Determinants of small-scale business owners’ participation in formal microcredit markets in Sudan

Heckman two-step selection model was used to analyze influences of household, business, and lender-related factors on the decision to participate and level of participation in formal microcredit using data from a survey of Micro and Small Enterprises (MSEs) in Sudan. Signs of the estimated parameters were consistent with expectations and in agreement with findings of relevant literature. While a number of household attributes were found to be important determinants of the choice to participate, most did not seem to have statistically significant influences on intensity. Conversely a number of key business-related characteristics appear to significantly affect intensity of participation in formal microcredit measured by the amount of microcredit applied for. Results of the study have important implications for microcredit policy and suggest various measures and reforms with high potential for enhancing the effectiveness and success of microcredit for MSEs in Sudan. One key finding relates to the effect of awareness of the predominant Islamic mode of microcredit, the Murabaha. As expected, awareness appears to positively influence participation, however awareness of the existence of formal microcredit and the Murababa lending terms and conditions was found to be low (only 65%) among the surveyed MSEs population. This indicates the importance of more efforts to improve awareness and flow of information on microcredit procedures in general, particularly Islamic modes of finance such as the Murabaha contract. On the other hand, the effect of awareness on intensity of participation (amount applied for) was found to be negative with high significance. This seems to suggest that the Murabaha mode is considered a high risk option by MSEs owners who are aware of this mode of finance substantially reducing their levels of demand for it. The study also confirmed the importance of key business related factors such as maintaining accounting records and value of assets, particularly for intensity of participation. The results tend to suggest that relatively larger and better-managed MSEs, demand higher credit levels. It is accordingly important to empower smaller and less equipped firms through increased awareness and training. These and other results suggest measures to strengthen business skills of MSEs managed by women, lower income owners, and relatively disadvantaged migrants through increased awareness, training and other complementary mechanisms to increase their participation. Innovative measures to ease constraining lender-related factors such as collateral requirements and loan processing time need to consider lending to beneficiary groups (e.g. cooperatives) to reduce risks of repayment defaults.