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Effects of factors influencing capital formation and financial management on the performance and growth of small manufacturing firms in Senegal: recommendations for policy.


This paper presents results of a survey conducted among 36 (n=36) owners of small manufacturing businesses in Senegal. Although most of these firms show promising potential for success they are threatened with some operational problems that constrains their ability to attain better results. In order for these mostly stagnated small firms to graduate into higher levels of development therefore, their need for adequate and relevant supporting infrastructures are essential. This study identified the biggest impediment facing most Senegalese small businesses to be that of limited access to sources of capital, in addition to other external conditions that affect the productive management and usage of funds. It is recommended that the government machinery, relevant establishments and business communities combine their efforts with that of entrepreneurs and create effective structures that will help ameliorate the process and conditions for effective capital formation. Taking this approach in addition to providing relevant training should enhance better management know-how for entrepreneurs and encourage the chances for progressive development of the small business sector in Senegal.


At the turn of the 21st century, it still appears that the level of development for most small firms in sub-Saharan African countries (Francophone or Anglophone) is still very basic. Most of these firms have not progressed beyond the basic craft, promotional (Filley & Adalg, 1978) or the Artisan levels (Longenecker, et al 2003), which are characterized as firms that are not innovative, use very little capital and maintain only simple methods for management and development. Firms of this category survive by sheer tenacity and remain in business mainly by sweat equity. In addition, such firms do not conduct any form of research for development to proactively gain control of market share because they either cannot afford to do it, do not know how, or simply do not see the immediate importance of doing any research due to myopic business growth vision that they have. Such firms would rather choose to use only simple benchmarking techniques or follow signals from other competitors when demand for similar products increases or decreases. Most businesses of this category in Senegal are seasonal in nature due to the type of products that they produce and are simply complacent as they struggle to remain in business just to earn enough money to maintain a stable means of livelihood.

Although factors influencing small firms' development and their effects are different in countries and environments, many factors have been identified by researchers as causes leading to poor performance, slow growth and development of small firms in countries. Some researchers for instance have noted that financial constraint is the most serious handicap confronting small firms in lesser developing countries especially in Africa (Cook, 2001 & McMahon, 2001). In another twist, Deakins et. al. (2002) noted assumptions made by some researchers that although inadequate financial management practices are regarded as important contributors to the causes of turbulence in small firms, little study has been done to know about the role owner-manager's approach in the evolution of strategy and associated learning in this area. Similarly, Chittenden, et. al. (1998) observed that little attention has been received from financial researchers, with regard to non-financial and behavioral factors that influence capital structure decisions.

There is therefore more to be understood about the pattern of how managers learn to adapt, develop strategies and make decisions in this area and how they are unique and different in specific environments. Relatively, limited amount of research especially has been conducted on SMEs and entrepreneurship around the African continent. This study therefore examines the role and practice of financial management decisions among small business managers and owners in terms of how they behave and cope in the Senegalese manufacturing sector. The study further investigates effects of decisions made by the entrepreneurs on the performance of their firms to grow and how they are able to remain in business in a constrained economy with limited financial resources.

Further, I argue that the wider environment and the role of culture and colonial influence have not received much attention in the study of factors influencing small businesses and entrepreneurial behavior in the context of financial management particularly in Africa. This study provides one more example of a wider and in-depth approach towards understanding the various factors influencing growth, performance and development of small firms especially in Africa. This study will therefore contribute new knowledge to small business and entrepreneurship literature.


First of all, the importance of this study is justified by the fact that only has little research been done in this area. In addition, the need for African countries, whether of the Anglophone, Francophone, Lusonphone, Arabs or Afrikaans background to develop their industrial and economic sectors for overall development in the age of globalization is crucial. Economic indicators show high unemployment rates and poverty amidst poor health and living standards (World Bank Reports, 2007). These kinds of problems are typical of those faced by most African countries in this era. While some countries have moved on with the technological revolution of Nanotechnology, other countries most of which are in Africa are still struggling at the basic levels of manufacturing. Countries of this category commonly referred to as banana states or rentier regimes mainly depend on exports of raw materials in low value added forms for revenues and then re-import even simple manufactured products made from their very own exported raw materials. This study will therefore point to where need for attention is most essential in the small business sector so that these impediments can be addressed for the way forward. The results of this study will help for consulting purposes, loans decisions, for formulating government policy and for further research to continue in this area especially in other African countries.


This study adapts a multiple site/unit (Romano, 1989) case study approach for small firms to investigate the approaches taken by 36 small business owners and managers in Senegal to develop financial management strategies and the effects of such decisions on their business performance overtime. Discussion of the findings from this study is done in view of previous studies drawn from literature on financial management of small firms. As mentioned earlier, there is proof by Deakins and Co., (2002) and Chittenden et al. (1998) to confirm the dearth of insight that is lacking from most previous studies in this area. Furthermore, it is apparent that most of the studies done in the area of small firms financial management are not dynamic but rather static and survey based while providing little information on behavioral factors. Such studies are even more limited among lesser-developed countries (LDCs). A case study approach to the study of small firms is therefore relevant for an in-depth analysis of data for results, while providing a multi-dimensional coverage to a particular area of study (Romano, 1989).

To ensure triangulation and cross referencing of data and results, a multiple method study is conducted by using at least three levels of analysis. At the first level an observation of the practices of small firms is done in their operating environment, which is followed by an in depth painstaking interview ranging from about two to four hours with each owner/ manager of the small firms. Collected data is then interpreted using both qualitative and simple quantitative statistical methods where applicable. Review of literature is also done to compare between differences and similarities as well as the theoretical relevance of other findings to the particular area of study.


Most previous studies have not only ignored the examination of financial management approaches in third world countries like Africa, but have also overlooked the need to look at dynamic elements like innovation, influence of the environment and colonial factors, family background, experience and traditional culture of entrepreneurs in the process. Certain managerial decisions and actions could indeed be influenced by environmental factors, such as national, societal, socio-cultural, political, economic, legal or technological (Dereskey, 2003). According to Chittenden et. al. (1998) non financial and behavioral variables such as the need for control, risk propensity, experience, knowledge and goals may be more important in influencing the capital structure of small firms at anytime among the owners of small privately held firms. Chittenden's results were derived from a study that was conducted in the greater area of Manchester in the UK. Considering the geographic location and other differences such as the level of economic development and general background of the UK (Manchester, England) and Africa (Dakar, Senegal), it should be expected that results that examine factors influencing financial decisions made by entrepreneurs on both sides would vary by comparison. It would therefore be interesting to see the unique nature of such differences that are specific from an environmental and behavioral point of view not only between the UK and Africa but also in comparison with other regions of the World.

The survey of the thirty-six small manufacturing firms in Senegal showed that the most popular source of financing is from personal savings and/or self generated profits. The reason attributing to this is not by choice but due to lack of alternatives. There are obviously limited sources from, which to generate external funding and this is a major weakness to the growth of businesses in Senegal. Furthermore, the funds that are self-generated or available from other sources are minimal to allow small businesses to grow and reach their full potential. This problem of resource paucity is also confirmed by the fact that only a sixth of the interviewed businessmen used external loans to start their companies. Among the reasons explaining for the limited number of loan beneficiaries is mainly as the respondents have said, because the process and conditions for acquiring loans in Senegal are bureaucratic, cumbersome and difficult. Most of the entrepreneurs interviewed for the study emphasized that loans are not given by compliance even when they qualify. At the core of the system by which funding opportunities are sought and obtained in Senegal is the 'connection' rather than merit method, whereby it is the relationship that someone has directly or indirectly with key personnel in relevant establishments that determines whether someone would get funded or not. In Senegal this practice is known as "Bars-long". As some Senegalese entrepreneurs and business students have said, "It would be very difficult for anyone start and manage a business successfully in Senegal without the bars-long connection". The barslong, is a French terminology and translated into English means 'long-hand'. The Bars-long as a practice is almost institutionalized in the entire Senegalese business and economic environment. Bars-long has become an important determinant for going into business regardless of whether or not someone has entrepreneurial talent or idea. Of course, this method not only discourages promising entrepreneurial talents but it also denies the economy of the contributions quality entrepreneurs would have made through growth as measured by gross national product GDP.

In China the Guanxi or in Japan the Kieretsu and in the Middle east the Wastaa networks work in similar but different ways to the bars-long, where strong business networking relationships are built on the basis of friendship and affection, with mutual obligation to reciprocate favors in business related circles such as among bankers, suppliers and in the market place. However, the type of relationship networks among these countries as indicated by their GDP are more progressive and dynamic than the one in Senegal, which is mainly centered on getting access to loans alone.

In Senegal the bars-long system requires that someone knows somebody who is either working in a bank, is a highly placed government official or is an influential figure in the society. The use of power and influence are evident in the process of bars-long. Power distance according to Hofstede (1984) is the unequal acceptance and distribution of power in institutions and which is therefore determined by societies. In the Senegalese society 'power distance' is high and is clear that unless someone has the ability to exchange or reciprocate favors to creditors even the most promising of entrepreneurial potentials that are not 'connected' would be handicap by lack of capital and other investment opportunities.

The position of a bars-long person is to play a mediating role. This is someone who is in a strong position to serve as a conduit between the lender and creditor, especially when large sums of money is involved. The backing that an entrepreneur gets from a bras-long figure when applying for a loan is not necessarily seen as that of a surety for collateral or as a guarantor but rather as someone who renders 'goodwill' on behalf of an applicant for the purpose of saving face and gaining respect to help facilitate getting a loan. The bars-long approach can actually be seen as a practice of 'give and take'. Perhaps this explains why even religious leaders in Senegal or the "Marabout" as they are known in French or the "Serign" in the local Wolof language, are very effective barslong instruments in negotiating for loans. For most entrepreneurs in Senegal the rationale behind the bars-long is to plan and secure the future by building business networking relationships. It is also an opportunity or time to sow seeds of favor. These seeds at the present are a form of investment for mutual benefit with the expectation that favors would equally be returned in the future to the donor when such is required. The more favors a giver or creditor has invested in, the more the connections and favors that would be available in the future. This approach could also be seen as some form of social security in case the donor needs help in the future.

In situations such as the bars-long, loan provision has become more political and selective rather than based on standard rules and procedures even within public institutions. This is unlike one would commonly find in developed countries like the UK or the USA. Since it could mean that it is not necessarily the best entrepreneurial talents that would get funded, quality would be compromised in form of products and services produced by entrepreneurs who got funded only because they were privileged to get it. In cultural societies that manifest this type of practice Fons Trompennaars (1993) describes them as being 'ascriptive' rather than 'achievement' oriented. Trompenaar's theory in this aspect is akin to that of performance oriented societies as described by the Project GLOBE (Global Organizational Behavior Effectiveness) study, cited by Javidian and House (2001). Performance orientation measures the importance of performance improvement and excellence in a society and refers to whether or not people are encouraged to strive for continuous improvement. Countries that score high on this scale are the USA, Singapore and Hong Kong where people in these societies are often seen to take initiative and have a sense of urgency and confidence to get things done. In the late 1990's and early 2000's both Hong Kong and Singapore have competed for the number one and number two best places to do business in the world. Italy and Russia on the other hand scored low on the performance orientation scale for a number of reasons. According to the GLOBE Project part of what contributed to the low performance orientation culture in the Italian and Russian societies can be attributed to their holding of other priorities ahead of performance, such as tradition, loyalty, family and background and they associate competition with defeat. The same attitude towards performance in Italy and Russia seem to manifest in Senegal, especially when standards for granting loans to entrepreneurs are not decided on merit and could affect quality and standards.

According to Fons Trompennars, the legitimization of status and power in 'achievement' oriented societies like the USA and most of Western Europe, employment, contracts or loan qualifications are strictly based on merit whereas in 'ascriptive' based societies like in Africa, Latin America or Asia, qualifications for opportunities are mostly based on who you know or what your status is in society. The likelihood that nepotism would play a role in such situations therefore is very high.

Although most of the reasons given for the collapse of the Indonesian economy during the Suharato regime between the late 1990's and the early 2000's had to do with either corruption, mismanagement or misappropriation of funds, the rampant practice of nepotism and related behaviors, where unqualified personnel were recruited for jobs simply because were 'family' was also accounted for as being partially responsible for the fall of the Suharato regime.

In a capital-intensive sector like manufacturing where machinery and equipment are crucial requirements for effective operation, most of which, would have to be imported due to the underdeveloped technical base of the region, ample amount of funds is very essential for firms to function at capacity. In some countries in sub-Saharan Africa like Nigeria, which is an Anglophone country, Mambula (2004) has observed that a number of entrepreneurs are improvising machines and spares in the absence of required funds to import equipments and machines for small plastics manufacturing. Although mostly sub-standard and poor in quality, the type of improvising practice among the Nigerian small plastics manufacturers is not noticeable among the small manufacturing firms in Senegal. Perhaps one reason that could explain for this difference is the fact that by comparison and while maintaining its status quo as one of the top-ten oil producing nations in the world Nigeria is a more populated, resource endowed and technically more advanced country than Senegal. To further support this evidence, between the 1970's and '80's, Nigeria has invested heavily in technical education programs at home and abroad and many of such technicians now own independent businesses of their own.

As a lesson to other lesser developed countries, the benefits of investment in science education and technology in India from the 1950s-1970's seems to be paying off today as most Information Technology companies from the western world are now outsourcing production to India.

There are other issues that raise concern for the development of the small manufacturing sector in Senegal. Among the examples observed from this study is the fact that three years after their businesses were in operation only 30% of those surveyed had applied for external funding for their projects, even though a higher percentage of the entrepreneurs were aware of possibilities for external funding. The two most common explanations the entrepreneurs gave for taking the decision not to apply for funding were that; external funding are too expensive to acquire in Senegal and the general perception among the people is that since external funding is very difficult to obtain, they saw no point in wasting their time to apply. The fact that there are very few sources of credit whether in the public or private sector establishments in Senegal is obvious. The scarcity of credit facilities therefore makes the availability of funds that can go around for most applicants limited and competitive. This is why the right approach to take for giving loans is by giving them to the best and most qualified entrepreneurs through compliance. However, as earlier mentioned the competitiveness, by which applicants can obtain funds, is not based on the promising qualities or credentials that entrepreneurs have. It is the bars-long factor that counts. The call to dis-mantle the bars-long system should be a primary reason that justifies the need to create more sources of external funding that can provide adequate amount of funds to local businesses without strings in Senegal.

From all indications it is already clear that access to external funding is very hard for entrepreneurs to obtain in Senegal. This finding agrees with what McMahon (2001) and Cook (2001), had noted earlier that dearth of funds is indeed one of the most serious impediments facing entrepreneurs in lesser-developed countries. Similarly, Mambula (2004) in a comparative study analyses of small firms and entrepreneurs that have received external support and those that did not has also discovered a higher level of performance among those with external support than those without, even though it made no difference that those entrepreneurs without external support had better education and seemingly better entrepreneurial acumen. It was access to available capital that was key to higher level of performance.

This study has identified that the most popular source of finance for small businesses in Senegal is from self-generated profits. Over 60% of the interviewed said that retained profits will be the main source of future funding followed by group funding and external investment, each supported by 17% of the interviewed respondents. It shouldn't be a reason for concern for most Senegalese entrepreneurs if their self generated profits were enough to cover the internal funding requirements that their companies needs but the amounts that they generate on average are very minimal. When the respondents were further asked with the question: "What proportion of your total internal funding requirements is currently met by self generated profits?" the answers are as follows:

1-24% of the interviewed said 27%; 25-49% said 29% of their profits covers their internal funding needs. A further 22% responded that their re-invested profits cover 50-74% of necessary funding. Only 8% responded that profits will cover more than 75% of funds needed. It should be remembered that retained profit is the main method most Senegalese businessmen depend upon for re-investment and their preferred method is group funding. Up to 50% of the respondents in this study have said that group funding is the most convenient alternative method for financing their investments because it pools more resources at a cheaper rate than with financial institutions that are very costly to obtain or with the public establishments, which is 'politically' difficult to get because of bars-long.

Senegalese entrepreneurs appear to have tendencies and preference for group work and creating networks amongst themselves to support one another, rather than doing it alone as also noted among family and friends in other parts of the world like in southern Italy and China for example (Orru, 1991). In Senegal the preference for group rather than individual work in business is not unrelated to the 'group goal' orientation, which has its roots in the tradition of the Senegalese culture and for preference to rely on family and friends to get trust, for reliability and security. Group members of family and close friends can also be loyal to the business and can even work without pay or sacrifice longer working hours without compensation, because of loyalty that is based upon the strength of shared relationship ties. Every member in the group is expected to protect and share equal responsibility for the success or failure of a group member. By comparison, external sources of support would appear to be intimidating, insensitive and hostile especially that of financial institutions that have typical capitalist principles. In this context, Hofstede (1984) would describe the type of cultural variable dimension of the Senegalese to fit that of the 'collectivist' society, which are also similar to the ones found in countries like China, Latin America, the Mid-East, Italy and Africa. Collectivists' contrasts with the 'individualistic', type as found in the USA, and most other countries of Anglo origin, like Australia, Canada and New Zealand. Ironically however, Hofstede noted that it was the individualistic societies that had more political freedom and higher living standards than those in collectivist's societies like Senegal. The group goal orientation also portrays attitudes of people described by Hofstede as being more 'feminine' rather than the 'masculine' type of culture. In feminine countries like Sweden, and most Scandinavian countries and Africa, people are more relational and have preference and concern about protecting the welfare and harmonious working relationship of the group while maintaining quality of life rather than promoting individual qualities in a more aggressive, materialistic and competitive manner as found in the environment of a masculine oriented society. Although the Senegalese share similar traits with the Scandinavians as feminine countries the former are economically more backward by comparison. This could mainly be attributed to the well-established structures for facilitating the business and economic sectors of the Scandinavian countries, which are lacking in Senegal.

It is also important to understand that the self-generated revenues from small businesses, which are the main sources of income for the interviewed entrepreneurs in Senegal, also serve the dual purpose of providing for both their means of livelihood as well as for running their business.

Thus, most of the entrepreneurs cannot afford to put all of their profits back into the business because they are compelled by obligation to use them to cater for domestic needs as well. One of the recommendations made by Schumpeter for business growth is the re-investment of capital and the efficient use of resources. The application of Schumpeter's theory considering the culture and economic environment in Senegal would be difficult. In collectivist societies like Africa and Asia particularly in China (Dereskey, 2003), people are expected to provide for the needs of their wider extended (f-connection) families, friends and even employees. Even in Japan social responsibility mainly means long-term relationships that requires catering for employees. In referring to what he calls the 'economy of affection', Goran Hyden (1984) explains that peoples' reputation in such societies like the collectivists are sometimes measured by how much they honor their responsibilities to others in times of need. How people show concern and are sensitive to other peoples needs is the issue. With the Chinese this cultural practice of showing face is known as the 'lien' and 'mien-tzu'. The former refers to the moral character, which defines a person, without which no body can live or exist (Deresky, 2003). The latter, refers to accomplishments, prestige and what someone has achieved and does to people (Ibid). Among the Chinese, people are obligated to give time, gifts and favor and succor to people when needed. These kinds of cultural norms in reality are what influences the more than 60% respondents who were saying that they can only afford to put back a maximum of 40-50% of generated profits into their business in Senegal, thus making the financial situation of their businesses marginal and worse off overtime, with little chances for growth. If being frugal and maintaining a parsimonious lifestyle are conditions by which, small businesses are expected to perform better or survive, the cultural setting in most of sub-Saharan Africa, which portrays as a sharing and giving society has a lot of challenges to small under funded businesses and entrepreneurs.

The adverse financial situation is responsible for other problems and weakness of the interviewed companies in Senegal. The companies face many other problems both in the marketing and in the research and development (R&D) fields. The problems the companies face in the marketing fields is not as severe as the problems concerned with financing. Almost 50% of the companies conduct some simple form of market research and although it is still a weakness, by comparison with other problems this is a higher ratio and is better than expected. Unfortunately only 55% could say what part of their budget is spent on improving their marketing efforts. The preferred method of advertising by the respondents is word of mouth (almost every company uses it); this however is the cheapest way to spread messages. Only 20% use advertising in the trade press. This again could largely be attributed to the financial constraints of the firms. There are however some positive aspects in the marketing field. Almost 50% of the entrepreneurs agreed that the current marketing position of their firms is conducive for growth in the company. Over 40% of the respondents said they received any form of free external marketing assistance from community and government publicity directly or indirectly e.g. campaign to support local producers, membership in local chambers of commerce and organized trade fairs. Over two thirds of the entrepreneurs interviewed foresee changes in their firms marketing position. This shows that although they have a vision for their businesses they are limited by resources to see beyond the local environment e.g. for exports to foreign markets or even to neighboring countries.

To conduct R&D is another real weakness for most of the surveyed companies. This is again mainly due to lack of capital availability for such purposes. A total of 67% respondents say they have not been able to proceed with any kind of innovation because of lack of funds. Also only 30% say that their company undertakes any kind of basic R&D. The questions regarding R&D show an interesting angle. There is little cooperation cultivated between different firms especially with the larger firms or with research institutions like universities. Even though they favor group financing most entrepreneurs in Senegal are also secretive and protective in sharing ideas and personal discoveries. Senegalese businesses do not conduct research for others and they also rarely subcontract R&D projects to other companies. This is unlike in Nigeria where Mambula (2004) found that information flows more freely among small entrepreneurs who share information and subcontract jobs among themselves and split profits. If cooperation among firms can be developed and strengthened, costs of R&D could go down significantly thereby making it easier and affordable to exchange mutually benefiting ideas. This is why agglomeration of companies in the same area like that of the silicon valley in San Francisco, silicon alley in New York and route 128 in Massachusetts or the research triangle in North Carolina are known to be breeding grounds for new companies and spin-offs through exchange of information and ideas (Audretsch et. al. 2002).

The area where the government and NGOs can provide the best assistance for development of small businesses in Senegal is with financial matters. Only 14% of the surveyed businesses have received any kind of assistance from government or external sources. This is a very low percentage especially if small businesses are expected to grow and make any significant contribution to the economy. There should be more and better accessible external sources of financing and assistance. Every of the few small manufacturers that received some kind of external or government assistance were very pleased with the results and almost every beneficiary interviewed say that the government should continue to assist more small businesses. However, there is a disturbing occurrence when the question was asked, if the respondents would accept government assistance? 51% say that they do not know. This is a clear message that many people are not confident or eager to pursue government assistance and need better education about the availability and beneficial effects of government aid. Another problem that seems to contribute to the lethargic growth and development of the small firm sector in Senegal is the issue of tax evasion. Most of the surveyed entrepreneurs and business students agreed to the fact that tax rates are too high for most small firms to afford paying them. For this reason many firms choose to remain anonymous and operate informally by choosing not to register their outfits with the government department of commerce. To play it safe such firms would conceal their identity by not announcing their existence unlike how a legitimate company would confidently do. To avoid their informal status from being exposed and which could even cost them to pay some penalties, such firms would decline from seeking any form of government support and have no option but to seek succor from alternative sources like their close friends, family or relatives or depend on self generated earnings, which is often very minimal.

Furthermore, the French colonial policy might have complicated industrial development matters for Senegalese entrepreneurs without giving due consideration to the latter's cultural background. The French colonial approach appears to be that of two different cultures (One in Europe and the Other in Africa) that were grafted into one through the 'assimilation' policy. Under this policy the Senegalese or any other French colony are considered as being the same or 'French', with the only difference being that they are living in a different part of the world and skin. For this policy to work effectively the Senegalese and all other French colonies had no choice but to adapt to the 'so called' French way of doing things. It should be clearly known that quite a few cultural differences exist between the French and the Senegalese. One is European and the other is African. For example from Hofstede's cultural variables, the French would be more individualistic in nature than the Senegalese who have a more extended family structure and are collectivist, which is typical of most African countries. In addition, studies have shown that the French are not very supportive of entrepreneurship, which is constrained by rigid bureaucratic government policies and procedures (See: Audretsch, et al 2002). These mentioned factors from French colonial influence does not seem to have allowed the Senegalese to fully develop their own entrepreneurial culture relevant to their original traditional culture, since everything has to be done the French way. Deresky (2003) noted that no country, company or manager should ever think that they could easily impose their own culture on another people by being ethnocentric. Cultures are relative and deeply rooted in their unique philosophies, beliefs, norms, religion, language, assumptions, understandings, codes of conduct, and values among other variables, which they share as a people and which forms their basis of living and shapes their overall environment.


As my survey has indicated, one of the most serious problems facing entrepreneurs in Senegal is lack of capital and this is attributed to the limited sources of funding available. In addition, the financial problem has directly or indirectly contributed to other problems faced by most small businesses in Senegal. Challenges arising from dearth of funds have not been made any easier due to the influence of prevailing cultural norms that further compound the difficulty for most entrepreneurs to generate and use capital appropriately. There are a few things that could be done to help the Senegalese improve on this factor. The first thing that should be done is for the Senegalese government to lessen the credit limits and restrictions for Senegalese banks. This will allow the banks to have a more aggressive credit policy and will be able to expand their credit portfolio. This method will allow better access to credit and funds to entrepreneurs that could not receive those benefits because of tight credit requirements. Another useful improvement is that the high tax rates need to be lowered as an incentive to small firms. Lower tax rates or even grace periods will encourage small firms to register as formal firms, which will also encourage them to apply for loans and avoid being suspicious and operate undercover as illegal firms. Unfortunately, government restrictions are not the only problem. Recent articles cite the lack of efficient management and inadequacy and the shortage of human resources in local banks as a main reason for the low services that banks give local SME's. This deficiency however, can be improved with training.

The second policy that should be placed in existence is government guaranties for small business loans. This should be done with caution so that the government does not slacken bank requirements by too much in order to protect banks against default because of fear of small business failures. The requirements to receive small business loans should be lower than the requirements for regular loans however. The Senegalese government should decide what those requirements should be and up to what amount it will guarantee for the loan. The USA Small Business Administration (SBA) guarantees up to $2million loans from banks for credible small business applicants (Coutler, 2003). A program like that was also successful in Bulgaria just a few years ago. Even though the program did not have as many participants as hoped for initially mainly because of credit requirements it was still a success and helped many small business owners and starting entrepreneurs to receive a small loan that helped them grow their businesses in Bulgaria.

A third policy that will help Senegalese SME's is the presence of NGO's that help small businesses with advice through strategic business planning and management consulting especially on uses of small credits. Some of such programs have been very successful around the world. The 2006 Nobel Prize winning Grameen bank for example adopted such an approach and has witnessed many success stories. The Grameen is a billion dollar micro business financing bank operating mainly in the South East Asian Region, particularly in Bangladesh. Approaches such as these are also popular in the post communist countries of Eastern Europe and the former USSR. The World Bank and other NGO's in countries all over the globe have applied and used methods like these for development. There are many studies showing the effectiveness of such programs. However, as it appears from this study, having access to such modes of financing is very limited in Senegal and other African countries at the moment. This situation needs to change and much more attention should be paid to SME financing in terms of earmarking sufficient funds for the effective development of the SME sector in Senegal and the rest of Africa.

A recent study on 'Enhancing the competitiveness and productivity of small and medium scaled enterprises (SMEs) in Africa: An analysis of differential roles of national government through improved support services' by Ashmelash Beyene (2002) explored how government policies has affected SMEs in sub-Saharan countries. Senegal was part of this study. Beyene's study showed that government policy in Senegal was disabling and not conducive to small business growth. However, the same study showed that this attitude is changing and government policy is becoming more open toward helping SMEs or at least not discouraging their growth by at least creating a free business environment. Creating an enabling environment alone is still a long way to go however as there are many examples of administrative bottlenecks and issues affecting and slowing down the growth of SME's like the complex administrative procedures for trade transactions and lack of transparency in processing administrative matters. Some believe that this approach to methods and policy in Senegal was inherited from the rigid bureaucratic system of their former French colonial masters, which did not consider African culture in the formula for bringing development to the country, by further complicating the process. Something that could be very helpful and does not need much of government help in helping businesses progress is for entrepreneurs is to create their own so-called 'networks' or 'clusters' amongst themselves. Such networks are very popular in Italy and in China. In China this is known as the 'bamboo network' and involves input from overseas Chinese. These networks show how fellow compatriots in the Diaspora can indeed contribute to small enterprise development and overall economic development at home. The Italian and Chinese small and family businesses are examples of such arrangements and are considered to be the backbone of these countries' economy and are creating great results. There are many studies on the positive effects of networks and the organizations that participate in them. Researchers on this subject agree that creating clusters of SME's helps enormously to disseminate knowledge and capital among firms both horizontally and vertically. It also helps firms create many synergies and reach economies of scale and scope they would not usually achieve (Peng, 2006, Thurick et al 2001).


The choice of financing is an important determinant of whether a product reaches the market, or whether an existing business can generate enough revenue and survive. The choice of financing is therefore a necessary part of being an entrepreneur. The business owner needs to have the ability to raise cash when a business has no or limited history and this takes skill and creativity. There are a number of sources of financing for small businesses that are being used in developed countries. Countries in Africa like Senegal could learn from these, although they would have to be adjusted to fit in with cultural and environmental situations. The suitability of the alternatives would depend on what stage the business is in, and will change as the company matures through different phases. A number of different approaches can be identified of the common forms of financing available. Most of these forms are almost unheard of and are not practiced in Senegal. The common methods for raising capital are through family, friends or self. That means that the entrepreneurs either draw down on their savings or use personal debt. In Senegal the opportunity to use additional sources of borrowing such as through credit cards, credit lines or equity mortgages to finance their business are not available in the way it is in developed countries. Family, friends and connections (barslong) are often used as the only source of financing, sometimes sacrificially to help sustain the business because family and friends do not demand to be paid with interest, especially when the business is short of cash. Due to their limited experience family and friends may not always be in a proper position to evaluate a business venture for success, but they would have acquired enough knowledge through long-term relationships about an entrepreneur's character in terms of dependability and ability to honor loans and be able to use them appropriately. This is another type of cultural norm that is practiced in business in African societies like Senegal, whereby people anticipate that sacrificial favors given to friends and family will be reciprocated for future benefits.

Another financing method that is frequently used by other businesses in developed countries is that of strategic partnership. Strategic partnership does not only provide a source of capital, but also provides an area of expertise that the entrepreneur does not bring to the table, such as operational or marketing skills. Naturally, the pitfall of a partner is that you do not maintain full control over the company and that sometimes there is a falling out between the partners. So it is important that a businessman does a good due diligence and background check for choice of partners. One of the advantages of partnering is that it saves costs from troubleshooting in trying to find solutions on aspects of the business that an entrepreneur is not acquainted with. The partner with skills and knowledge in an area that is unfamiliar to the other would not only help provide free learning in a new area, but will also help to save money incurred through wastage, lost business opportunities or paying for consulting fees. This method should indeed work well in Senegal considering their preference for group work over individuality. Partnership should be made to include other helpful links with larger companies for sub-contracting and with research centers like universities for innovative products and processing methods, also with trade associations and chambers of commerce for promotion as well as with technological centers for ideas, in addition to finding other avenues and opportunities for encouraging growth.

Angel Financing is another method commonly used to finance small businesses in the USA. Angel financing is made of freelance financers interested in offering smaller amounts of money, say between $50,000-$500,000. They can often provide the seed capital required to develop an idea to get to the point where a firm can obtain formal financing. Angel investors will also invest in growing companies that may have a strong revenue base, but are not yet established enough to get bank loans or other financing. Another benefit of Angels is that they can bring a lot of experience and industry contacts to the table. The disadvantage of using angel financers however is the tendency of loosing ownership and control of the firm and eventually buying out the original founder. Senegalese business leaders and captains of the industry should therefore provide input in this area to help small businesses rise to better levels of development. Even though the Senegalese culture favors group goal relationships in the work environment, the type of strong business networking relationship that the Japanese developed through (Kieretsu) and the Chinese through (Guanxi) are non-existent.

Venture Capital is another form of financing where small firms approach lenders when they have developed to the point where a venture capitalist can add value. The venture capitalists will generally sit on the board of directors, provide expertise and provide funding based on the attainment of milestones. They are generally interested in firms that can generate rapid growth and returns over a few short years; the time horizon is generally 3-8 years. Again some of the funding institutions and NGOs including banks in Senegal could introduce such methods geared towards fast track small businesses.

Trade Credit, is also another and one of the largest sources of short-term financing used in many developed countries especially in the USA. Trade credit occurs whenever a businessman purchases from a supplier but does not have to pay for the merchandise for a length of certain days (or whatever the terms are). Trade credit can be expensive if a small business is foregoing discounts but a new firm may not have much of a choice. Government development agencies would be better suited to handle such type of funding method in Senegal, as they can subsidize costs and offer grace periods for credit payment than financial institutions. These can be helpful especially for importing machinery and parts and for raw materials. Grace periods will give enough time for struggling businesses to recuperate especially when they are recovering from difficulties experienced from harsh periods of economic downturns, like a recession or other unfavorable policies, which is not within their control.

Similarly, factoring or another name for 'collector' is also a popular source of financing for growing firms. When a small business generates receivables they may sell it to a factor who will then collect the receivable for the company. Typically, the business will get between 75%-90% upfront for the receivable and the remainder when the factor collects, less a fee. The business community can organize such arrangements so that small Senegalese businesses can therefore use such methods and maintain positive cash flow and improve on their payables and receivables by reducing the burden it places on their available working capital.

Asset based lenders, will lend to businesses that lack sufficient cash flow to support unsecured financing, but have sufficient assets that can serve as collateral. In other word when they have a higher capital ratio than the norm. Typically, the assets are accounts receivable and inventory, but can be equipment or other similar assets. The lender relies on the assets to repay the loan, not the cash flow of the firm. Fast growing firms who cannot get sufficient financing from a financial institution will be a typical client of an asset based lender. This practice is not yet available in Senegal, but could be useful to the under-developed small manufacturing sector of the country. Most machines in Senegal are cheap, simple and some antiquated usually below value. There are hardly any modern state of the art machines or equipments that could be used as collateral in most cases to attract the services of asset based lenders in Senegal. In this case, again it should be the government through its lending agencies and NGOs that would be better suited to handle this method of financing to small manufacturers.

Mezzanine financing is a subordinated debt. It is a type of hybrid between senior debt and equity. Mezzanine financing is typically high risk, and can be expensive. A typical target company is generally one that has been in business for a number of years and has an established revenue base and positive cash flow stream. When a company may have reached its maximum level of financing from a lending institution it could qualify and obtain mezzanine financing to bridge the gap and finance their growth. The Mezzanine financer will subordinate its debt to the main lender.

Mezzanine type of financing would be good for existing business that need some help to continue to remain in business and not liquidate. Even in developed countries the government comes to the aid of companies by using taxpayers money to rescue ailing but important businesses that serve the community well. Senegalese government and capable stakeholders should also respond to the needs of such ailing companies when needed and should also benefit from the same.

Banks are typically regarded as the main source of financers to businesses generally. Entrepreneurs can source for start-up money from banks but are usually seen as high risk. Firms that attract loans from banks are those that usually have been in business for a couple of years, have developed solid revenue, are earning profits and have maintained a reasonable balance sheet. The bank will provide daily operational financing as well as long-term financing. Bank loans are expected to generally be the cheapest form of financing but as observed in the case of Senegal, it can also be the hardest to get for small business due to not only their high-risk level but also the need for connections or bars-long. The process for obtaining loans in Senegal according to the respondents of this study is very cumbersome and selective and interest rates can also be costly. This discourages most small businesses from applying for such loans and resort to other cheaper but less bountiful alternatives.


This study has been able to show that capital formation and financial management methods by reason of cultural and environmental factors in addition to limited awareness and practice of other funding approaches have contributed to the backward development of the small manufacturing sector in Senegal. The paucity of sources to acquire adequate funding and the lack of any bold commitment by the government and relevant institutions to give support to small firms in Senegal is also lacking. The methods of raising capital are still very basic in Senegal and even some of the other simple but efficacious methods available in developed countries are not available. It is for this reason that it can be suggested that the government plays a more active role to support especially the small manufacturing business sector that has seemingly been neglected through the provision of training, creating awareness and by enacting favorable policies for banks and financial institutions to be equally as participative in the process. Indeed, cultural factors have played an important role in influencing how entrepreneurs and managers behave and make decisions with regards to uses of funds in Senegal, but this has been caused by lack of awareness of educated management practices, which most of the entrepreneurs have not been exposed to. Banks would certainly consider such businesses with limited exposure and business training as high risk. The Senegalese entrepreneurs need more guidance in understanding the process of running a modern day small business, through progressive growth phases. Lessons in strategic business planning and Total Quality management (TQM) would perhaps enhance the chances of small businesses with banks and other loan institutions. A comment was made by a Senegalese Director of a small German NGO based industrial estate facility for small business firms in Senegal. The Director had said that, among the serious growth problems facing private business owners in Senegal is the effect of French colonial mentality. According to the Director this mentality problem is about how people are generally tuned into expecting the government to do everything for them, creating some sort of dependency. This attitude makes the entrepreneurs to have a mindset that limits their innovative skills or to search for alternatives that improve on their approaches to modern business and management. This explains why most small businesses in Senegal are into trading than manufacturing. This also explains why most manufacturers are into similar lines of businesses to follow the norm that most businesses go into, like that of furniture making. If small business owners in Senegal are willing to work together however by forming unions to share ideas they should have coaches who would guide them in the right direction and this could be done with government input. The government at the moment seems to be reluctant in its assistance towards helping small businesses compared to its interest for larger companies. Perhaps this bias is partly because of the benefits reaped from larger companies in form of revenue from taxes and more employment generation per company and or for political purposes. The political basis on which loans or the minimal public funds available and given need to be checked. The bars-long method should be withdrawn from public and formal institutions, as it does not support conventional capitalist approach to doing business. Loan packages should entirely be based on compliance to standards and capability among entrepreneurs. Business plan presentations (Richards, 2002) and monitoring even after funding has been presented should be conducted on regular basis. Using these methods would help encourage existing and potential entrepreneurs to surface and also raise a standard for identifying quality 'avante garde' type of entrepreneurs in Senegal. More programs are needed in Senegal to upgrade the level of awareness and interest among existing and potential small business owners in Senegal. Education at basic levels, issues of subcontracting, exports, alliances, research and development and total quality management measures would need to be introduced. Like in other countries the Senegalese government could be among the leading customers of small industries by offering procurement opportunities as is done in some developed countries like the USA, Japan and the UK. Small companies in Senegal should be encouraged to register as formal companies by providing them with incentives that will lessen their burden as established firms. Lower taxes or grace periods, free programs and training opportunities, subsidized costs where needed, contracting and other forms of support should help. Senegalese small businesses and entrepreneurs should be exposed to what other similar small business and entrepreneurs are doing around the world, especially in developing countries. This could be done by organizing and attending international trade fairs and trade shows. The networking relationships among the seemingly disintegrated business community in Senegal need to be brought together by educating the public in this regard. Building a sound foundation of all stakeholders would help create the supporting facilities needed for a more robust business and economic growth. Different groups within the business community could provide the various forms of financing mentioned in the study. The French would have to find ways to be independent from the influence of the French culture in everything they do especially in business and develop their own approach suitable to their own cultural environment. The French should only play a supportive role to aid entrepreneurship development in Senegal and it's other former colonies but not to be involving. Senegal is an underdeveloped economy whereas French is among the G-7 most industrialized nations. The two countries are two far apart in terms of their cultural, economic and technological backgrounds to be treated as the same in practices. The government of Senegal needs to play a more active role by harnessing all resources, creating networks and set the 'ball rolling'. The stage must be set for take off in the right direction with good and professional guidance and support.


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Charles J. Mambula, Langston University

Summary of Survey Findings

 Percentage of
S/N Survey Question Description Respondents

1. Source of funds are self generated 60%
2. Have preference for Group funding and external 17%
3. Proportion of funding met by self generated funds
- 25-49% 29%
- 22% 50-74%
- 8% Above 75%
4. Group funding is the most convenient method for 50%
 financing investments
5. Maximum re-investment of 40-50% back into their 60%
6. Spend part of budget on Marketing 55%
7. Use some form of Advertising 20%
8. Current Market position is conducive to business 50%
9. Receive some form of external market assistance 40%
 from govt., and other sources
10. Have not been able to proceed with innovation 67%
 due to lack of capital funding
11. Conduct basic R&D 30%
12. Received government assistance 14%
13. Don't know if they would accept any government 51%
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Author:Mambula, Charles J.
Publication:International Journal of Entrepreneurship
Article Type:Survey
Geographic Code:6SENE
Date:Jan 1, 2008
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