Small and Medium Enterprise Access to Finance in Ethiopia. Synthesis of Demand and Supply

This paper reports an in-depth study into demand and supply issues relating to Small and Medium Enterprises (SMEs) access to finance in Ethiopia. The demand side analysis is done using primary data collected from 519 business firms drawn from the major towns in Ethiopia. Similarly, information for the supply side analysis was collected from 8 banks and 3 Micro Finance Institutions.

The logit model is used to analyze determinants of firms’ access to finance from formal financial institutions. We added a measure of credit constrained status of firms by classifying firms into three ordinal categories – Not Credit Constrained, Partially Credit Constrained and Fully Credit Constrained – and analysis was made using order logit model. Similarly, descriptive analysis was used to analyze data collected from banks and MFIs.

Results indicate that banks and MFIs engagement in financing SMEs in Ethiopia is limited. The demand side findings and analysis revealed that access to finance is significantly influenced by the age of the firm, firm’s previous engagement with banks, experience of the manager and whether firms are managed by the owner (owner-manager) or not. In a similar fashion, SMEs specific factors such as poor financial records of SMEs, lack of adequate collateral, SMEs poor management of risks, and informalities of SMEs are the major obstacles underlined by banks and MFIs to their engagement with SMEs. In general, young firms who do not have adequate managerial and operation experience, and those with inadequate collateral are highly credit constrained.

by: Fredu Nega (PhD) and Edris Hussein (MSc)