CHAPTER an engine for economic development in the

CHAPTER IINTRODUCTIONOverviewChapter one begins with lighting up the background of this study. In addition, it explains about the problem statement which leads to general objective and specific objectives. Moreover, research questions are highlighted, then brief descriptions of the rationale of the study follows. Finally, the chapter ends up with the scope of the study.Background to the ProblemSmall and Medium Enterprises (SMEs) serves as an engine for economic development in the world especially the least developed countries including Tanzania (Masataka, 2007). (The global economic development is mostly driven by small and medium enterprises (SMEs).

These SMEs, they acts as an engine and fuel for development worldwide for instance in the developed up to the least developed countries including Tanzania (Masataka, 2007)This is due to the fact that SMEs makes up more than 90 percent of all business enterprises in the developing countries (UNIDO, 1999). Also, SMEs have created as well as employed over 50 percent of the total global population (UNIDO, 1999). On average, more than 60 percent of the gross domestic product (GDP) in Tanzania comes from the business sector (Frimpong, 2013).

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According to Olomi (2006) Tanzania’s economic growth and development are contributed by asignificant role played by the SMEs. That means a large part of that income is generated in the small and medium enterprises (SMEs). Therefore, the growth and prosperity of small and medium enterprises will cause the development of the Tanzania’s economy.

No matter the substantial contribution made towards an economic development, yet the small and medium enterprises in the least developing countries are faced with different challenges which restrict them from growing (Mamman, Kanu, Alharbi, and Baydoun, 2015). These challenges are inadequate access to finance, marketing difficulties, poor infrastructure and modern technology, regressing government regulations such as excessive taxes, levies and fees and poor managerial skills (Kotey, Mazzarol, Clark, McKeown, and Battisti, 2015). Also, Cook and Nixson (2000) suggested that among the factors restricting small and medium enterprises (SMEs) are low access to finance, insufficient, market competitions, the high cost of resources.Parker, Riopelle, and Steel (1995) examined the limited access to finance is the major challenge which would have made operations easy from the resources purchasing to the business operations which require funds. Majority of the SMEs owners they lacks collateral, as a result they cannot secure a loan from the financial institutions. This is the major cause of their restricted financial access. Kessy and Temu (2010) said that SMEs have high restrictions on access to finance including access from the formal financial institutions due to high risk of lending them.

This is due to the fact that majority of the SMEs loans are bound to default. So, it’s very risky for any financial institutions to lend SMEs.Aboagye and Jones (1998) found that products or services of the small and medium enterprises are mainly for the domestic market. Few of them produce for the foreign market.

The few products produced fails to penetrate the foreign markets due to stiff competition. Also, the issue of market competition does affect even the domestic products or services because of the dumping of products from foreign industries with financial strength, technology, and personnel.


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