Determinants of Access to Formal Financial Sources of Micro and Small Enterprises (MSEs) in West Oromia Region, Ethiopia
International Journal of Business and Economics Research
Volume 6, Issue 5, October 2017, Pages: 100-110
Received: May 5, 2017; Accepted: May 20, 2017; Published: Sep. 25, 2017
Views 2130      Downloads 224
Deresse Mersha, Department of Accounting and Finance, Jimma University, Jimma, Ethiopia
Zerihun Ayenew, Department of Management, Jimma University, Jimma, Ethiopia
Article Tools
Follow on us
Ethiopian MSEs are at early stage of development and face various constraints. One of the most crucial problems is financial constraint for start-up and operational activities. In order to promote MSEs as engines of growth, it is essential to understand the bottlenecks surrounding MSEs' access to finance. The main objective of this study is therefore to identify factors enabling successful access to formal financial sources. 200 sample MSEs selected from three towns in west Oromia region are used for this study. The finding indicated that; availability of collateral, MSE’s age, Sector of the MSEs, Legal ownership, owner’s or manager’s age, owner’s or manager’s religion and Size of the MSE significantly determine access to bank credit at p < 0.1. It was also found that Keeping accounting record, Sector, Legal ownership, owner’s or manager’s age, owner’s or manager’s business experience and Size of the MSE significantly determine access to credit from MFIs at p < 0.1. From supply side, high interest rate and long loan procedures are the main factors. This implies that though MFIs are established to provide credit to MSEs, the system of credit provision is almost similar with banks.
Access to Finance, Determinant Factors, Micro and Small Enterprises, Formal Financial Institutions
To cite this article
Deresse Mersha, Zerihun Ayenew, Determinants of Access to Formal Financial Sources of Micro and Small Enterprises (MSEs) in West Oromia Region, Ethiopia, International Journal of Business and Economics Research. Vol. 6, No. 5, 2017, pp. 100-110. doi: 10.11648/j.ijber.20170605.13
Copyright © 2017 Authors retain the copyright of this article.
This article is an open access article distributed under the Creative Commons Attribution License ( which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Abdullah, M. A., & Manan, S. K. (2011). Small and Medium Enterprises and their Financing Patterns: Evidence from Malaysia. Journal of Economic Cooperation and Development, 32 (2), 1–18.
Abor, J., & Biekpe, N. (2007). Small Business Reliance on Bank Financing in Ghana. Emerging. Mark. Financ. Trade, 43 (4), 93–102.
Abor, J. (2008). Determinants of the Capital Structure of Ghanaian firms. African Economic Research Consortium.
Anthony, K. A., & Frank, G. S. (2013). Determinants of credit rationing to the private sector in Ghana. African Journal of Business Management, 7 (38), 3864-3874.
Ayalew, B. B., & Gashu M. (2015). Factors affecting access to finance with reference to MSE in Dilla town, Ethiopia. Journal for studies in management and planning.
Beck, T., Demirgüç-Kunt, A., & Maksimovic, V. (2008). Financing patterns around the world: Are small firms different? Journal of Financial Economics, 89 (3), 467-487, doi:
Berger, A. N., & Udell, G. F. (1998). The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle. Journal of Banking & Finance, 22, 613-673.
Bigsten, A. et. al (2003). Credit Constraints in Manufacturing Enterprises in Africa. Journal of African Economies, 12 (1), 104-125. doi:
Brooks, A., Collings, S. & Gonzales, P. (1990). Accounting for Small Business: a Single-Entry Approach, VCTA Publishing, Collingwood.
Briozzo & Vigier (2009). The effect of life cycles on diversification of financing sources for SMEs: Evidence from Argentina. African Journal of Business Management, 6 (3), 811-826.
Byron, E. L., & Friedlob, G. T. (1976). Why small businesses fail, Management Accounting.
Bhaird, C., & Lucey, B. (2010). Determinants of capital structure in Irish SMEs. Small Business Economics, 35, 357 - 375.
Cassar, G. (2004). The Financing of business start-ups. Journal of Business Venturing. 19, 261-283.
Cole, R. A. (1998). The Importance of Relationships to the Availability of Credit. Journal of Banking and Finance, 22 (6), 959-977. /10.1016/S0378-4266(98)00007-7
Commercial code. (1960). Commercial code of Imperial Government of Ethiopia. Addis Ababa: Berhanena Selam Printing Enterprise.
Cull, R., Davis, L. E., Lamoreaux N. R., & Rosenthal J. (2005). Historical financing of small and medium size enterprises. World Bank Policy Research Working Paper No. 2334.
Fanta, A. B. (2012). Banking reform and SME financing in Ethiopia: Evidence from manufacturing sector. African Journal of Business Management, 6 (19), 6057-6069.
Fatoki, O. O., & Asah, F. (2011). The Impact of Firm and Entrepreneurial Characteristics on Access to Debt Finance by SMEs in King Williams’ Town, South Africa. International Journal of Business and Management, 6 (8), p 170.
Frempong, G. (2007). Towards an African e-Index: Small & Medium Business Survey Wireless Opportunities and Solutions: A regulatory perspective LIRNE Expert Meeting and International Workshop, 7-9.
Gebru, G. H. (2009). Financing preferences of micro and small enterprise owners in Tigray: does POH hold? Journal of Small Business and Enterprise Development, 16 (2) 322 – 334.
Gujarati, D. N. (2003). Basic econometrics (4th ed.). USA, Mc Graw-Hill.
Honhyan, Y. (2009). The determinants of capital structure of the SMEs: An empirical study of Chinese listed manufacturing companies. Journal of Finance and Economics. 77, 117-146.
Hutchinson, P. (1999). Small Enterprise: Finance, Ownership and Control. International Journal of Management Reviews, 1 (3), 343-365.
Jordan, J., Lowe, J., & Taylor, P. (1998). Strategy and financial policy in UK small firms. Journal of Business Finance and Accounting, 25 (1), 1-27.
Kebede, S. N., Tirfe, A. G. & Abera, N. (2014). Determinants of MSEs’ access to finance. Developing countries studies. 4 (21).
Kothari, C. R. (2004). Research methodology: Methods and techniques (2nd Rev. ed.). New Delhi, New age International publishers.
Kroszner, R. S. (2003). What drives productivity growth? Implication for the economy and Prospects for the future.
Klapper, L., Sarria, A. V., & Sulla. (2002). Small and medium size enterprise financing in Eastern Europe. Working Paper.
Linder, B., & Hoelzl, K. (2012). SME financial reporting practice in Austria. World Bank center for financial reporting reform (CFRR) and the Austrian Institute of for SME Research.
Levitsky, J., &. Prasad, R. (1989), Credit guarantee schemes for small and medium enterprises. World Bank technical paper; no. 58. World Bank, Washington DC.
Martin, M. M., & Daniel, K. T. (2013). Does Firm Profile Influence Financial Access Among Small And Medium Enterprises In Kenya? Asian Economic and Financial Review. 3 (6): 714-723.
Mateev, M., Poutziouris, P., & Ivanov, K. (2013). On the determinants of SME capital structure in Central and Eastern Europe: A dynamic panel analysis. Research in International Business and Finance, 27 (1), 28-51. doi:
McMahon, R. G. P., and Holmes, S. (1991). Small business financial management practices in North America: A literature review, Journal of Small Business Management, 19 – 28.
Michaelas, N., Chittenden, F., & Poutziouris, P. (1999). Financial Policy and Capital Structure Choice in U.K. SMEs: Empirical Evidence from Company Panel Data. Small Business Economics, 12 (2), 113-130.
Mosisa, T. (2011). Accounting practices of small and medium sized enterprises and its effect on access to finance in Addis Ababa (MSc thesis) AAU.
Mulaga, A. N. (2013). Analysis of External Financing Use: A Study of Small and Medium Enterprises in Malawi. International Journal of Business management. 8 (7).
McMahon, R. G. P., and Holmes, S. (1991). Small business financial management practices in North America: A literature review, Journal of Small Business Management, 19 – 28.
Odit, M. P., & Gobardhun, Y. D. (2011). The determinants of financial leverages of SME are in Mauritius. Int. Bus. Econ res. J, 10, 113-125.
Okpara, J., & Wynn, P. (2007). Determinants of Small Business Growth Constraints in a Sub- Saharan African Economy. South Africa: Sam Publication.
Ono, A., & Uesugi, I. (2009). Role of Collateral & personal Guarantees in relationship lending: evidence from Japan’s SME Loan Market. Journal of Money credit & market.
Pallant, J. (2005). SPSS Survival manual: A step by step guide to data analysis using SPSS for window (Version 12). Australia, Allen & Unwin.
Petersen, M. A., & Rajan, R. G. (1994). The Benefits of Lending Relationships: Evidence from Small Business Data. The Journal of Finance, 49 (1), 3-37. doi:
Quartey, P. (2003). Financing Small and Medium Enterprises (SMEs) in Ghana. Journal of African business, 4 (1), 37 — 55.
Reddy, M. (2007). Small Business in Small Economies: Constraints and Opportunities for Growth. Social and economic studies, 56 (1/2), 304-321.
Romano, C., Tanewski, G. & Smyrnios, K. (2001). Capital Structure Decision Making: A Model for Family Business. Journal of Business Venturing, 16 (3), 285–310.
Sebopetji, T. O., Belete, A. (2009). An Application of Probit Analysis to Factors Affecting Small-Scale Farmers Decision to take Credit: a Case Study of Greater Letabo Local Municipality in South Africa. African Journal of Agricultural Research. 4 (8), 718-723.
Ssendaula, G, (2002). Minister of Finance, Planning and Economic Development, Keynote Address on a Symposium on “Modalities for Financing Small and Medium-Scale Enterprises”, United Nations.
Storey, D., (1994). Understanding the Small Business Sector, Routledge, London, 33-55.
Stevens, J. (1996). Applied multivariate statistics for the social science (3rd ed.). USA, Lawrence Erlbaum.
Tabachnick, B. G., & Fidell, L. S. (2007). Using multivariate statistics. USA: Pearson Education, Inc.
Van Auken, H. (2005). Differences in the usage of bootstrap financing among technology-based vesus non-technology-based firms. Journal of Small Business Management, 43 (1), 93-103.
Van der wijst. (1989). Determinants of Small Firm Debt Ratios: An Analysis of Retail Panel Data. Small Business Economics, 5, 55—65.
Vos, E., Yeh, A. J, Carter, S., & Tagg, S. (2007). The happy story of small business financing. Journal of Banking & Finance, 31 (9), 2648-2672. doi:
Science Publishing Group
1 Rockefeller Plaza,
10th and 11th Floors,
New York, NY 10020
Tel: (001)347-983-5186