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Small Business Financing(Entr 434) Question Paper
Small Business Financing(Entr 434)
Course:Business Administration
Institution: Kenya Methodist University question papers
Exam Year:2012
TIME: 2 HOURS
INSTRUCTION
Answer question one and any other two questions.
Question One
Innovative Financing Models for SMEs Operating In Conflict Or Crisis-Affected Countries.
Lending is severely biased towards larger firms in developing countries. The World Bank’s International Finance Corporation and McKinsey estimate $750 to $850 billion of unmet SME demand for credit in emerging markets. Traditional financial institutions have operating models that yield very small profits for small and medium enterprises. Assuming fixed evaluation costs and a percent based revenue that depends on the loan size, the finance of small and medium enterprises presents a less attractive option than the finance of larger firms. Microfinance now enjoys a greater access to finance due to innovations that standardize processes and lower the cost of evaluation, but such innovations are only starting to be applied to the small and medium firm sector.
This "missing middle" is even more starkly apparent in countries recovering from strife where the small and medium enterprises (SMEs) benefit from hardly any access to finance. In South Sudan for instance, "access to finance remains a major constraint for businesses and individuals" where "bank loans mostly finance working capital for large firms" and "47 percent of firms surveyed considered access to finance a major obstacle to doing business." In view of the difficult settings of post-conflict economies where entrepreneurs have limited management skills and there is lack of legal systems to formalize the use of land as collateral of resolve disputes, it is not surprising that banks are unwilling to lend to SMEs. Nonetheless, addressing this gap is crucial in order to provide jobs, income and stability through broad-based economic empowerment.
It is important to understand the inefficiencies that limit the provision of finance through market mechanisms in order to resolve problems at their source including financial intermediation. The cost effective information gathering and innovative risk assessment techniques are crucial in spite of the challenging informality of systems. In the long term, this could be effectively dealt with by establishing land registries, drafting laws, building the functionality and capacity of courts and setting up credit bureaus.
However, these processes take a significant amount of time and there is a short run need for innovative approaches that would effectively differentiate between risky and safe types (problems of adverse selection) and enforce responsible use and repayment of funds (problems of moral hazard). There needs to be a process of ’creative experimentation,’ where policymakers and researchers work together to think out of the box and learn from successes and failures. A balanced solution involving backward linkages from viable sectors through the direct allocation of purchase contracts, equipment finance and business advice is one example. The coordinated funding of programs that adopt such measures would achieve significant short run impact in complex and still largely informal environments. The appropriateness of each of the financing models depends with the country environment.
Critically analyze the appropriateness of financing models in Kenya today and make your suggestions on the way forward.
(10 Marks)
Show how the concept of financial intermediation is being applied in Kenya today.
(10 Marks)
Describe any five informal methods of saving adapted in Kenya today.
(5 Marks)
What do you think is the solution to credit fatigue especially as demonstrated by MSE operators in Kenya?
(5 Marks)
Question Two
Show why Mohamed Yunus is regarded as the father of micro financing principles today?
(6 Marks)
Identify and discuss the various regulatory reforms that have been undertaken in the financial sector in Kenya since 1987 and show their effects on lending MSEs.
(14 Marks)
Question Three
Identify and discuss the various strategies an entrepreneur can use to demonstrate credit worthiness to a credit officer or finances.
(10 Marks)
Debt financing is the most suitable for a business at the growth stage. Demonstrate why this is so using relevant examples.
(10 Marks)
Question Four
Discuss the concept of "deposit protection" and demonstrate how this is being done in Kenya to cushion small savers.
(10 Marks)
Discuss the roles donor community non-governmental organizations (NGOs) and private sector intermediaries play in improving MSME’s access to finance.
(10 Marks)
Question Five
Differentiate between debt and equity financing.
(5 Marks)
Discuss the following forms of financing;
(6 Marks)
Trade credit.
Letter of credit.
Angel financing.
Discuss the various challenges a new microfinance institution might face while trying to establish itself in the market.
(9 Marks)
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