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Financial Access to Micro and Small Enterprise Operators: The Case of Youth-Owned Firms in Ethiopia

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  • Woldehanna, Tassew

Abstract

The government of Ethiopia has been providing financial access to micro and small enterprises through microfinance institutions. Despite the financial services support given to MSEs, lack of access to finance remains the main business challenge limiting the expansion of the self-employment sector in Ethiopia. This paper aims to study what financial sources are available to MSE operators and examine what factors drive access to credit. Quantitative information was collected from a sample of 909 youth MSE operators and a descriptive and econometric model was applied to examine sources of finance, factors influencing access to loan, and constraints of accessing financial services. Only very few operators (about 8.7%) used borrowing from the formal sector as a source of funding their investment. The result of the study shows that inadequate collateral and difficulties in proving their credit worthiness or absence of credit history were by far the main reasons that discouraged youth MSE operators from submitting applications for bank loans, followed by difficulties in processing loans and the high cost of borrowing. The regression results indicate that age, type of enterprise, and possession of a business plan by the youth MSE owners are significant variables influencing the likelihood of taking a loan. In other words, as age increases, the probability of the MSE operator to take a loan tends to increase. Type of enterprise was found to have a negative effect, indicating that operators in microenterprises have lower probability of taking credits than those engaged in small enterprises. The finding of the study also reveals that the age of the owner, the type of the enterprise, migration status, the location of the business, and the presence of a business plan were statistically significant variables influencing the size of credit accessed by the operators. There is a need for a deliberate intervention and a tailored support program by government and development partners, on the basis of size and gender, to improve financial access to the youth MSE operators without distorting the financial market and ensuring the sustainability of the finance providers.

Suggested Citation

  • Woldehanna, Tassew, 2017. "Financial Access to Micro and Small Enterprise Operators: The Case of Youth-Owned Firms in Ethiopia," Ethiopian Journal of Economics, Ethiopian Economics Association, vol. 26(01), April.
    • Handle: RePEc:ags:eeaeje:343202
    DOI: 10.22004/ag.econ.343202
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    References listed on IDEAS

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