DETERMINANTS OF ACCESS TO FINANCE: EVIDENCE FROM SMALL AND MEDIUM ENTERPRISES, GAMO ZONE, ETHIOPIA

Abstract

The main aim of this study was to analyze the determinants of SMEs' access to finance in the Gamo zone, Ethiopia. A descriptive and Explanatory research design was employed, and a quantitative research approach was used. To achieve the intended objective, primary data were collected from a sample of selected 216 SMEs and 16 Financial institutions using a questionnaire. The samples of SMEs were selected using a stratified sampling technique. Finally, after collecting the relevant data, the data were analyzed using descriptive statistics and the econometric tool of binary logistic regression. The regression result revealed that access to finance is significantly affected by education level, financial literacy of the manager, collateral, size, age of the enterprise, and financial institution-enterprise relationship. Similarly, the descriptive result of the supply side indicates, SMEs-specific factors like lack of adequate collateral; lack of adequate information about SMEs (asymmetry information), and the high transaction cost of lending are major obstacles underlined by financial institutions to their limited engagement with SMEs. Considering the significant challenges SMEs face, all responsible bodies are recommended to take measures to improve SMEs' access to finance. Specifically, the Government is recommended to improve SMEs' access to finance by introducing an extended Credit Guarantee fund that reduces the excessive demand for collateral security. In addition to this, SMEs are also recommended to improve their quality through efficient utilization of available human and material resources.