Determinants of Access to Credit and Credit Source Choice by Micro, Small and Medium Enterprises in Nekemte, Ethiopia

Abstract

Now days, in almost all economies of the world, Micro and  small enterprises (SMEs) are recognized as engines of growth by their main contributions to national income, poverty reduction, export promotion and contribute to employment in developing countries and become the second largest employment generating sector for the poor households following the agriculture sector. The main objective of the study is to assess determinants of access to credit and credit source choice by SME entrepreneurs in the study area. Data was collected by using structured questionnaire from 173 entrepreneurs and the analyses of binary logistic regression and multinomial logit model is conducted by STATA version 10. The study shows that the major source of finance for SME is own source finance. The results of binary logistic regression reveals that there is statistically significant relationship between firms’ access to credit and firm size, firms owing of  business plan, firm location, risk taking propensity of the firm head, firm age, and prevalence of corruption problem. Also, the result of multinomial logit model shows that firm size, access to work premises, firm location, access to business information, firm age, firm capital and prevalence of corruption in loan processing have statistical significant relationship with credit source choice decision by MSE entrepreneurs. The study result reveals that firm size, firm age, corruption problem and firm locations are statistically significantly determine both access to credit and credit source choice of the SME entrepreneurs in the study area. Based on the finding of this study, it is  recommends that government should formulate policies that will make sources of financing such as commercial banks, micro finance institutions and other sources to relax their credit regulations and operations which encourage borrowing and offer more credit facilities for firms especially which are found at micro and small sized level. Also, the government should establish stringent rule that curbs the corruption problem that prevail in accessing credit sources. Moreover, the government through its SME support institution has to facilitate the construction and arrangement of favorable business location for SME entrepreneurs in the study area.

Keywords: SME, Determinant, logistic regression, multinomial logit, access to credit, credit choice, Nekemte