MAKERERE UNIVERSITY

A RESEARCH PROPOSAL SUBMITTED TO THE SCHOOL OF EDUCATION

AND EXTERNAL STUDIES IN PARTIAL FULFILMENT OF THE
REQUIREMENTS FOR THE AWARD OF DIPLOMA IN BUSINESS
MANAGEMENT
AT MAKERERE UNIVERSITY UGANDA

TOPIC: THE IMPACT OF ACCESS TO FINANCE ON SMALL

AND
MEDIUM ENTERPRISES (SMEs)
CASE STUDY: MAKINDYE KAMPALA, WAKISO DISTRICT
BY
NALWOGA HALIMA
UBB067/2019/B/D/A/288

JULY 2022

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 DECLARATION

I Nalwaga Halima, hereby declare that this research report is my original work and it has not
been submitted in this form or any other form to this or any other institution .

Signature………………………………..

Date…………………………………………

i
 APPROVAL

This research report has been submitted for examination with my approval as the university

candidate supervisor

Signature …………………………… Date………………………………….

MULONDO (university supervisor)

ii
 DEDICATION

I wish to dedicate this project to my beloved mother, Miss Nagujja Aisha and Mr Mubiru

Haruna for the spiritual ,moral and financial support they extended to me during my years of

study at campus.

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 ACKNOWLEDGMENT

I wish to thank the almighty God for keeping alive and providing me with wisdom,capacity

and courage to go through the two year succcessfuly.

I appreciate and also humbled to give my special thanks to my supervisor mr Kiyimba Chris,

thank you for your guidance,advise ,support and time you accorded to me during the

completion of this report.

Special thanks to all those friends and relatives who supported me during the course.

God bless you all.

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 Table of Contents
DECLARATION........................................................................................................................i
APPROVAL..............................................................................................................................ii
DEDICATION..........................................................................................................................iii
ACKNOWLEDGMENT...........................................................................................................iv
CHAPTER ONE........................................................................................................................1
INTRODUCTION......................................................................................................................1
1.1 Background of the study......................................................................................................1
1.2 Statement of the problem.....................................................................................................4
1.3 Purpose of the study.............................................................................................................4
1.4 Specific objectives...............................................................................................................4
1.5 Research questions...............................................................................................................5
1.6 Scope of the study................................................................................................................5
1.6.1Geographical Scope...........................................................................................................5
1.6.2 Content Scope...................................................................................................................5
1.6.3Time Scope.........................................................................................................................5
1.7 Significance of the Study.....................................................................................................5
1.8 Conceptual frame work........................................................................................................6
Figure 1: Conceptual Framework...............................................................................................6
CHAPTER TWO.......................................................................................................................8
REVIEW OF RELATED LITERATURE.................................................................................8
2.0 Introduction..........................................................................................................................8
2.1 Theoretical Review..............................................................................................................8
2.2 Microfinance........................................................................................................................9
2.3. Small enterprise development...........................................................................................11
CHAPTER THREE..................................................................................................................13
METHODOLOGY...................................................................................................................13
3.0 Introduction........................................................................................................................13
3.1 Research design..................................................................................................................13
3.2 Research Population...........................................................................................................13
3.3 Sample size.........................................................................................................................13
Table1. Population and sample size table................................................................................14

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3.4 Sampling procedures..........................................................................................................14
3.5 Research Instruments.........................................................................................................15
3.5.1 Questionnaires.................................................................................................................15
3.6 Validity and Reliability of the instruments........................................................................15
3.6.1 Validity............................................................................................................................15
3.6.2 Reliability........................................................................................................................16
3.7 Data Analysis.....................................................................................................................16
3.8 Ethical considerations........................................................................................................16
3.9 Limitations of the study.....................................................................................................16
References................................................................................................................................17
APPENDIX I: QUESTIONAIRE............................................................................................20
DEMOGRAPHIC CHARACTERISTICS OF THE RESPONDENTS...................................20
PROPOSED BUDGET............................................................................................................25
Appendix III: Time frame........................................................................................................26

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 CHAPTER ONE

INTRODUCTION

1.0 Introduction
The study was meant to establish the impact of access to finance on SMEs (small medium
enterprises ) in Makindye Kampala Division consists of the background to the study,
statement of the problem, purpose of the study, objectives of the study, research questions,
scope and significance of the study.

1.1 Background of the study

It is the dream of every country to have an economy that is self sustaining; with yet in Africa
poverty is the heart of its problems especially in sub-Saharan Africa. In Uganda poverty has
been increasing at the rate of 2.5% every year since 2004 due to higher increase in
population, Corruption of some big members of government, lack of social services like
transports and communication to some part of the country etc. Increase in poverty has caused
many problems like increase in environmental destructions, low income to the people
especially central part of the country and poor economic-social empowerment. (PEAP; 2007)

Beginning in the late 1970’s some highly inventive non- profit making agencies and banks
pioneered techniques to issue loans to the self-employed who know their trade well, but lack
conventional means to secure a loan. Micro-finance institutions (MFI’s) as these innovations
are now called, have prospered in some of the poorest countries of Africa, Latin America and
Asia.

The financial system in Uganda is composed of formal, semiformal and informal institutions. 
The formal institutions include banks, Microfinance Deposit-taking institutions, Credit
Institutions, Insurance companies, Development Banks, Pension Funds and Capital Markets. 
The semi informal institutions include Savings and Credit Cooperative Associations
(SACCO) and other Microfinance institutions, whereas the informal ones are mostly village
savings and loans associations (B O U, 2005).  Formal institutions are less prominent in rural
areas than urban areas and they only serve 14% of the rural population. Informal institutions
play an important role in the rural service provisions and serve approximately 12% of the
rural population. 

In Uganda, micro-finance institutions started early 1986 aiming at provisions of micro credit
and savings services to low income earners but economically active poor. Generally the

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focuses on the group already engaged in one or several small scale activities, clients borrow
and invest in their activities, repay their loans and borrow again. There are so many
microfinance institutions operating in Uganda, the most prevailing are PRIDE and FINCA
which provide credit and savings to the poor people without collateral(Kaplan & Norton,
1992)

By early the 1990s, the banking sector was comprised mainly of four foreign banks (Standard
Chartered, Standard Bank, Barclays and Baroda), and the two large indigenous banks (UCB
and Co-op) that controlled 70 percent of the banking assets and liabilities but were
insolvent. By the end of 2005, the system had substantially grown and was made up of a
formal and an informal sector. The number of commercial banks increased to 20 in 1996,
when a moratorium on banking licenses was imposed and after the closure of some banks and
consolidation, fell to 15 (B O U, 2005).

Microfinance is the provision of finance services to low income clients including consumers
and the self employed that traditionally lack access to banks and related services (Nuwagaba,
1997). Microfinance institutions are therefore institutions that provide finance services to low
income earners who lack access to banks and banks related services (Georgina, 2001).

According to Garner(1996) the object of microfinance institutions is a world in which as

many poor and near poor households as possible have permanent access to an appropriate rate
of high quality services, including not just credit but also savings, insurance and fund
transfers, those who promote microfinance institutions have believed that such access of
poor or near poor people to an appropriate rate of high quality financial services of credit and
savings will help poor people out of poverty and lead to rural development ( Agarwal, 1990).

This study is based on Theory of Change (TOC)-based approach to M&E, impact assessment
by Weiss, C.H. (1995). The classic microfinance theory of change is simple: poor person
goes to a microfinance provider and takes a loan(or saves the same amount) to start or expand
a micro enterprise which yields enough net revenue to repay the loan with major interest and
still have sufficient profit to increase personal or house hold income enough to raise the
person’s standard of living.

The theory of change provides a model of how a program or business can be supported and
led to growth through proper financial support that increases performance of small business.

2
In other words it provides a road map of the development of a small business to a large
productive business.

The study will also be guided by the principal agent / cooperate social responsible theory
(P/A Theory & CSR) in global value chains. In this theory, practitioners and are increasingly
aware that doing the right things is not just a matter of being profitable. The ethics of
business activities are becoming increasingly important, and more and more companies are
evaluated on their ability to meet not only the customers’ needs but also the various needs of
employees, NGOs, representatives of the local community and other interest groups. The
globalization of economic activities has undoubtly affected this development. When part of
the value chain is in different geographic, cultural and institutional settings, differences in
social and environmental standards are uncovered.

Access to finance is necessary to create an economic environment that enables firms to

grow and prosper. SMEs in developing countries, however, face significant barriers to
finance. Financial constraints are higher in developing countries in general, but SMEs are
particularly constrained by gaps in the financial system such as high administrative costs,
high collateral requirements and lack of experience within financial intermediaries.
Increased access to finance for SMEs can improve economic conditions in developing
countries by fostering innovation, macro-economic resilience, and GDP growth.

The major concepts that will appear in this work will be concerned with the microfinance
services and the level of growth of small scale enterprises. According to Georgina, (2001)
Microfinance is understood as small and adapted financial services for poor and low-income
populations and micro, small, and sometimes medium-sized enterprises. They may or may
not have limited access to mainstream financial services. Microfinance institutions are
therefore institutions that provide finance services to low income earners who lack access to
banks and banks related services.

Small enterprises are one the other hand defined as normally privately owned corporations,
partnerships, or sole proprietorships that are operating on a small scale. Small business
owners are responsible for managing all aspects of their company and provide the necessary
capital for the survival of such businesses (Ddumba Ssentamu, 2000). The growth of small
enterprises is referred to as the quantitative increase in the size and level of productivity or
operations of a business.

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Micro finance has been a major strategy adopted by many developing countries as a way of
enhancing growth and development of small business. Developing countries have always
been challenged with the problem of unemployment caused as a result of having many
dependants chasing the few available jobs. Through following the need for reforms as stated
in the world bank report 1996 regarding reforms in developing countries, many strategies
such as expanding the informal sector where most of the people are meant to create their own
small businesses as this will reduce unemployment and also lead to development.

The creation of the small businesses however require funding for expansion and increase in
the level of productivity and growth, this therefore means that creation of micro finance
institutions where people can access small loans or funding to take their businesses to the
next level would be the best strategy of expanding these businesses (Georgina, 2001).

1.2 Statement of the problem

The following section will first look at debt financing, and the reasons why banks provide
insufficient debt to SMEs. It will demonstrate that the access to finance gap is a complex
problem driven by several factors including lower returns, higher risk perceptions, an
uninspiring regulatory environment, and a lack of intermediary skills, experience and
capacisstudy

Many critics of microfinance institutions had asserted that microfinance does not have the
power to simple handedly defeat poverty and enhance the growth and development of small
enterprises. The lack of documented evidence measuring and monitoring the impact of
microfinance institutions towards small scale business growth and development had been the
source of considerable criticisms. This is because many people in the developing countries
like Uganda where micro finance institutions are meant to effectively operate have not
participated or used these institutions.

The proposed study therefore aims at examining the role of microfinance towards small scale
enterprise growth development taking Makindye town in Kampala Uganda as the area of
study. It is hoped that the study results will shade some light on the role of microfinance
institutions played towards small scale enterprise growth. Possible solutions to improve the
role microfinance institutions played towards small scale enterprise development will be
suggested whereby if implemented would cause greater small business development
emanating from microfinance institution.

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1.3 Purpose of the study

The purpose of the study was to evaluate the impact of access to finance on SMEs (small
medium enterprises) in Kampala divistudy

To establish the impact micro finance institutions towards the growth and development of
small scale enterprises in Makindye Kampala

1.4 Specific objectives

The following are the specific objectives of this study
To assess the performance of small scale business enterprises in Kampala Division

To find out if the policies are adhered to by the SMEs to access finance.

To find out problems affecting SMEs to access finance.

I. To examine the spread and performance of micro finance institutions in Makindye

Town in Kampala
II. To examine the level of growth of small enterprises in Makindye Town in Kampala
III. To establish the impact of microfinance institutions towards the growth of small
enterprises in Makindye Town in Kampala.

1.5 Research questions

The study will seek to answer the following questions

What is the performance of small scale Enterprise in Kampala Division?

Are SMEs aware of policies concerning to access finastudy

What are the problems faced By Sstudy

What is the level of spread and performance of micro finance institutions in Makindye Town
in Kampala?

I. What is the level of growth of small scale enterprises in Makindye Town in Kampala?

II. What is the impact of microfinance institutions towards the growth of small
enterprises in Makindye Town in Kampala?

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1.6 Scope of the study
The study covered small scale enterprise in Kampala Division. Specifically, the study
investigated the performance of small scale intermediaries, the awareness of the finance
policy problems faced by the SMEs and the relationship between the taxes paid and the
performance of the small scale businesses.

1.6.1Geographical Scope

The proposed study area is Makindye Town in Kampala. The area is located in outside parts
ok Kampala town with high population and easy accessibility with a lot of small scale
enterprises and microfinance.

1.6.2 Content Scope

The proposed study content is basically involved with finding out the roles of microfinance
institutions towards the growth and development of small enterprises, the study will focus on
finding out the number of micro finance institutions their performance correlated with the
level of growth of small enterprises in the selected area.

1.6.3Time Scope

The proposed study will be conducted with a period of five months (5) to effectively gather
the information that effectively meets the study objectives. The stud shall base on the data
from 2005 to date as the most relevant data for better analysis and comparison purposes.

1.7 Significance of the Study

With the study on small scale development through use of microfinance institutions, the

researcher hopes that the study will form a basic material to the following beneficiaries:

To scholars and researchers, the findings of the study are expected to contribute to the
existing literature about taxation and the effect it causes to the economy as a whole.

To the tax authority and government, the study will guide them in adjusting tax policies so
that they suit requirements of small scale businesses.

To future academicians especially of Makerere University, the study will help in gaining
insight about taxes and performance of small scale business enterprises.

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The accomplishment of the study will enable the researcher to acquire hands on skills about

processing of research work and data analysis. This proficiency will enable the researcher to

handle such related work with a lot of precision and proficiency.

The information will be useful for planners and decision makers in different institutions

dealing with microfinance program .The findings and recommendations will also be useful to

small scale enterprise managers in determining the usefulness of microfinance towards

development and growth of their enterprises.

The academicians will also use the findings of this study to embark on a related study. In

other terms, the study findings in this research will act as reference for other future

researchers

The researcher will also acquire necessary skills of data collection, interpretation, analysis

and discussion and this will help him in carrying out similar research in future and to enable

him getting the award of other degrees related to accounting and finance.

1.8 Conceptual frame work

Figure 1: Conceptual Framework

Independent Variable Dependent Variable

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Microfinance institutions

The above conceptual frame work describes the relationship between the independent
variable and the dependent variable. The frame work further presents the intervening factors
that can also impact or determine the dependent variable.

The performance of microfinance institutions is the independent variable and this involves
factors such as provision of loans, the interests rates, advisory services and training to people
to enable to effectively use these funds. The services provided by the microfinance
institutions determine the growth and development of small enterprises. This therefore means
that the growth of the small enterprises depend on the services delivered by microfinance
institutions and the growth is expressed in terms of size of the enterprise, level of profits,
efficiency and increase in the level of productivity.

According to the frame work, the small enterprise is not only impacted on by the services of
microfinance institution but also impacted on by other factors such as the government factors
like taxation and economic factors which are essential determinants of the success of
activities.

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 CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.0 Introduction

The following chapter elaborates the theoretical review of the research and reviews literature
on the study. The presents concepts, opinions and ideas on microfinance and performance of
small scale enterprises and the second part reviews related studies
This chapter looks at taxation and its impact to performance of small scale business
enterprises in Uganda particularly makindye Town Council.It consists of existing literature
on taxation by different scholars/research studies from magazines, text books, journals and
news papers. This chapter covers taxation, classification, and purpose of taxation. However it
particularly addresses the problems affecting tax payers, the awareness of the tax obligation
and performance of small scale business enterprises.

2.1 Theoretical Review

This study is based on Theory of Change (TOC)-based approach to M&E, impact assessment
by Weiss, C.H. (1995).  The classic microfinance theory of change is simple: poor person
goes to a microfinance provider and takes a loan (or saves the same amount) to start or
expand a micro enterprise which yields enough net revenue to repay the loan with major
interest and still have sufficient profit to increase personal or house hold income enough to
raise the person’s standard of living.

The theory of change provides a model of how a program or business can be supported and
led to growth through proper financial support that increases performance of small business.
In other words it provides a road map of the development of a small business to a large
productive business.

According to Weiss, C.H. (1995), the idea of the ToC approach seems to have first emerged
in the United States in the 1990s, in the context of improving evaluation theory and practice
in the field of community initiatives. Yet the “current evolution draws on two streams of
development and social program practice: evaluation and informed social practice (Vogel,
I.2012). From the evaluation perspective, ToC is part of broader program analysis or
program theory.

9
In the development field, it also grew out of the tradition of logic planning models such as the
logical framework approach developed from the 1970s onwards. The notion of developing
informed social practice has a long history; practitioners have often sought (and used) tools to
attempt to consciously reflect on the underlying theories for development practice (James,
Cathy. 2011).

The study will also be guided by the principal agent / cooperate social responsible
theory( P/A Theory & CSR) in global value chains. In this theory, practitioners and are
increasingly aware that doing the right things is not just a matter of being profitable. The
ethics of business activities are becoming increasingly important, and more and more
companies are evaluated on their ability to meet – not only the customers’ needs but also the
various needs of employees, NGOs, representatives of the local community and other interest
groups. The globalization of economic activities has un doubtly affected this development.
When part of the value chain is in different geographic, cultural and institutional settings,
differences in social and environmental standards are uncovered.

2.2 The concept of taxation

This refers to assessment, collection, administration and management of taxes in Uganda. It

deals with raising public revenue, managing public expenditure and public debt. It is the
responsibility of URA (Manasseh, 2000). The general idea behind taxation is the provision of
public goods and services. However the benefits received by tax payers from the government
are not related to or proportionate to the tax paid (Bhatia, 2002).Taxation is a payment which
cannot be avoided without attracting a punishment and in return of which no gain/quid pro-
quo is promised by the government to the tax payer (Balunywa, 1988). The government is
responsible for providing to its citizens certain public facilities and services like roads,
hospitals, schools, and market securities. There are two main tax authorities; the local
government authority and the central government authority through Uganda revenue
authority (URA).

Tax

It can be defined as a compulsory and non refundable contribution executed by government

for public purposes. Payment is not followed by concurrent benefit in return. A tax is
generally referred to as a compulsory levy imposed by the government upon the assessees of
various categories. A tax is paid without a corresponding return in terms of goods or services
from the government and hence it is referred to as a non quid proquo payment (Income Tax
Act, 1997)6A tax can also be defined as a contribution imposed on any person,
business/property, for supporting central/local governments (Tayebwa, 1998).

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Classification of taxes.

According to Manasseh (2000), taxes are classified as either direct versus indirect or
proportional versus progressive tax.

a. Direct versus indirect.

1. Direct taxes are those that affect the individuals/firms directly through a deduction from
earnings. Examples include; individual income tax, corporation tax, taxes on property and
others.

2. Indirect taxes are those taxes that are paid to government by an intermediary and then
passed on to the final user by including the tax in the final price. Examples include; export
and import duties, excise and local production, value added tax (VAT) and others.

b. Proportional versus progressive tax

On the basis of equity, taxes are classified as proportional/progressive. A tax is said to be

progressive when with increasing income the tax liability not only increases in absolute terms
but also proportionate to income.

The purpose of taxation

According to Income Tax Act (1997), taxation is an important source of government revenue
and an economic policy tool by government to attain economic growth. The importance of
taxation therefore arises from debate of whether government should interfere in the
operations of the market mechanism. Income Tax Act (1997) further noted that taxes may be
levied for other reasons but revenue remains the prime objective of most taxes. Balunywa
(1988) noted that, taxation has increased in importance not only as a tool of raising revenue
for the traditional roles but also for accelerating the economic growth and ensuring social
justice. The primary objective of taxation in underdeveloped countries is not related to
stability of income and expenditure. These countries facenumber of problems of insufficient
savings and 7capital accumulation, which calls for a need to promote specific products to fill
both the supply and demand gaps. It is the problem of growth that covers a number of
aspects; the tax system has to be designed to help the economy (Bhatia, 2002). According to
the Uganda economic journal (1973), taxes can reduce the quality of resources consumed by
the private sector. The Economic Journal (1973) also shows that, in stressing consumption
reducing aspect, taxes may change the distribution of income and help to stabilize the
economy.

Tax policies.

The World Bank has influenced many countries in under taking tax reform policies. For the
case of Uganda, the tax base has remained significantly narrow since independence, leading
to inadequate tax revenue. By May 2004, the tax ratio of tax revenue to GDP was just 18-
20%. The composition of tax revenue has been predominantly important. Small scale
businesses are taxed differently compared to corporation/business with an annual turnover of

11
above 50 million shillings. Medical practices, legal practices, engineering service, accounting
and audit practices are tax payers even when their turn over is less than 50 million shillings.
As quoted by Kitinisa (2003), there are three broad approaches to tax policies and these are;

1. Application of the standard tax provisions to all business activities

2. Taxing various business activities differently to achieve economic business policy such as;
increase in private investment, exports/employment depending on the revenue needs, the
second approval can result in a relatively high tax rates in some sectors and hence induce
problems for compliance and adversely affect the general investment climate.

3. Uganda has gone through a number of tax policy reforms, these include; gender,
nationalization, and harmonisation of tax rates and tariffs, abolition of wide ranging
exemptions, new tax incentives and conditional exemptions.

Approaches to tax administration

According to Bird (1974), tax administration refers to the identification of the tax payer,
assessment of tax payable, collection of taxes and enforcement of tax liability. According to
Olman (1967), tax administration refers to a structure/procedure of identification of potential
tax payer, collection and laws governing taxation. 8RoyBahl (1988) says that much attention
should be paid to critical aspects of tax administration, training, procedures, staffing,
collection and use of information. The weaknesses in tax administration are mainly caused by
lack of relevant information about the tax payer, continued criticism of the tax and its
structure. The tax structure should be simple in order to avoid tax evasion.

Identification of a tax payer

Taxes are levied on individuals, groups/legal entities income earned. The identification of a
tax payer is done with reference to natural/artificial persons who can earn income.However,
for the purpose of this research we shall confine ourselves to business as a tax payer and a
business can be defined as vocation, trade, profession, adventure in the nature of trade but
does not include employment (Income Act, 1997).

Assessment of taxes

Income Tax Act (1997) section 3 (a), defines assessment as the ascertainment of the
chargeable income and the amount of tax payable on it by the tax payer for a year of income.
Assessment of tax is a process of ascertaining the amount of tax to be levied on a
person/business according to his/its income. According to the income tax Act (1997) section
96 (11) the commissioner is required to make an assessment of the chargeable income based
on his returns and on any other information available within seven years from the date the
return was furnished. However, small scale businesses are not required to submit in any
return to the commissioner.

2.3. Small scale business

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According to the Income Tax Act (1997), small scale businesses are those with growth turn
over of less than 50 million shillings per annum. In Uganda it’s not only income tax Act that
has tried to define small scale businesses; there are also institutions which have tried to define
small scale business (SSB) such as; Ministry of Finance Planning and Economic
Development (MFPED), the Uganda Small Scale Industries Association (USSIA). The
MFPED defines SSB as a unit with a capital investment not exceeding US$ 300,000.

The USSIA defines SSB as those with employees between 1-25 people and assets and capital
exceeding US$ 1,000,000.9The study is to assume a small scale business as one with the
following features;

i). A business which employees 1-50 people.

ii). Has a capital investment of less than shillings 40 million.

iii). Has average annual revenue/sales of less than shillings 50 million.

Fines and penalties

Musgrave argues that in all matters of legal rules, better compliance can be served either by a
higher penalty if the offender is caught or by well facilitating the enforcements so as to
increase the probability of being caught. However, Bird (1974) argued that the law should
provide an adequate penalty structure, appeal system and general administration.The penalty
structure should be primarily financial in character and probably progressively related to the
amount of tax evaded and the seriousness of the offence in case a tax payer fails to pay any
tax including; provisional tax, any withholding tax or tax required to be withheld, the penalty
is 2% simple interest per month on the amount unpaid calculated from the date on which
payment was due until the date on which payment is made (Pius, 2001). Under estimating
provisional income return is less than 90% of the tax payer’s actual chargeable assessed for
the year ofincome, the penalty is 20% of the difference between taxes based on provisional
return as revised, and tax calculated in respect of the 90% of the actual income for the year of
income.

Performance of small scale business

Kitinisa (2004) describes performance of small scale business as the ability to attain it’s goals
by using resources in an efficient and effective manner, the goals of the organisation include;
survival, profit making and expansion. Pandey (1979) looks at financial analysis as a measure
of the organisation/business performance. The assessment of financial performance of
business entities has a well established methodology that includes computation and
interpretation of univariate and multivariate models. Univariate predictions of performance
are single ratios calculated for efficiency (Makerere Business Journal, 1996).10In this study,
the researcher is to consider performance of small scale business as the ability of the
business:

i. To meet its tax obligations.

13
ii. Cover its operating expenses and still retain some profits which can either be used for

re-investment or otherwise.

iii. The ability of the business to make sales that sustain its expenses.

Taxation and business performance

Taxes levied on revenue are worthwhile only if it can generate meaningful revenues at

acceptable rates and procedures (Musgrave and Musgrave, 1984).According to Gordon and
Dawson (1987), through taxation, the government takes away money from people they would
otherwise spend on private sector. As a result, purchasing power reduces per unit of
production in the private sector to the public sector. They further asserted that, one of the
most frequent arguments against high income tax is that it destroys the incentive to business
people and employees to work harder and more efficiently. According to the World Bank
Symposium (1991), businesses carry out tax planning so as to have a minimal tax liability
and thus increasing the purchasing power. It is through taxes that the government takes away
money from people/business they would otherwise spend onprivate sector. This loss of
purchasing power reduces the demand for units of products in the private sector (Gordon and
Dawson, 1987).

Taxes and profit levels.

The taxable profits of business are always different from the normal business account profits
for three major reasons;

i. Certain income which may be considered in the normal accounting system may not be
liable to tax.

ii. Certain expenses that are deducted on profit and loss account may not be available when
determining taxable income.

iii. Some tax allowances may be provided and will not be reflected in business account.
(Manasseh T. 2000).11 Gordon and Dawson (1987) assert that many business people have
complained probably with some justification that taxes interfere with the opportunities to re-
invest their profits in their businesses.

Taxation and investment

Given the fact that there are financial institutions and mechanism for collecting the
community’s savings and bringing them to investors, the level and patterns of investment
will be greatly influenced by taxes. This is because the investors are basically interested in
making profit yet profitability of investment can be affected through various tax measures in
the following ways;

i. The possibility of taxing savings themselves. If this happens, the investor will experience a
low level of savings and the over all level of investment will be low.

14
ii. The authorities might tax earnings from investment to an extent that it might become a
problem for the firm to raise adequate resources in the market.

iii. If the retained profits of the firm are taxed, they will not be able to depend much upon
their internal resources for expansion, instead they will borrow and invest if at all they do so
(Bhatia H.L, 2002).

Problems encountered by SSBs in trying to comply with tax policies.

Most businesses in Uganda are owned and managed by persons who are unskilled in the
profession of accounting and thus do not keep proper books of accounts. These are especially
sole proprietors and family businesses or partnerships. These generally do not keep books of
accounts, have low sales turn over and change hands and business very often (Ravenous,
2005).

Mugulusi (2001) found out that a large proportion of business community is ignorant about
taxes they pay, how these taxes are computed, lack of knowledge is attributed to the poor
methods of sensitization used by URA.

According to Ravenous (2005), the following are some of the problems faced by tax payers;

i. There is unfair treatment of tax payers, some of which are not necessary tax

obligations and thus not met as a result of this process. 12

ii. Tax payers have little understanding of the obligation as a result of lack of tax education.
It is said that URA would get fewer problems with tax payers if they were able to understand
how their liabilities come about.

Tax payer’s knowledge

Most Ugandans have poor/lack understanding of the rationale of taxes and knowledge of
different taxes imposed on them (Coping with taxes 1996). As a result, the tax compliance in
Uganda is still very low. Besides that, various surveys conducted on small scale businesses in
Uganda suggest that about 60% of them keep no records at all, while 25% keep partial
records making it difficult to assess taxes (Ndandiko, 2000).

Alwedi (2002) found out that most SSBs are managed on unprofessional lines (poor or no
business records) thus there is great uncertainty among traders in Uganda as regard to tax
matters and to some extent due to their own making.

Ludega (2002) asserts that, many traders have expressed ignorance about taxes imposed on
their businesses. They say that this is highly attributed to the poor work being done by the
tax authorities leaving traders ignorant about issues like the way taxes are assessed,
advantages of paying taxes and the use to which it is put. Therefore there is a need to
sensitize the public especially business owners. The sensitization should be done on different
taxes that impact the business owners and the rationale that underlines the imposition of

15
taxes, because tax payers are not aware of the reasons for paying taxes, evasion of tax duties,
laws and regulations are very rampant. (World Bank Survey, 1994).

Conclusions

This chapter is analyzed using across section of literature dealing with taxation and the
performance of SSBs. However, most of the literature reviewed does not give details about
how taxation affects the performance of small scale businesses. Therefore there was need to
carry out a primary research to close the gap between research variables as this was not made
clear in

CHAPTER THREE METHODOLOGY

3.0 Introduction
This chapter outlines the methods adopted in order to answer the research questions detailed

in chapter one. It looks at the research design, research population, sampling techniques, data

collection instruments and procedure of data collection, mode of data analysis and

presentation as well as ethical consideration and limitations of the study.

3.1 Research design.

The research was a descriptive cross sectional survey design where data was collected from a
cross the population at one point in time. This design is cheap, less time consuming and easy
data collection and analysis (Amin 2005). Both qualitative and quantitative data collected
were used during the data collection.

3.2 Research Population.

Thetarget population of this study will consist of 80 respondents having small scale

enterprises and those working in the micro finance enterprises. 50 respondents shall be form

16
the small enterprises in Makindye Town while the 30 respondents shall be from the

microfinance institutions.

3.3 Sample size population such that the research findings

Slovene’s formula will be used to obtained can be considered valid. The

compute the sample size. This formula will details on the determination of sample size

be employed so as to sample fairly a large using Slovene’s formula are shown below;

size as representation of the total

By using Slovene’s formula (=N n=80/1. 2=66.66=67

1+ (e) 2 Sample size for small enterprises

respondents
n= sample size

n=50 X 80=2= 42
N= population size

80
e =level of significance

Sample size for microfinance enterprises

n=80
n=
30x67=25

1+0.2 80

Table1. Population and sample size table.

C a t e g o r i e s P o p u l a t i o n S a m p l e s i z e
Small scale enterprises 5 0 4 2
M ic ro fi na nc e i ns ti tu ti on s 3 0 2 5
T o t a l 8 0 6 7
Source field

17
3.4 Sampling procedures
This study will use a technical of stratified random sampling .The respondents of this study
are divided into two categories 5o work in small scale enterprises, 30 work in microfinance
institutions

3.5 Research Instruments

This study will use questionnaires, guided interviews, guided observation, and record
sheets .This is because of the nature of data to be collected, the time available, as well as by
the objectives of the study. The overall aim of this study is to evaluate the relationship
between microfinance and growth of small enterprises in Makindye. The researcher will be
concerned with views, option, perception and feelings from the environment. Such
information will be corrected through the questionnaires, and interviews, and because the
study will be conversed with variable that cannot be directly observed.

The sample size is also quite large, and given the time constraints and target population is
literate and unlikely to have difficulties in responding to questionnaire items, questionnaire is
ideal tool for collecting data.

3.5.1 Questionnaires
Questionnaires will be used to determine: the level on the performance of microfinance
institutions on growth of small enterprises in Makindye Town. The questionnaires will be
self- administered and closed ended so as save time and enable respondents to give relevant
choice since different options will be given. This method of data collection is preferred for
this study because it gives freedom to respondents to give their truthful opinions since there
will be no one to challenge their answers as it is in the case of interviews. This will give a
complete confidence to respondents to effectively answer questions asked without feeling shy
or being scared. The scoring system of this instrument will be based on the five scales or
Likert type scale of rating involving: 1=very low, 2= low, 3= moderate, 4= high, 5= very
high.

3.6 Validity and Reliability of the instruments

3.6.1 Validity
To insure the validity of the questionnaire and interview guide; some two experts in research
will be involved. In this regard, after constructing the questionnaires and interview guide,

18
they will be submitted to two experts to ensure their validity through their duties ‘basis. This
will be based on alpha coefficient value of 0.7 and more. Thus, after the expert judgments,
the compilation of the responses from raters will be computed to determine the content
validity index (CVI). If the coefficient computed is from 0.7 and above, the instruments shall
be considered to be valid but if it is less, the instruments shall be considered to be invalid so
new ones shall be made.

3.6.2 Reliability
To ensure the content reliability, the research will use either the test -retest method or cron
batch alpha, method for the two tests, results will be analyzed using peason’s correlation
coefficient (PLCC) and the T-test for PLCC if the significance will be equal or inferior to
0.05 then instrument will be reliable for T test, if significance will be equal or greater than
0.05, the instrument will be reliable.

3.7 Data Analysis

During this process of data analysis, the researcher will use frequencies and percentage
distribution to analyze data on profile of respondent .Mean and standard deviation will be
used to determine the level of performance of small enterprises Makindye Kampala.
Items/respondents answer analysis will help to demonstrate strength and weakness of
respondents on the microfinance and growth of small enterprises in Kampala.

Numerical values and the interpretation will be used to interpret the response based on the
mean score, for each item question both microfinance and growth of small enterprises in
Kampala.

3.8 Ethical considerations

The researcher will seek for authorization from potential respondents. The researcher will
ensure free will consent from participants. The names or identifications of the respondents
will be anonymous and information collected from them treated with utmost confidentiality.

3.9 Limitations of the study.

The researcher was affected by the following challenges during the study.

It will be hard to find the right respondents willing to provide accurate required information
concerning their company since the study involves the need for some vital information
concerning the company.

19
The research will be tire some because it will be hard to fix the researchers plans in to the
plans of respondents who were always busy doing their work.
CONCLUSION

Micro Financing is becoming increasingly important to poor countries like Uganda as an

engine of growth and development and it is therefore important that policy makers accord
more attention to it than ever before in order that the current and potential 'beneficiaries' can
actually stand to improve on their welfare.

On the MFIs services, the reason behind the massive use of the loan service as compared to
the rest of the services is that most small scale entrepreneurs require funds for starting up
ventures, reinvesting in the existing businesses or overcoming various financial obligations.
Insurance services are not easily adaptable to even people of a recognized degree of literacy
due to their complexity and to make it worse, the rural women and youth do not have the
asset base that can warrant the need for such services. Money transfer services are also rare
in rural set ups and are therefore not attractive to Wobulenzi people. The general poverty
level coupled with the illiteracy rate in Wobulenzi are the major causes of the higher rate in
the use of loans as compared to the rest of the services. MFIs should for that matter
concentrate more on the improvement of this service than any other service.

Evidence from clients reveals that it is up to the clients to gauge from their individual
situations and come up with a way of accounting for their performance. The parameters for
the measure of performance are therefore bound to change from person to person, period to
period and circumstances of the time. Management of MFIs should therefore set up
individual appraisal parameters for each client basing on already drawn policies. Such
policies should be flexible.

There is no single rule to use as the correct measure of the contribution of MFIs funding to
the clients' business growth. Loan officers can at the same time not dictate any parameters to
measure this because different clients will use different approaches. It is also not good to
leave important information untapped lest it is required in the future. Management should
therefore device 'middle ground' parameter to use especially where the client is undecided as
to what parameter to use Since micro finance institutions are proving important to the less
developed societies, it is paramount that various strategies be formulated to pave a way
forward for them thus propelling the people from the current status to greater heights.

20
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51SOME ABBREVIATIONS FI NCA - a leading Micro Finance Institutions in Uganda

MFIs - Micro Finance Institutions

CERUDEB - Centenary Rural Development Bank

GO - on Governmental Organization

APPENDIX I
: QUESTIONAIRE

DEMOGRAPHIC CHARACTERISTICS OF THE RESPONDENTS

Gender (Please Tick):

(1) Male

(2) Female

Age

Qualifications Under Education Discipline (Please Specify):

(1) Certificate_______________________
(2) Diploma _______________________

(3) Bachelors ______________________

(4) Masters ______________________

(5) Ph.D. _______________________

Other Qualifications other than education discipline ___________________

Number of Years Working Experience (Please Tick):

(1) Less than/Below one year
(2) 1- 2yrs

24
(3) 3-4yrs

(4) 5-6yrs

(5) 7 years and above

What type of business do you have?
a) One or sole proprietorship business
b) Partnership

c) Limited Company

Section B

Performance of microfinance services

Instruction: Honestly indicate or show your opinion regarding the level of microfinance

services in your area. Tick the right number corresponding with each item key: 1=very low,

2= low, 3=moderate, 4= high; 5= very high.

M i c r o f i n a n c e

s e r v i c e s

There are many micro finance institutions in 1 2 3 4 5

Makindye Kampala.

Microfinance institutions are institutions providing small financial support like loans to people who donor have access to
1 2 3 4 5
big investments or loans

These institutions are very active and many poor people have of several occasions accessed loans
1 2 3 4 5
from these institutions

Microfinance institutions not only provide loans but also advice to the people that are need of these funds. The advice can be regarding the use of the funds as
1 2 3 4 5
well as better business management

25
They have provided employment to the natives or 1 2 3 4 5

local people

They provide support through buying the small 1 2 3 4 5

enterprise produce

Microfinance institutions have positively enhanced development of small businesses 1 2 3 4 5

in Makindye town

The services of these institutions are mainly 1 2 3 4 5

targeting the poor

P e r f o r m a n

c e

The organizations have provided quality and efficient services towards the boosting of small scale
1 2 3 4 5
enterprise development

Institutions are located near the people and in rural areas to ensure easy
1 2 3 4 5
accessibility to the services.

The performance of these organizations is highly impacted on by the government factors

1 2 3 4 5
and requirements.

Their also affected by the willingness of the people to use

1 2 3 4 5
the services.

Some of the people do not know the role of these institutions and it is because of lack of capacity building and the fact that most of
1 2 3 4 5
them never went to school.

The institutions have been able to deliver and take a step towards small 1 2 3 4 5

26
enterprise growth

The institutions are however challenged by a number of factors and constraints such as lack of trust from the natives and the 1 2 3 4 5

political issues in the country

All in all the microfinance institutions have not covered a wide area due to the
1 2 3 4 5
instabilities in the country

Section C
Small Scale Enterprise
M i c r o f i n a n c e a n d S m a l l E n t e r p r i s e

27
Makindye town is a fast growing town occupied with trade and commerce. 1 2 3 4 5

The area is full of small scale enterprises that are privately owned by the natives. 1 2 3 4 5

Small enterprises are operating on a small scale with capital and finance from the sole owners of the enterprises
1 2 3 4 5

They are mainly providing or dealing in necessities

1 2 3 4 5

Most of the owners of these enterprises have always got support from financers like microfinance institutions in the area
1 2 3 4 5

The small enterprises are usually operating on a small scal e 1 2 3 4 5

They are characterized with having a single owner who largely gains from the

Small enterprises have highly expanded and increased in number and this has solved the unemployment 1 2 3 4 5

problem J

Section D
Microfinance services on small enterprises

Impact of microfinance services on small enterprises

Microfinance has largely contributed to the introduction of new small enterprises in Makindye town
1 2 3 4 5

Microfinance has provided financial support to small enterprises and this has led to their expansion
1 2 3 4 5

Microfinance has been the major source of capital for the small scale enterprises in the region 1 2 3 4 5

They have provided advice and also developed new ideas for survival in rural areas like Makindye villages
1 2 3 4 5

Microfinance institutions have provided investments to ideas of young entrepreneurs leading to establishment of new small enterprises
1 2 3 4 5

28
The institutions provide support through offering small affordable loans to the local people 1 2 3 4 5

They provide achievable standards inform of advice to business owners on how to manage business
1 2 3 4 5

The development of small enterprises has increased because of the support from the microfinance institutions 1 2 3 4 5

The institutions have not effectively improved or led to growth of the small enterprises. 1 2 3 4 5

The services of the microfinance have not effectively been used by many natives due to ignorance about their existence
1 2 3 4 5

The institutions are also challenged by the large financial institutions such as the commercial banks that also offer the same services

Thank you for your support

Appendix II

PROPOSED BUDGET

P a r t i c u l a r Q u a n t i t y A m o u n t ( U G X )

S t a t i o n a r y P a p e r 5 7 0 , 0 0 0 / =
R e a m s
35,000/=
Ink 1 Cartridge
250,000/=
Binding materials 10

Transport costs 5 0 0 , 0 0 0 / =

D a t a A n a l y s i s 4 0 0 , 0 0 0 / =

U p k e e p 3 0 0 , 0 0 0 / =

M i s c e l l a n e o u s 2 0 0 , 0 0 0 / =

T o t a l 1 . 7 5 5 , 0 0 0

29
 Appendix III: Time frame

A c t i v i t Apr M a r J u n J u l J u n
y
1. C o n c e p t u a l XX
Phase
C h a p t e r XX
1
2. Design & P l a n n i n g XX
Phase
C h a p t e r 2 - X X
3
3. Dissertation X X
Proposal
4 . E m p i r i c a l X X
P h a s e
Data X X
Collection
5 . A n a l y t i c X X
P h a s e
C h a p t e r 4 - X X
5
6 . J o u r n a l X X
A r t i c l e
7. Dissemination Phase X X

V i v a X X
V o c e
8 . X X
R e v i s i o n
9. Final Book Bound X X
Copy

30