The determinants of small and medium size enterprises (sme’s) on access to finance

Abstract

SMEs contribute positively to economic growth, employment and poverty alleviation in Tanzania. However, the failure rate of SMEs is very high in Tanzania. One of the factors limiting the survival and growth of SMEs in Tanzania is non-availability of enough financial services. Considerably, the Government of Tanzania through the current reforms has resulted in liberalization of the financial sector to a great extent. This has led to establishment of a number of banks including the Micro Finance Bank, liberalization of financial rates and establishment of a stock exchange market. In spite of all efforts done, the SME sector is still facing a major constraint in accessing finance. A survey of the literature on financing small and medium sized enterprises (SMEs) indicates a significant gap in knowledge of the determinants of access to finance by the SMEs in developing countries, including Tanzania. This study, therefore, examined the determinants of the access to bank finance in Small and medium sized enterprises in Tanzania. Nachingwea district was taken as a case study. Hypotheses for this study were derived utilizing ten factors which affect credit worthiness as identified in the previous researches. Data were collected through self- administered questionnaire in a survey. Chi-square statistic was chosen to examine whether the determinants of access to finance were significantly different among the firms that obtained loan and those that did not. The chi square results indicated that, education background, firm performance, age of the firm, entrepreneur’s experience and industry sector of the firm were associated with access to finance. Unexpectedly, all other factors identified in the study did not show any association with access to finance. The study recommends that SMEs owners/managers should be investment ready by providing collateral; The government should support the education and training and the SMEs should attend seminars and training programs to improve on their managerial competence. The government should also establish a mechanism to help SMEs to get access to finance through SACCOS, and Agriculture and Marketing Cooperative Society (AMCOS) even when they do not have collateral