Determinants of Micro and Small Enterprises’ Access to Finance

Abstract

In developing countries, micro and small enterprises (MSEs) have a dynamic role and serve as engines through which the growth objectives of developing countries can be achieved. The MSE sector has been instrumental in bringing about economic transition by providing goods and services, which are of adequate quality and are reasonably priced, to a large number of people, and by effectively using the skills and talents of a large number of people without requiring high-level training, large sums of capital or sophisticated technology. However access to finance remains to be a major problem hampering MSEs from playing their constructive role in the economy. The main objective of this study was to assess the major determinants of access to finance by using semi structured questionnaire administered to 134 randomly selected MSEs in Asella. Binary logistic regression was used to identify major determinants of access to credit from formal financial institutions and test the hypotheses. The result of the study revealed that age of operator, educational level, and possession of fixed asset, employment size, lending procedure and loan repayment period are significant factors that affect MSEs’ access to credit. MSEs run by operators of >40 years of age, that have reached TVET/College and above, which possess fixed asset, with > 6 employees are more likely to access credit from formal financial institutions than MSEs run by operators of 31-35 years of age, with no formal education, do not have fixed asset and with 1-2 employees. In addition, MSEs run by operators who have negative attitude towards lending procedure and loan repayment period of formal financial institutions are less likely to access credit than those which do not. Considering the role MSEs in employment generation, income generation and poverty alleviation, all stakeholders (government and non-governmental institutions) have responsibilities to facilitate sufficient access of finance for MSEs.

Keywords: Access, Credit, Education, Fixed asset, Size, lending procedure.