Role of Financial Institutions in the Growth of Small and Medium Enterprises in Sokoru Town, Ethiopia

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.