Poverty in Ethiopia is a widespread and remains a major challenge of sustainable development and stability.
There are multi-dimensional problems like extreme poverty, unemployment, low per capita- income, and unequal income distribution facing in developing countries like Ethiopia that deepens the rate of poverty.
As a result the government of Ethiopia is framing different strategies policies to create job opportunities and to pull the county out of these problems. One of the strategy is to create jobs and accommodate maximum number of citizens has been emerged, i.e. the establishment of Micro and Small Enterprises. The government of Ethiopia has issued the national Micro and Small Enterprises Development Strategy for the promotion of small and micro enterprises in 1997 and revised the strategy in 2011 in order to integrate the development of the sector with the countries five year Growth and Transformation Plan.
However, the MSEs in Ethiopia are facing many challenges while performing in accordance with the designed strategy. Among other factors lack of access to finance is prominent. For any business firm finance plays a great role whether to start up, growth, diversify or expand.
Some authors argue that Riba (1999) the major constraint for Micro and Small Enterprises ( MSEs) growth expansion, diversification is not the shortage of access to finance. It is rather lack of access to medium and long-run credit (time duration of credit) that hinders MSEs. Because, most credit available for MSEs are on short term loans.
Therefore, the purpose of this study focuses on the effect of finance as it leads to success or failure in the operation of the firms.
Furthermore, the study analyzes some important variables such as adequacy of loan size, interest rate, loan term ( loan duration) and availability of loan on time to assess whether aces to finance by itself appropriate or inappropriate.
1.1 Background of the Study
For any business firm, it is obvious that finance plays a key role in any aspect of its operations. Finance is used to start up, expand, diversify and for working capital of the firm.
Without working capital, any business enterprise cannot achieve its objectives. Micro and small enterprises also need finance since they are concerned as a part of business enterprises.
Any business enterprise including MSEs need finance from start up to growth, expansion, diversification and smooth operation at any time in its life cycle (Mckernan and Chem, 2005).
In developing countries the informal sector that mainly constitutes microenterprises is the major source of generating employment and income for the urban population. ILO (2000) estimated the share of informal employment to the total non-agricultural employment accounts for nearly half or more in all regions of the developing world and about 72% in sub-Saharan Africa. Besides employment creation, they also play a very important role in the developing world economy. For example, in Sub Saharan Africa, the contribution of the informal sector in non-agriculture Gross Domestic product (GDP) is about 41 %. Hence, their efficiency matters in determining overall economic performance and poverty reduction.(Truneh Abebe p9)
Despite their potential to improve economic growth, micro and small enterprises (MSEs) in developing countries lack serious attention. They produce largely for the low income group and employ lower levels of techniques. Many of them are self-employed type with a low transformation rate into higher size categories and their innovative activities are limited (Gebreeyesus, 2009). MSE…1A
Ethiopia, as one of developing country to improve the performances and raise the contribution of MSEs to the economic growth, has integrated MSEs as a strategic tools in the Growth and Transformation Plan (GTP) and forwarded a MSE development strategies to promote the sector. However the sector confronted several factors that affected its performance to grow and develop to its potentials (Werotew, 2010:226-37). MSE…1A
More importantly, the sector is facing financial challenges, which impeded its role in the economy. These challenges are lack of access to credit, insufficient loan size, time delay and collateral (Gebrehiwot and wolday, 2006). In addition to this, Wattanapruttipaisan (2003), Molhotra et al. (2006), Beck (2007) and Vandenberg (2009) also stated that acute financial constraint is a strong obstacle for MSEs in developing countries.
According to Molhotra et al. (2006), MSEs play a pivotal role in developmental goals such as in improving living standard, distributing income fairly among low level and high level group, reducing unemployment rate, fostering linkages among various economic sectors, easy to begin and expand, labor intensive, require small capital, low technology, and little know – how, this sector is receiving due attention of policy makers and development practitioners. Furthermore, MSEs serve as a bridge to reach at the technically advanced medium and large enterprises. It is undisputable to the fact that there is expansion and diversification of MSE sectors in our country, Ethiopia. However, these expansion and diversification of MSE sectors is not satisfactory. So, the country should work or dig out more and more on this sector to compete with other developed nations.
In connection to the idea of Molhotra et al. (2006), Wattanapruttipaisan (2003) pointed out the role of MSEs in providing individuals with better job opportunities, facilitate the import and export transactions among countries. Generally, to create comfortable ground for MSEs, finance is the major determinant one.
Among the seven classifications of MSEs, the study has focused on the following MSE sectors, which are currently survive in the locality. These are Construction materials, Metal and Woodwork, Service sector, Manufacturing, Urban agriculture and Trade and Commerce sectors in Basketo Special Woreda of South Nation Nationalities and Peoples Region of Ethiopia.
1.2 Problem of the Statement
In almost all economies of the world, Micro and Small Enterprises Sectors contribute to the economy of nations’ by creating employment opportunities, production of goods and services and other value added activities. The existence of a strong small business sector is necessary for the boosting of the economy. However, the transition of this sector to medium and large business sectors is as crucial to preserve the flow of new small businesses into the economy. In addition, such transition or growth will further reduce the unemployment rate and increase the number of products or services offered to the society. ……..(Truneh Abebe)
As stated in the (OECD, 2006), the difficulties that MSEs encounter when trying to access financing consists of many incomplete range of financial related activities, regulatory rigidities or gaps in the legal framework, lack of information on both the bank’s and the MSE’s side. Banks and other financial institutions may avoid providing financing to certain types of MSEs in particular for those which are in start-up and very young firms that typically lack sufficient collateral, or firms whose activities offer the possibilities of high returns but at a substantial risk of loss.
In Ethiopian context, as to the Ethiopian government’s strategy, Growth and Transformation plan, micro and small enterprises are the bridge to achieve the goals of the government (MoFED, 2011). Since Ethiopia is a developing country, policy makers of the country pay due attention for MSE sectors. Due to their low capital requirement, easy of start-up and operate, easy to operate in urban and semi urban areas or environments with small expenditure, they attract the attention of the government. Even though MSEs are believed to require low capital expenditure, still finance is the primary requirement to start and run MSEs. Capital is important to start-up, expansion, diversification and operation of MSEs. However, due to:
Limited access to working capital and long-term credit
? Legal and regulatory restrictions
? Inadequate infrastructure
? High transaction costs
? Limited managerial and technical expertise
? and other multiple and interrelated constraints (OECD, 2006),
MSEs growth, development, expansion, diversification and promotion is not progressing much as expected to achieve.
Studies conducted so far concluded that the problem of MSEs are access to working capital and long term credit, inadequate loan size, inadequate infrastructure, high transactional cost, limited managerial and technical experts and marketing problems World Bank, (2008), Hailay (2003) and Gebrehiwot and Wolday (2006). Even though many authors have concluded the above listed problems of MSEs, they are still don’t agree on each point. For example, Wattanapruttipaisan (2003) stated that lack of access to finance is a strong obstacle for MSEs in developing countries. In contrast, Riba (1999) argued that the major constraint for MSEs’ growth, expansion, diversification and promotion is not the lack of access to finance rather its loan term, to medium and long-term credit, whereas Malhotra et al (2006) shared the arguments of both sides. In addition to this, these authors did not identify some more serious problems.
This research will focus on the effect of finance that is whether it leads to success or failure in the operation of the firm. The major focus is on adequacy of loan size, interest rate, loan term (loan duration), and the availability of loan on time (delays in loan request processing). The variables have been analyzed to assess whether the access to finance by itself is appropriate or inappropriate