Determinants of Lease Financing Practice and Its Effect on the Income of Small and Medium Enterprises: In Case of Jimma and Bench Sheko Zones

Abstract

The main aim of this study was to investigate the determinants of lease financing practice and its effect on the income of SMEs by focusing on demand (SMEs) side factors that constraint SMEs from lease financing participation. Leasing is a financing in kind for production and service purpose by which a leaser provides specified capital goods on financial lease or hire purchase agreement basis to a lessee, without collateral, for a specified period of time and collects in return a certain amount of periodical payments over the specified period. Lease financing is an alternative means to finance SMEs that missed sector in Ethiopia. The study used both qualitative and quantitative method. Both primary and secondary data was used as evidence for the study. In identifying the respondents from the study population simple random sampling method was adopted. Based on this, 91 sample SMEs were drawn from total population of 1052 SMEs in the study area. Jimma and Bench Sheko zones were used to take sample respondents. The collected data were analyzed through descriptive statistics and Heckman two stages procedure model. Determinants of lease financing practices were identified by Heckman first stage procedure; whereas Heckman second stage procedure was used to evaluate the effect on income of SMEs. The study found that education level of SMEs manager, capital of SMEs, awareness about lease financing, access to working premises and access to electricity significantly and positively affected SMEs participation decision. The estimates of Heckman second stage showed income of respondents was a robust and the result of the study showed that capital of the SME was significantly increased SMEs income from lease financing project. Therefore, lease financing practice should be encouraged by government and nongovernment organizations through supporting training of SMEs’ managers, creating awareness about lease financing services, making available working premises and improving electric availability in the study area in order to increase SMEs participation in lease financing thereby improving their income level so that it can be taken as an alternative development strategy