The effect of credit financing on the financial performance of medium-scale enterprises in Katwe – Butego Division, Masaka Municipality

Abstract

Over the years, medium sized enterprises have been shown as the main driving forces for promoting economic growth in any nation as they encouraged entrepreneurship and wealth creation, alleviated poverty and increased productivity levels in a nation, not only in developed countries but also in developing countries and emerging economies (Sacerdoti, 2005). The purpose of the research was to examine the effect of credit financing on the financial performance of medium scale enterprises, case of selected medium scale enterprises in Katwe – Butego Division in Masaka Municipality. Credit financing was the independent variable and the dependent variable was financial performance of medium scale enterprises. The study was based on three objectives; to examine the effect of loans on the financial performance of medium scale enterprises, to examine the effect of trade credit on financial performance of medium scale enterprises, to establish the relationship between credit financing and financial performance of medium scale enterprises, and the research questions were formulated from the specific objectives to the study. The Researcher used a descriptive research design to undertake the study with the help of quantitative approaches. The Researcher had a sample size of 42 respondents and 10 medium enterprises in Katwe – Butego Division that were contacted. The Researcher obtained primary data through field survey as well as secondary data from libraries, journals, text books and unpublished research reports. The Researcher used only questionnaires for collecting data from the field. Data collected from the field was collected, interpreted and analyzed using Statistical Package for Social Scientists (SPSS) version 16.0 to generate the frequency tables, pie and bar charts for which data analysis and discussions were made. From the field findings, it was found out that medium scale enterprises use loans, trade credit and bank overdraft in financing their business operations despite the high interest rates and administrative costs attached when acquiring loans and credit supplies from suppliers. The study therefore, concluded that; the profits made by medium scale enterprises were greatly encroached on by the high interest rate charges on loans and bank overdrafts thus resulted into poor financial performance of such businesses. Lastly, the Researcher recommended that the central bank should set policies and procedures to prevent barriers that inhibit potential owners and managers of medium scale enterprises from accessing credit facilities from financial and other credit institutions in order create a conducive environment for MSEs’ growth and expansion as well as opening up opportunities for jobs thus enhancing economic growth.