Impact of Credit and Capital Structure Decisions on Growth of Small Enterprises: Evidence from Tigray Regional State of Ethiopia

Abstract

The primary objective of this study was to examine how and to what extent access to formal credit and capital structure affect growth of small enterprises, following the static-trade-off theory of capital structure as theoretical frameworks. The study intends to address two basic questions: (1) Does access to formal credit have significant influence on growth of small enterprises? (2) To what extent is growth of small enterprises affected by capital structure decision of their owners/managers? In order to address these questions, a mixed explanatory cross-sectional research design was crafted that is inclined towards quantitative approach. Data were collected from both primary and secondary sources through a standardized questionnaire, key informant interview (KII), direct observation, and documentary analysis.  A combination of purposive, systematic, and simple random sampling techniques was employed to choose appropriate samples. Accordingly, primary data were collected from 333 small enterprises operating in five urban towns of Tigray. These were selected out of 2765 small firms operating in the target areas. In this research descriptive statistics, statistical difference tests, and regression analysis, and propensity score matching were applied for the purpose of data analysis, with the help of Stata version 12 software. The descriptive analysis shows that that debt financed small enterprises have been growing at 9.41% but  growth rate of those equity financed firms was 5.98%. The regression model also revealed that leverage has significant positive contribution to growth of small enterprises with a growth coefficient of 2.76 (P< 0.05). Besides, results of propensity score matching showed that leveraged firms grew at 3.4 percent higher than those equity financed small enterprises (p < 0.05).The researcher found that possessing strong financial resources, more leverage and easily accessible credit facilitieshave significant positive effect to enhance growth of small enterprises.  On the other hand, growth rate of majority of the enterprises have been retarded due to lack of financial resources because banks could not provide adequate credit to the sector. Therefore, the writer provides the following recommendations so that credit need of the sector could be satisfied. Ethiopian government (1) need to introduce and strengthen a credit guarantee fund as a risk sharing scheme; (2) assess the potential of such non-bank financial services  and develop guidelines or regulations for smooth functioning of these institutions to participate (3) initiate some guidelines  to introduce Mandatory Minimum ratio of Bank loan to small enterprises so that banks are directed to make loans to potentially growing enterprises, (4) take necessary action so that  credit is easily accessible  through development of development oriented banking  that specialize on financing SEs, (5)upgrade knowledge and skill of owners and/or employees of the SEs so that they can prepare financial statements and business plan that banks use as input in  assessing  the financial condition and operating result of their businesses

Key words: Capital Structure, Credit, Growth of Small Enterprises, Static-trade-off Theory, Tigray-Ethiopia.