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

Ethiopian Economics Association (EEA)
Tassew Woldehanna


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.