Abstract:
Small and medium enterprises (SME's) play a very significant role in the economy of any
country. They provide employment and improve the standard of living of individuals-both the
employers and employees. They are a major source of entrepreneurial skills and innovations; the
objective of this study was to investigate the role of financial institutions, with a particular focus
on banks and MFIs, on the growth of SMEs in Ethiopia, particularly in Sokoru by using
disaggregated data. Ethiopian government has given due emphasis to SMEs though they are
facing various constraints. One of the decisive problems is financial constraint for start-up and
operational activities. In order to promote SMEs as engines of growth, it is essential to
understand the bottlenecks surrounding SMEs' access to finance. Linear regression model is
applied to test the formulated hypotheses and to examine the four variables whether they are
affecting the role of financial institutions, with a particular focus on banks and MFIs, on the
growth of SMEs and the data was analyzed using descriptive data analysis and inferential
analysis technique. 162 sample SMEs selected from Sokoru town, Ethiopia are used for this
study. The finding indicated that financial institutions were contributing to SMEs growth.
Consequently, the relationship between loans from financial institutions and SMEs growth are
positive and statistically significant. Further, it identifies ways of addressing the problems that
SMEs face in accessing and settling loans include: flexing terms and conditions, using alternative
collateral and credit facilities, refinancing, and postponing maturity period. Finally, the thesis
recommends a serious of measures which should be performed by the government and by
financial institutions. These include: creation of a level playing field, lowering transactional
costs, and commercial banks should reappraise their role by adding some article which is
convenient for customer.
