. Stewart et al. (2012)
argue that eventually, micro credit is likely to increase income. However, because
borrowers incur debts which must be repaid over time, expected positive impact of
microcredit on some economic outcomes may not be immediate.
Karlan and Zinman (2010) identified the impacts of a credit expansion for marginal
entrepreneurial borrowers in Manila. They noted that the case of access to micro credit
increases profits, business scale and household consumption is not supported. Instead,
the impacts are diffuse and heterogenous..The results suggested that micro
entrepreneurs used credit to re-optimize business investment in a way that produced
smaller, lower-cost, and more profitable businesses. Profits increase in an absolute
sense, suggesting that many micro entrepreneurs employ workers with negative net
productivity. However, the results by income suggest that effects on profits may be
larger for those with relatively high incomes. This follows that lower-income borrowers
may have lower returns to capital.

Ardianti and Atmadja (n. d.) indicated that micro credit does not significantly give direct
contributions to both member/clients sales and profit, as the business performance (BP)
indicators, achievements. The general conclusion of the study is that the financial
benefits, which are micro credit facilities, provided through microfinance programs, have
a tendency to improve the clients standard of living, but not their business performance.
It indicates that instead of using the micro credits solely for business purposes, the
clients seemingly use the credits for purposes other than the business itself, such as
consumption spending, to improve some of their standard of living indicators. Thus,
micro credits distributed through microfinance programs does not seem to have a
significant role in supporting their clients business performance, however being a
member/client of a MFI and receiving its loans may create a positive impact on the
recipients well-being.
A related study by Mcpherson and Rous (n.d.) determined that the discrete factor
model of their study on access to finance and small business growth provided no
evidence that access to credit has an appreciable effect on a firms growth. Evidently,
growth is determined by the sector in which a firm operates, its initial size, its age, and
certain unobservable characteristics of the firm and the community in which it operates.
This suggests that factors such as entrepreneurial eagerness may be important for firm
growth, but that access to credit is not. Gharad B. et al, (2013) on the other hand, stated
that increased access to credit may make micro enterprises more efficient and
profitable, potentially taking away business from their competitors. But, if increased
access to credit leads some businesses to develop better methods of production that
their competitors can copy, access to credit could potentially indirectly benefit their
competitors and thus would not produce any effect at all in the profitability of the micro
enterprise.
Lastly, Vogelgesang U. (2002) observed that the effects of loans on the
performance indicators varies somewhat across countries so further country-specific
analyses will be useful. Moreover, many of the effects do not vary with the size of the

loan and that some loans may be too big in the sense that they bring about a
diminishing return or even decline in performance.
While most of the above mentioned studies provide a positive influence of
microloans on profitability, they do not directly or explicitly model the microenterprises
as most of them are studies on SMEs (Small Medium Enterprises). Also the studies are
conducted in Nigeria, Africa, India, Peru etc., and no research was conducted in the
Philippines. The main contribution of this paper is to focus on Philippines to study the
relationship between the profitability and the microcredit of micro enterprises and to
determine the other impacts of microcredit. The paper shows that microfinance plays a
crucial role in the revenue and profit growth of Micro Enterprises. Furthermore, the
paper was conducted to determine the factors that affects the access of micro
enterprises to microfinance and their main purpose of acquiring micro loans.