Formal vis-a-vis Informal Financial Institutions as a Source of Credit for Micro and Small Enterprises in Ethiopia: Empirical Evidence from Wolaita and Dawro zones, Ethiopia

Abstract

In the current world with many challenges, Micro and Small Enterprises (MSEs) together with institutional facilities are expected to create jobs for youths both in developed and developing countries. Microfinance institutions, claimed as established to provide credit for MSEs are considered as appropriate institutional platforms to play the touched issue here above. However, studies about how MFI provides credit for MSEs as expected are limited and if any not satisfactory. By considering the case of MSEs in Wolaita and Dawro zones from Southern Ethiopia, the current study was undertaken to investigate credit providing related issues of MFIs to the MSEs to be revitalized as institutions established to play such roles. The study was based on data collected from a sample of 158 MSEs from the two zones and analyzed using descriptive statistics and logit model. The finding shows the instrumental role MFIs play in providing credit for MSE and has identified the major constraints faced by MSEs in getting credit from MFIs. Accordingly, the study result from descriptive statistics revealed that majority of the sampled MSE operators (about 77%) claimed that the loan was not adequate for their planned business start-up. The sampled MSE also raised the issue of long process to secure credit, lack of adequate collateral; inflexibility in repayment arrangement systems, high borrowing costs, and problems related with disbursement time as a major factor affecting their credit access from formal financial institutions in the study area.  In addition, the finding from logit model shows that number of workers employed by each MSE, number of members in the enterprise, educational level of the MSE owner/manager, and number of business development training attended determines the likelihood of getting the credit amount needed and requested by MSE from formal finance sources such as MFIs in Wolaita and Dawro zones. From this finding, the study concludes that even if MFIs are playing a priceless contribution in supporting MSE sector development in the country, there are still a number of problems attached with loan giving process in the study area. Further strengthening and expanding MFIs services and working on the above listed constraints are the key recommendation from this study if MSE development was expected more to create jobs for jobless in the study area.

Keywords: MSE, MFI; Formal, Informal, Credit, Wolaita zone, Dawro zone.