Determinants of access to Bank Finance in Small and Medium Sized Enterprises in Addis Ababa: The case of Addis Ketema sub-city
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Date
2022-11-07
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A.A.U.
Abstract
Small and Medium Enterprises (SMEs) play an important role in developing countries, serving as driving forces for achieving the sustainable development goals of the country. By providing adequate quality and reasonably priced goods and services to a large number of people, and by effectively utilizing the skills and talents of a large number of people without requiring high-level training, large sums of capital, or sophisticated technology, the SME sector has been instrumental in bringing about economic transition. Access to credit, on the other hand, continues to be a fundamental issue that prevents SMEs from playing a positive role in the economy. The main objective of the study was to explore SMEs’ source financings and analyze the major determinants of access to bank finance by administering a semi-structured questionnaire to 169 randomly selected SMEs in Addis Ababa, Addis Ketema Sub City. It is found that the major source of startup finance is friends/family, own savings, Equb, MFI and banks in their order. The source of finance for working capital on the other hand is own saving, Equb and banks again in their order. It concludes that the major source of finance both for startup and working capital is from informal financial sources. Binary logistic regression was also employed to identify determinants of access to bank finance and test hypotheses. The study found that owner-manager’s age, possession of fixed Asset and perceptions about lending procedure had statistically significant effects on access to credit from banks. In contrast owner-manager’s gender and educational level; firm’s age, size and sector had no statistically significant effects on the probability to access to bank finance by SMEs. Using the age of 51-years-old and above entrepreneurs as a benchmark, entrepreneurs between the ages of 31 and 40 are 88.9% less likely than those aged 51 and more to obtain financing from banks. SME operators who have a negative attitude about lending procedure are 69% less likely to access credit from banks than those who do not. SME operators who posses fixed asset 14.028 times more likely to access credit from banks than those who do not. Given the importance of SMEs in job creation, income generation, and poverty reduction, all parties (government and non-governmental institutions) have a responsibility to ensure that SMEs have enough access to capital.
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Keywords
Credit, Access, Owner-manager’s Age, Fixed Asset, Lending Procedure