DETERMINANTS OF ACCESS TO FINANCE FOR SMALL AND MEDIUM ENTERPRISES: THE CASE STUDY OF YIRGALEM TOWN IN SIDAMA REGIONAL STATE OF ETHIOPIA

Abstract

Small and medium Enterprises (SMEs) play a crucial role in alleviating poverty and fostering economic growth in developing countries, including Ethiopia. This study investigates the determinants of access to finance for SMEs in Yirgalem Town, Sidama Regional State, utilizing a sample of 65 businesses and employing a binary logit regression model. The results reveal that key factors such as opportunity to market, cost of borrowing, and collateral requirements significantly influence access to finance, while institutional factors do not show a statistically significant impact. Notably, the opportunity to market has the strongest positive effect, suggesting that businesses with better market access are more likely to secure financing. Surprisingly, a positive correlation between cost of borrowing and access to finance indicates that higher borrowing costs may be associated with greater credit availability. The study emphasizes the need to enhance market access and revise collateral policies to improve financing opportunities for small businesses. Additionally, despite the insignificance of institutional factors in the short term, strengthening legal and regulatory frameworks may yield long-term benefits for financial inclusion. Policy recommendations include lowering borrowing costs, promoting marketing opportunities, and improving access to collateral-free financing options. The study also suggests avenues for future research, such as examining informal lending systems and expanding the study to other regions for comparative analysis. These findings offer valuable insights for advancing financial inclusion and small business development in Ethiopia and similar economies..