The Problem Of Financing Small

The Problem Of Financing Small & Medium Enterprises
In Oromia The Case Of West Shoa Zone

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BACHELER OF SCIENCE IN ACCOUNTING AND FINANCE
AAU UNIVERSITY

July, 2018

ACKNOWLEDGEMENT
It is a great pleasure to me to thank the many people who, in different ways, have supported me and contributed to the process of writing this paper. Primarily, I would like to thank my colloquies all the wise and insightful comments, support and direction he gave me. Secondly, I would like to thank and acknowledge all the employees of Oromia SMALL AND MEDIUM ENTERPRISE employees and management . Lastly, I acknowledge all my families my and friends who have been encouraging me on regular basis and given me inspiration throughout the process of writing this thesis.

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Table of Contents

Abstract II
Acknowledgment III
List of Table VI
CHAPTER ONE: INTRODUCTION 1

1.1 Background and context 1
1.2 Statement of Problem 3
1.3 Objective of the Study
1.4 research area
1.4.1 Oromia state
1.4.1 west Shewa zone
1.5 the purpose of the Study 4
1.6 Organization of the Study 4

2. LITERATURE REVIEW 7

2.1 Definitions SMALL AND MEDIUM ENTERPRISE 7

2.2 Characteristics of SMALL AND MEDIUM ENTERPRISE in Oromia 8

2.3 The Contribution SMALL AND MEDIUM ENTERPRISE the economy 9

2.4 Constraints of by SMALL AND MEDIUM ENTERPRISE 11

2.5 Types of Financing available to SMALL AND MEDIUM ENTERPRISE 13

2.6 Sources of Financing for SMALL AND MEDIUM ENTERPRISE 16

2.7 Promoting SMALL AND MEDIUM ENTERPRISE Development 21

2.8 Importance of Financial Institution in SMALL AND MEDIUM ENTERPRISE Development
2 .9 The Financial Institutions (Banks and micro finance) 6

2.10 The Operators Of SMALL AND MEDIUM ENTERPRISE 23

IV

CHAPTER THREE: METHODOLOGY 26

3.1 Introduction 26

3.2 Research Method 26

3.3 Data Collection Technique 26

3.4 Target Population 27

3.5 Sample Size 28

3.6 Sampling Techniques 29

3.7 Data Analysis 29

3.8 Procedure 31

3.9 Limitation 32
CHAPTER FOUR: PRESENTATION, ANALYSIS AND DISCUSSION OF DATA
33

4.1 Introduction 33
4.2 Characteristics of SMALL AND MEDIUM ENTERPRISE 33
4.3 SMALL AND MEDIUM ENTERPRISE Constraints 36
4.4 Factors Contributing to SMALL AND MEDIUM ENTERPRISE Constraints 37
4.5 Alternative Sources of SMALL AND MEDIUM ENTERPRISE Financing 40
CHAPTER FIVE: CONCLUSION AND RECOMMENDATIONS 45

5.1 Conclusion 45

5.2 Recommendations 46

5.2.1 Establishing factoring services by banks 46

5.2.2 Enforcement of the Loan Reporting Act 46

5.2.3 Provision of incentives for banks’ lending to SMALL AND MEDIUM ENTERPRISE 47

References 49
Appendix: Questionnaire 52

V

List of Tables
Table I Distribution of Forms of Participant SMALL AND MEDIUM ENTERPRISE 34
Table II Distribution of Nature/ Kind of Participant SMALL AND MEDIUM ENTERPRISE 34
Table III Distribution of Average Monthly Turnover of Respondent SMALL AND MEDIUM ENTERPRISE 35
Table IV Distribution of Major Constraint to the growth of the Participants SMALL AND MEDIUM ENTERPRISE 36
Table V Number of Participant SMALL AND MEDIUM ENTERPRISE granted or denied access to Loan 38
Table VI Distribution of Factors that Hinders Participants SMALL AND MEDIUM ENTERPRISE 39
Table VII Distribution of the Level of Interest rates on Loans 39
Table VIII Distribution of SMALL AND MEDIUM ENTERPRISE Major Sources of Funding 41
Table IX Distribution of Sources of Funds for Start-up Businesses 42
Table X Participants SMALL AND MEDIUM ENTERPRISEE stablishing Branches in the Major Cities in Oromia 43
Table XI Distribution of Loan Repayment Distribution 44

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VII

Chapter One: Introduction

1.1 Background
SMALL AND MEDIUM ENTERPRISE play the important role in economic development. It constitute about 5% of total business units in Oromia and account of 10% of Oromia’s employment opportunity(KDI, 2018). They are often described as efficient and the best way of job creators, the seeds of regional economy and the fuel of national economic engines. Even in the developed industrial economies, it is the SMALL AND MEDIUM ENTERPRISE sector rather than the multinationals that is the largest employer of workers (Mullineux, 1997). This is also supported by a research done on Small businesses in the United States by Dr. Charles in June 2006, which indicated that U.S. Small businesses numbered 23 million in 2003, and it covers about half of the private sector work force, and also produces about most of the nation’s private sector output. Regarding the diversity of the informal sector activity (Micro Enterprises), the survey indicated that a large number of informal sector operators are concentrated in a limited area of activities, i.e., 47% in manufacturing, 42% in Trade, Hotel and Restaurant activities, about 6% in Community and Personal services and the rest 5% are involved in Agriculture, Hunting, Forestry ; Fishing, Mining ; Quarrying, Construction and Transport activities(kebede 2005).

Oromia micro finance institution in its study, “Building the Foundations for the Development of SMALL AND MEDIUM ENTERPRISE in Oromia” (September 2015) noted rather badly, the obstacles these SMALL AND MEDIUM ENTERPRISE of daily in Oromia. The study show that these as smaller sizes of the SMALL AND MEDIUM ENTERPRISE; they are few in number and lack competitiveness. These factors affect the SMALL AND MEDIUM ENTERPRISE in many ways. Foe example, most of SMALL AND MEDIUM ENTERPRISE in Oromia are reportedly having workers numbering less than expected. The smaller size of these SMALL AND MEDIUM ENTERPRISE means less competitive as fewer processes are possibly involved in the production.
A 2016 study by the Oromia Statistical Service revealed that nearly 23 percent of all registered
businesses in Oromia are of the SMALL AND MEDIUM ENTERPRISE category.
Small enterprises in Oromia are said to be a characteristic feature of the production
land scape and have been noted to provide about most of manufacturing employment of
Oromia (Steel and Webster, 2008; Aryeetey, 2012).
SMALL AND MEDIUM ENTERPRISE are also expected to contribute
about 10% to Oromia’s GDP and account for about 15% of businesses in Oromia.

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From an economic perspective, however, enterprises are both suppliers, and consumers; this plays an important role if they are to position themselves in a market with purchasing power: their demand for industrial or consumer goods will stimulate the activity of their suppliers, just as their own activity is stimulated by the demand of their customers . Demand in the form of investment plays a dual role, both from a demand-side (with regard to the suppliers of up to date industrial goods) and on the supply-side (through the potential for new production arising from equipment) (Berry et al., 2010).
In order for the Oromia SMALL AND MEDIUM ENTERPRISE’s to continue to fulfil their purpose , they need access to finance to carry out their business operation and expansion. The lack of finance for SMALL AND MEDIUM ENTERPRISE is both retarding the expansion and the growth of the nation’s economy. Macroeconomic conditions in Oromia in 2015 severely constrained private sector access to loan. High levels of government borrowing pushed interest rates up and crowded the private sector out of the financial markets. With government treasuries paying real interest of 9 percent, banks had little incentive to take on what they perceived as riskier private sector debt. (USAID’s DCA Oromia Impact Brief,2013)
In view of the perennial financing problem of by these SMALL AND MEDIUM ENTERPRISE, many interventions have
been made by the government through its recent monetary policy and financial sector
reforms. These have substantially increased banks’ lending to the private sector but limited
access to loan, high interest rates and prohibitive collateral requirements still pose
significant constraints to the growth of many SMALL AND MEDIUM ENTERPRISE’s. Access to medium to long- term
financing necessary for capital investment is still tight. (USAID’s DCA Oromia Impact Brief,
2013)
Another area of constraint, which tends to challenge the flow of loan to SMALL AND MEDIUM ENTERPRISE, is lack of transparency. Small business owners most often possess more transparency about the potential of their own businesses but in some situations it can be difficult for business owners to articulate and give detailed transparency about the business as the financial institution criteria. Additionally, some Small business managers tend to be restrictive when it comes to providing financial institutions with detailed transparency about the core of the business, since they believe in that, transparency about their business may leak through to competitors (Winborg and Landstrom, 2015).

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In addition to unwillingness to disclose transparency to financial institutions, SMALL AND MEDIUM ENTERPRISE in Oromia are also of with the problem of book keeping practices that makes it obstacles for institutions who are even willing to assist to them.

1.2 Statement of the Problem
Despite the role of SMALL AND MEDIUM ENTERPRISE in the economy, the financial constraints in their operations are daunting and this has had a negative impact on their development and also limited their potential to drive the national economy as expected. This is challenge for a developing economy without the requisite infrastructure and technology to attract big businesses in large numbers.
Most SMALL AND MEDIUM ENTERPRISE in the country lack the capacity in terms of qualified personnel to manage their
activities. As a result, they couldn’t to publish the same quality of financial transparency as
those big firms and as such are not able to provide audited financial statement, which is one
of the essential requirements in accessing loan from the financial institution. This is
buttressed by the statement that privately held firms do not publish the same quantity or
quality of financial transparency that publicly held firms are required to produce. As a result,
transparency on their financial condition, earnings, and its prospect may be incomplete
. This type of uncertainty, a lender may deny loan, sometimes to the
firms that are loan worthy but unable to report their results (Coleman, 2015).
Other issue might be to do with the in complete capital base of most SMALL AND MEDIUM ENTERPRISE in the country to meet the collateral requirement by the banks before loan is un accepted. In the situation where some SMALL AND MEDIUM ENTERPRISE are able to provide collateral, they often end up being inadequate for the amount they needed to operate value’ to ensure that the loan is realistically covered in the case of default due to the uncertainty surrounding the survival and growth of SMALL AND MEDIUM ENTERPRISE(Binks et al., 2016).
These are some of the factors already studied by some researchers as lagging most SMALL AND MEDIUM ENTERPRISE in accessing loan from the financial institution in the country. But are these really the case in Oromia?

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SMALL AND MEDIUM ENTERPRISE in Oromia do not also have the luxury of picking a financing scheme that will be
appropriate for their businesses. The major type of financing open to them is debt financing
from the financial institutions, which most often comes with a long list of requirements that
most SMALL AND MEDIUM ENTERPRISE find them difficult to meet. The other type that is Asset financing, aside the long
list of criteria also requires operators of SMALL AND MEDIUM ENTERPRISE to provide 50% of the funds and the financing
institution providing the other half to fund the purchases of the assets. This type of financing
do not allow for growth of the SMALL AND MEDIUM ENTERPRISE sector since they are all short term in nature.

1.3 Objective of the study
To highlight the specific problems inhibiting SMALL AND MEDIUM ENTERPRISE in accessing loan in Oromia with a view to proposing some recommendation to help mitigate these problems.

In pursuance of this objective, the following research questions were administered:

• Does SMALL AND MEDIUM ENTERPRISE have problems in accessing loan in Oromia? What are they?
• To what extent has these problems affected their operations?
• What alternative sources of funding are SMALL AND MEDIUM ENTERPRISE resorting to and how viable are these?
• Examine the financial and social intermediation for SMEs.

• Investigate the challenges in accessing finance from MFBs.

• Examine the process of accessing financing by SMEs.

1.4 Research Area
Research is carried out Oromia state of west Shoa zone.
1.4 Oromia State
The settlement of the Oromo people covers a large area of the country. In the West and South, it stretches into Kenya and the Sudan, in the East into Somalia and Djibouti, internally it goes North up to Raya. Though it was always a cause of dispute, local resources being the main grounds, attempts were made to fix the boundaries by the House of Federation and in Article 2/1 of the Oromia State Revised Constitution of 2001. While this state is the most populous state with 27,158,471 (37% of the total population) the land area is also the largest in the country covering 353, 632 square kilometer (32% of the total area of the country). Afaan Oromo, Oromiffa(a) (and sometimes in other languages by variant spellings of these names; Oromic, Afan Oromo, etc.), is an Afro-Asiatic language. It is the most widely spoken tongue in the family’s Cushitic branch, as presently written with Latin characters, is an official state language. Afaan Oromo is spoken by some 83.5% of the people who live in the state (CSA, 2007). Currently the state has a revised constitution enforced by Proclamation No. 46/2001. The previous constitution which was proclaimed on 22 June 2014 was revised to make the separation of power and accountability of the state organs clear and enable them to render effective services.
1.4.2 West Shoa Zone
the West Shoa zone is endowed with mountains like Tullumara, Gorfoo, Wanchi, and rivers like Muger, Awash, Dabus and Ghibe. The zone has three major drainage basins, Abay (the Blue Nile), Ghibe and Awash rivers. They drain not only water, but the rich top soil and the lives of the upper-stream people. The West Shoa is a zone where remnants of indigenous tree forests like Chilimo, Gedo and Jibat State forests are found. Dendi Lake, known as one of the source to one of the tributaries of Abay (the Blue Nile) is also located in this zone. This zone is characterized by its potential resource of mines including gold and other minerals, gypsum, agricultural land with high potential for irrigation, indigenous wild game and large livestock populations
Travelling through breathtaking chains of mountains on the left and right, Ambo, the capital of West Shoa is found at 109 kilometers. It is one of the biggest zones in the state, with 21,552 square kilometers width. The population, according to CSA (2007) is 2,329,250. This was 2,072,485 in the 2012 census, a significant increase. The zone has 18 districts – most of them with very poor road access – and one town with district status.
It is not a secret to everybody that this zone and most parts of the west wing of the country are disadvantaged and marginalized in respect of roads and other communication networks. It took five years to rebuild the Italian built road that goes to Ambo, making connections very difficult. It was taking us three to four hours’ drive only for the 100 kilometers distance. Such disadvantages are not only limited to this area. Sometime ago, I heard of a farmer, in a place 300 kilometers west of Finfinne who had brought 100 kg of maize to sell, but because no one wanted to buy his product, he scattered it in the market and went home with his empty sacks. We can see from this how infrastructure matters to motivate producers and increase products. On the other hand we can also compare this situation with the other parts of the country that suffers extreme food shortage.

1.5 the purpose of the study
Studying why SMALL AND MEDIUM ENTERPRISE in Oromia have difficulty in accessing loan or funding from financial institutions from the perspective of the operators of these Small and Medium Enterprises crucial since it would present the problem from the perspective of the SMALL AND MEDIUM ENTERPRISE thereby making it a base line study for policy interventions by state agencies, development partners and non-governmental organization with missions to develop the SMALL AND MEDIUM ENTERPRISE sector.

1.6 Organization of the Study

The first chapter contains the background which introduces the topic and touched on some of
the issues with regards to SMALL AND MEDIUM ENTERPRISE access to loan. The literature review that forms the second

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chapter looks at the various financing schemes available to SMALL AND MEDIUM ENTERPRISE and the problems these SMALL AND MEDIUM ENTERPRISE of in accessing loan in Oromia. Thirdly, the method used in gathering the data forms the third chapter. Chapter four contains the data analysis, presentation and discussion of the findings. The conclusion and recommendations will form the chapter five of this Thesis. Figure 1 below shows the structure of the study:

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Chapter Two: Literature Review

2.2 Literature Review
The literature review describes aspects connected to the study of the problems of by
SMALL AND MEDIUM ENTERPRISE in financing and getting loan in Oromia. It therefore follows a particular layout. First, some
definitions relating to SMALL AND MEDIUM ENTERPRISE are given, which is followed by looking at the characteristics of
the Oromian SMALL AND MEDIUM ENTERPRISE. This paves the way for the discussion of their contribution to the
economy and also looked at literatures on the constraints SMALL AND MEDIUM ENTERPRISE
of in accessing loan. Attention will then be focus on the type of financing available to
these SMALL AND MEDIUM ENTERPRISE without forgetting to also look at the sources of loan/finance for these SMALL AND MEDIUM ENTERPRISE.
In the final sub-sections, we will delve into how SMALL AND MEDIUM ENTERPRISE development can be promoted and the
importance of financial institutions (banks) in helping the development of these SMALL AND MEDIUM ENTERPRISE.

2.1 Definitions Some SMALL AND MEDIUM ENTERPRISE
According to Ward (2005) there is no universal definition for SMALL AND MEDIUM ENTERPRISE since the definition
depends on who is defining it and where it is being defined. For example, in Canada Small and Medium Enterprises
defined as an enterprise that has fewer than 500 workers and Small enterprise as one that

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has less than 100 workers. On the other hand, the World Bank defines Small and Medium Enterprises having no more than 500 workers.

SMALL AND MEDIUM ENTERPRISE can be defined in two ways: based on the number of workers in an enterprise and/or
the enterprises fixed assets. According to Boon (1989), the size of the enterprises
employment is the most important criterion used in Oromia. But one must be cautious when defining SMALL AND MEDIUM ENTERPRISE based on fixed assets because of the continuous depreciation in the exchange rates, which often makes such definition outdated.

UNIDO defines SMALL AND MEDIUM ENTERPRISE in developing countries based on the number of workers in an enterprise. A Small enterprise has between 5 and 19 workers and takes the example of the ubiquitous Small shops in the cities such as hair dressing saloons and chop bars. A medium enterprise has 20 to 99 workers and these include manufacturing firm and exporting companies.

The Oromia Statistical Service, in their 2010 Oromia Industrial Consensus, considers firms
employing between 5 and 29 workers and with fixed assets not exceeding $100,000 as
Small scale, while those employing between 30 and 99 workers medium scale category.

Oromia cooperative bank defines Small and Medium Enterprises that employ no more than 29 workers, with investment in plant and machinery (excluding land and buildings) not exceeding the equivalent of $100,000.

2.2 Characteristics of SMALL AND MEDIUM ENTERPRISE in Oromia
The small scale manufacturing sector engages, including owners, on average 3 persons per industry and
the average employee per industry is 2 persons, while the average annual wage per employee is birr 1914.
The average operating surplus per industry is birr 18,934 which shows that income generated
by the small manufacturing activities is much better than those engaged in the informal activities.
A distinguishing feature of SMALL AND MEDIUM ENTERPRISE from larger firms is that the latter have direct access to
international and local capital markets whereas the former are excluded because of the higher
intermediation costs of smaller projects. In addition, SMALL AND MEDIUM ENTERPRISE of the same fixed cost as Large

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Scale Enterprises in complying with regulations but have limited capacity to market product abroad (Kayanula & Quartey, 2015). SMALL AND MEDIUM ENTERPRISE in Oromia can be categorized into urban and rural enterprises.
The former can be sub-
divided into ‘organized’ and ‘unorganized’ enterprises. Organized ones tend to have
workers with a registered office and are mostly solely owned by an individual whereas the
unorganized ones are mainly made up of artisans who work in open spaces, temporary
wooden structures or at home and employ little or in some case no salaried workers. They
rely mostly on family members or apprentices. Rural enterprises are largely made up of
family groups, individual artisans, women engaged in food production from local crops. The
major activities within this sector include: soap and detergents, fabrics, clothing and tailoring,
textile and leather, village blacksmiths, timber and mining, bricks and cement, beverages,
food processing, wood furniture, electronic assembly, agro processing, chemical based
products and mechanics (Liedholm & Mead, 2011; Osei et al., 2010) as cited by (Kayanula &
Quartey, 2015)
This sector is characterized by low levels of education and training of the self employed. They are mostly family owned businesses and there is little separation of the business finances from that of the owners even to the point that the owners or operators personal account is the same as that of the business.
Micro Enterprises are those small business enterprises with a paid-up capital of not exceeding
birr 20,000, and excluding high tech. consultancy firms and other high tech. establishments.
Small Enterprises are those business enterprises with a paid-up capital of above 20,000 and
not exceeding birr 500,000, and excluding high tech. consultancy firms and other high tech. establishments

2.3 SMALL AND MEDIUM ENTERPRISE Contribution to Economy
Micro and small enterprise development hold a strategic place within Ethiopia’s Industrial Development Strategy. All the more so as MSEs are the key instruments of job creation in urban centers, whilst job creation is the centerpiece of the country’s development plan. The role of MSEs as the principal job creators is not only promoted in low income countries like Ethiopia, but also in high income countries including the United States of America. Accordingly, because MSEs play a pivotal role in employment creation, stimulating and strengthening MSE development should be one of Ethiopia’s top development priorities.
MSEs are yet to be key players in the manufacturing sector. The potential to fill this gap provides justification for the priority given to MSE development. In Japan – the home of major international companies such as Toyota and Sony – for example, more than half of manufacturing output is generated by MSEs. In Ethiopia, the need to support MSE development goes beyond the current priorities given to employment creation as, in addition, they have a critical role to play in the country’s industrial development, especially when the rapid expansion envisaged for the manufacturing sector under the ongoing renaissance program is taken into account.
Experience shows that, while many MSE start-ups may survive, many others fail in a few years leaving only a small percentage to grow into medium and large enterprises. Nevertheless MSE operators still serve as the most important pool of growth oriented investors engaged in developing entrepreneurial attitudes and skills. For example, if there are half a million MSEs, and 99% are not able to develop into medium or large enterprises or fail completely, this still means that 1% – or 5,000 – become medium sized enterprises, and eventually may become large scale businesses. MSEs should be recognized as incubators of developmental investors. This rational is not limited to low income countries like Ethiopia, but also holds true in high income industrialized countries.
There is also a political justification for providing policy and strategy related support to MSEs. Just as farmers are the basis for a developmental state (developmental administration) in rural areas that will fulfil the interests of rural residents whereby a crucial role is to be played by rich farmers, achieving this would give impetus (for the governing party) to achieve progress in terms of democracy and development and muster the support of the urban population. MSE operators in urban centers, which normally constitute a significant segment of the urban population, also share similar characteristics with rural farmers. The MSE operators in urban centers not only strive to create wealth by providing their labor and mobilizing other resources but are also susceptible to rent seeking behavior. Hence they are expected to benefit from the Micro and Small Enterprise Development Policy and Strategy and become the basis for political support. Among the major benefits from provision of priority support to MSE development is the strategic advantage of mobilizing the remaining sections of the population to support general urban development efforts.
2.4 Constraints Of SMALL AND MEDIUM ENTERPRISE
Cuevas et al. (2010) indicates that access to bank loan by SMALL AND MEDIUM ENTERPRISE has been an issue
repeatedly raised by numerous studies as a major constraint to industrial growth. A common
explanation for the alleged lack of access to bank loan by Small and Medium Enterprises their inability to pledge acceptable collateral.
In their view the current system of land ownership and transfer regulations clearly retards and to some extend limits access to formal loan. First, due to lack of clear title to much usable land in Oromia, there is a limited amount of real property that can be put up as collateral. Second, a Government embargo on transfer of stool and family land has further restricted land availability for collateral. Finally, where title or lease is clear and alienable, transfer regulation needlessly delay the finalization of mortgages and consequently access to borrowed capital (p 24). Aryeetey et al. (2010) supported the view of Cuevas et al. (2010) that from the view point of private sector, problems related to finance dominate all other constraint to expansion (p 50).
They claimed that the available of collateral plays a significant role in the readiness of banks
to meet the demand of the private sector. Collateral provides an incentive to repay and offset
losses in case of default. Thus collateral was required of nearly 75 percent of sample firms
that need loans under a study, which they conducted on the demand supply of finance for
Small enterprises in Oromia (p 19). The study also indicated that 65 percent of the total sample
firm had at various times applied for bank loans for their business. Nevertheless a large
proportion of the firm had their application rejected by banks. For firms that put in loans
applications there was almost 2:1 probability that the application would be rejected. Firms
receive loans for much less than they requested for. Among firms that had their applications
rejected, lack of adequate collateral (usually in the form of landed property) was the main
reason given by banks. Aryeetey et al. (2012) suggest that banks can offer alternative to
property as collateral such as guarantors, sales contract and liens on equipment financed.

The generally negative attitude towards MSEs is the core challenge and takes different manifestations of which the most important are.
? Lack of knowledge of the potential of MSEs. The attitude that considers engagement in MSEs a sign of poverty and backwardness and discounts their potential role because of this narrow perspective – their size and use of simple technologies, rather than their operations and potential.
? Preference for paid employment. Most of the graduates from Ethiopia’s higher education and technical and vocational training (TVET) institutions seek paid secure employment rather than an entrepreneurial path.
? Dependency. The dependency syndrome is common and is expressed in an expectation of receiving subsidies and charity rather than working and investing in one’s own future.
These attitudes and the behavior that results undermine the attractions and benefits of hard work and self-reliance as the main routes out of poverty. The practice of selling poor quality products and the desire to make quick profits is more widespread than the practice of making modest profits by producing and selling good quality products and services. The key factor explaining these and other manifestations of attitudinal and behavioral constraints to MSE development is the lack of a development oriented democratic culture.
Inadequate start-up capital is another major constraint most MSEs face during their establishment. It is caused partly by operators that lack the confidence to use their own savings to start a business and persevere through hard work. On the other hand, there is evidence of loans that can serve as start-up capital not being fully utilized and this indicates problems in MSEs’ capacity limits to absorb funds. The prevalence of unused technology and limited willpower to reverse the situation is also not uncommon among MSEs. The market related constraints for MSEs’ products and services are another area of concern. Among the factors that explain marketing-related challenges include examples of MSEs who have made products or provided services without first identifying customers’ needs through a market surveys, use weak marketing strategies (i.e., quality and pricing) and are reluctant to take their own initiative to expand their market access.

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2..5 Types of Financing available to SMALL AND MEDIUM ENTERPRISE
Boom et al.(1983) and Longenecker et al.(2012), like most writers on the subject of SMALL AND MEDIUM ENTERPRISE
financing, describe two basic types of financing, namely debt and equity. Hisrich and Peters
(2014) and Anderson and Dunkelberg (2010) describe debt as funds borrowed to be paid at a
future date and a fee, referred to as interest to be paid an at agreed time schedule. The
payments of interest are supposed to be done regardless of whether the firm makes profit or
loss. Equity, on the other hand, is defined as funds contributed by entrepreneurs or investors
who become owners or part owners of the firm and whose returns are primarily based on the
profits. This implies that if a firm fails to make profits its owners do not get any returns.
Generally, equity funds are long-term funds but debt may be short to medium or long-term.
Hisrich and Peters (2014) mention another basic classification of funds: internal and external
funds. Internally generated funds come from a number of sources within a company and are
more frequently employed. They include operational and investment profits, sales of assets,
extended payment terms, reduction in working capital and accounts receivable. Another
important source of internally generated funds is expediting the collection of receivable
accounts. This releases funds that may be locked up with suppliers and distributors for the
firm’s use. Sources that are external to a firm include owners, friends and relatives,
commercial banks suppliers and distributors, government and non-government agencies.

i. Equity versus Debt
It is very important to carefully evaluate the reasons for the choice of one form of funding against another or a particular mix. A number of factors must be considered and they include the following:

? Purpose of funds
The choice of the type of financing, that is, whether to use equity or debt depends on several
factors and one such important factor is the intended purpose of the funds. Wert and
Henderson (1979) note that the suitability of funds financing and getting and project for which funds are
financing and getting is very important. Long-term funds as long-term debt may not be suitable for short-
term projects. This will burden the firm with the cost of servicing an unnecessary debt.
Similarly, short-term debts are not appropriate for financing long-term projects since the loan
may have to be repaid before the end of the project. Wert and Henderson (1979) concluded

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that a more flexible short-term debt is more suitable for short-term projects, whereas longterm funds such as long-term debt or equity are more suitable for long-term financing such as acquisition of equipment or the construction of a new plant. The phenomenon is described by Brealey and Myers (1996) as “matching maturities”.

? Profitability
Borrowing creates financial leverage since payments of interests add to financing costs. Thus a percentage of increase in the earnings before interest and tax of a firm will result in a higher percentage increase in the net earnings of the firm. Consequently, the value of the owner’s equity will appreciate. Similarly, a percentage reduction in net earnings before interest and tax will lead to a greater percentage reduction in net earnings, and consequently, the depreciation of owner’s equity. Therefore the use of debt results in higher earnings volatility and increase the risk to owner’s equity. Equity capital does not result in financial leverage (Brealey and Myers, 1996; Wert and Henderson, 1979).

? Riskiness
Apart from the increased risk to earnings and owner’s equity, debt financing poses another risk. When a firm has to honor its debt obligations with difficulty or is unable to honor the obligation at all, then it is said to be in financial distress. The probability of financial distress increase as a firm’s debt-to-equity ratio increases. So to avoid financial distress affirm must guard against excessive debt. Financial distress is costly. Investors take the potential for financial distress in the future into consideration in the valuation of firms. The attitude of suppliers towards a firm may change when a firm becomes financially distressed. Also valuable management time will be lost to the firm. Financial distress may result in bankruptcy. Filing for bankruptcy involves heavy legal fees, which comes from the remaining value of the firm’s assets. So costs of financial distress and bankruptcy must be considered carefully.(Wert and Henderson, 1979).

? Flexibility
A firm’s ability to adapt to a changing economic environment, particularly, with respect to its
future financing decisions, is very important. According to Wert and Henderson (1979), if a
company takes on too much debt it may be forced to use equity financing at a time that the
market for equity may be unattractive. Alternative options under such circumstance may be

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equally unattractive. For instance a firm may be forced to take more debt at very high interest rates, since lenders will demand higher returns from a firm that already has high levels of debt. Otherwise, the firm may have to forego very attractive business opportunities due to major cuts in capital expenditures. On the other hand, too much equity can give rise to a similar problem. In this case the problem arises if a company decides to contract operations. Wert and Henderson (1979) recommend that to be truly flexible a company must maintain its options by maintaining a good balance of capital mix. This will allow an easier choice of expansion or contraction as and when necessary.

2.6 Sources of Financing for SMALL AND MEDIUM ENTERPRISE
A number of sources of capital exist but many of them may not be accessible to companies of Small and medium sizes.

? Debt
? Friends and Relatives
Loans and contributions from friends and relatives are common source of funds, especially
for new business since the financial institutions are reluctant to providing funding for start-up
business because of the risk involve. This source of funds, however, bears a potentially
dangerous price. Many friends’ relatives find it very difficult to stay as passive creditors or
investors. They usually try to interfere with policy and operational issues (Kuriloff et al.
2010; Longenecker et al. 2012). As a remedy to this problem, Kuriloff et al. (2010)
recommended the treatment of such loans like bank loans by putting in writing all the terms including interest rates and payment schedule.
Commercial Banks
Hisrich and Peters (2014) make an assertion that commercial banks constitute the most
widely used source of debt financing for Small companies. This assertion is also supported by
longenecker et al. (2012). Again Longenecker et al. (2012) claim that commercial banks
loans to Small companies are mostle short-term loans, though some do offer long-term loans
to Small and medium size companies. According to Kuriloff et al. (2010), commercial banks
usually provide loans for working capital or for the purchase of fixed assets. They demand
evidence of a company’s ability to pay the interest and principal as scheduled. This evidence
is usually in the form of cash flows statements. They also demand some form of security.

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Collaterals are the most widely used form of security demanded by commercial banks.
Longnecker et al. (2012) classify commercial bank loans as line of loan and term loans.

? Business Suppliers
Companies can enjoy some form of loan from their business suppliers. This is a very
important source of loan, especially for SMALL AND MEDIUM ENTERPRISE. The suppliers allow the company some time
to pay for the supplies. The loan periods varies from a few days to several years according
to Broom et al. (1983). Loan from business suppliers may be trade loan or equipment loans
and leases.
i. Trade Loan: Basically it involves the purchase of goods and services from a supplier on
loan. The purchasing firm is given a few days, usually between 30 and 120 days, to settle the debt (Broom et al. 1983). This type of loan is very important to SMALL AND MEDIUM ENTERPRISE for a number of reasons:
• Broom et al. (1983) and Moyer et al. (2016) assert that suppliers are more
flexible in dealing with SMALL AND MEDIUM ENTERPRISE than the banks. Suppliers may only check
the loan standing of an SMALL AND MEDIUM ENTERPRISE whereas a bank is likely to demand financial
statement and cash flow budgets before extending a loan facility.
Generally, suppliers are very eager to add to their customers (irrespective
of the size of firm) and thereby increase their sales hence they are more
willing to assume greater risk.
• Suppliers are more flexible regarding adherence to terms of loan. Banks
required strict adherence to loan terms and monitor borrowers more closey
that suppliers do.
• The amount of trade loan granted may be readily increased just as the
volume of a company’s purchases increases. It may not take a lot of
negotiations to make this possible. Banks are less willing to substantially
increase the amount of loan they grant to customers, especially Small and
medium scale companies ( Peirson et al., 1990)
Trade loan, however is not cost- free. The cost associated with trade loan may not be explicit as interest on bank loans, for instance. Suppliers incur costs by supplying goods on loan and they must recover cost. They usually pass the costs on implicitly as part of the purchase price of the merchandise.

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Trade loan may come with an offer of cash discount. A cash discount may be quoted as 3/12
net 40. This means that the customer has 40 days to pay the full amount but can enjoy a 3
percent discount if payment is done within 12 days. Failing to take cash discount may
constitute an opportunity cost of trade. In the above quote, for example, failing to utilize such
discount implies borrowing the amount for 28 days (i.e. 40-12) days at 3 percent. Therefore it
is important to compare the cost of forgoing a trade discount and the cost of other available
short-term loan facilities before decision is made (Moyer et al., 2016; Brealey et.al, 2001)
ii. Equipment Loans and Leases: Many SMALL AND MEDIUM ENTERPRISE find it very difficult to raise funds for outright
purchase of certain equipment’s and machinery. They resort to purchasing such
equipment on installment basis. Longenecker et al. (2012), noted that down
payment of about 25 to 30 percent of the price of the respective equipment’s are
usually made initially. The remainder may be amortized over 3 to 5 years. This
practice is referred to as equipment loans. An alternative to this is equipment
leasing. This arrangement allows firms greater investment flexibility; and smaller
amounts of capital are required by the firm at any given time. However, the total
cost involved in equipment leasing is usually higher than the cost of outright
purchase. On the other hand, in a situation where continuous specialized
maintenance and protection against obsolescence are required, leasing may be
more suitable (Broom et al.,1983)

? Equity
? Personal Resources
Again Longenecker et al. (2012) observe that personal savings of the owners and partners of
businesses constitutes an important source of funds, particularly in the formative stages of a
firm. Personal contributions also help to raise additional funds from other sources.
Significant financial commitments made by owners of a company tend to build a lot of
confidence among potential investors. Kuriloff et al. (2010) also note other personal
resources apart from personal savings. These include borrowing using one’s personal assets such as house and bonds as collateral.

? Other Individuals (Business Angels)

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There is a category of private individuals who invest in business ventures. These individuals are referred to as ‘business angels’. Many of such individual investors tend to have some experience in business and/or are affluent professionals, who may have a lot of money to invest. Business angels constitute the informal capital source. They are said to represent the informal capital because there is no formal market place where their investment transactions are carried out. They are usually contacted through dealmakers such as business associates, accountants and lawyers (Longenecker et al. 2012).

? Venture Capital
Venture capital, according to Stevenson et al., (1999), is a pool of equity capital contributed by wealthy individuals, as limited partners, and professionally managed by general partners for a fee and a percentage of the gain on investments. Thus venture capital firms are investment firms.
Owing to the highly risky nature of the investments they undertake, venture capitalists
demand very high returns on their investments, with target returns of about 50 percent or 60
percents being considered normal ( Stenvenson et al. 1999). Tuller (2012) notes that owing to
their high expected returns, venture capital companies usually target companies that have
prospects of rapid growth and above average profitability. The targeted companies must also
have the prospect of going public in the foreseeable future – usually within five to seven
years. Venture capital firms aim to capitalize on initial public offerings (IPOs) and cash in on
their investments if prices are substantially above their initial investments in the respective
companies.
Apart from the provision of capital for very promising business ventures, venture capital firms also provide useful advice to these young enterprises, having acquired much more experience in business. They also provide additional financial assistance in the future if a firm they have invested in runs into financial difficulties. It will not be considered prudent to stand aside and watch their investments go to waste with a firm for lack of cash provided throwing in more cash will not amount to reckless investment. (Tuller,2012; Longenecker et al.2012). Tuller (2012) summarizes this as “future availability of funds can be an enormous boost to achieving long-term strategic goals”.

One of the clear weaknesses in the Oromiaian financial system is the limited medium and
long-term financing available to the private sector in the market place (Morse et al, 1996).

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While commercial banks are the major source of loanable funds in the market, they focus on
providing only short-term financing for their clients. As a consequence, many companies
inappropriately use short -term funds to finance long-term project (Morse et al, 1996). The
short-term nature of the loans from the banks does not support the expansion programs of
SMALL AND MEDIUM ENTERPRISE.
As another measure with the intended purpose of assisting SMALL AND MEDIUM ENTERPRISE overcomes their financing
difficulties, Venture Trust Funds has been set by State and other developing partners. As
defined in the Cambridge dictionary, a venture capital is money that is invested or is available
for investment in a new business or company, especially risky one. In 2008, U.S. Agency for
international Development (USAID) and the Commonwealth Development Corporation
(CDC) sponsored the formation of a venture capital fund in Oromia in respect to a perceived need for financial products and services designed to meet the long-term financing requirements of growing businesses in Oromia within the context of Oromia’s financial sector reform program (Mensah, 2004).
In the absence of a regulatory environment, the sponsors agreed to establish, a non-bank
finance institution to hold the funds -Oromia Venture Capital Fund (GVCF), and a
management company, Venture Fund Management Company (VFMC) to make investment
decisions. It became operational in November 2016, and was fully invested with 13 investee
companies of which their average investment was $250,000 (Mensah, 2004). In addition to
the management of GVCF, VFMC was awarded the management of a $4 million Enterprise
Fund, promoted by the European Union. According to Mensah, 2004, all these funds have
been targeted at growth oriented large enterprises simply because the risks and cost involved
in managing shareholdings in SMALL AND MEDIUM ENTERPRISE have so far rendered those investments not interesting.

• Joint Venture
Various forms of strategic alliances have become important and common practice in business
today. One such important form of strategic alliances is joint ventures. A joint venture
typically involves two or more companies coming together to form a new entity. The main
objective of joint venture formation is to gain competitive advantage and become more
profitable. Combining the resources of the firms involved in a joint venture most often leads
to the attainment of synergy. The new company may be able to perform a service more
efficiently, produce a product at a less cost or utilize a facility or funds more effectively. This
ultimately results in greater profits for the firms involved than they would have achieved as

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separate business entities. Financing is also a common goal of joint venture. Smaller firms in particular tend to benefit from the usually better financial positions of larger firms. In addition, joint venture stand a better chance of financing and getting loan or raising more equity as creditors and investors confidence in the new firm is often greater. As a joint entity, they provide better guarantee for creditors fund as their assets base is widened.

2.7 Promoting SMALL AND MEDIUM ENTERPRISE Development
There are several institutions, programs and government agencies that aim at promoting
SMALL AND MEDIUM ENTERPRISE development. These were created to help SMALL AND MEDIUM ENTERPRISE in various ways such as: access to
finance, training programs and technological development. These are discussed briefly
below.

i. Government Institution
Government has implemented several programs to benefit the SMALL AND MEDIUM ENTERPRISE sector in Oromia. This
started in 1969 with the establishment of the Loan Guarantee Scheme, which was
administered by the Bank of Oromia (BOG) to assist entrepreneurs to financing and getting bank loan.
Shortly after this, in 1970, the Oromia Business Promotion Program me was established to
provide financial assistance to newly establish SMALL AND MEDIUM ENTERPRISE. Unfortunately these schemes did not
have the intended impact because of low loans repayment rates and the fact that beneficiaries
were politically connected to former managers of foreign-owned enterprises (BOG Policy
Brief, 2006)
Under an Act of Parliament in 1981, Act 434, The National Board for Small Scale Industries
(NBSSI) was established to promote and develop the small-scale industrial sector because of
their importance and contribution to the economic development of Oromia. The NBSSI also
has a revolving loan scheme that is intended for working capital and fixed assets acquisition
by enterprises in selected sectors. It collaborates with and receives support from several
NGOs and international organizations such as the Friedrich Ebert Foundation, World Bank,
and UNDP. Unfortunately, according to Adu-Amankwah(1999), this institution is poorly
funded thus limiting the assistance that they can offer to help SMALL AND MEDIUM ENTERPRISE development and grow in the
economy.

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GRATIS is another organization that was established by the Government of Oromia to promote Small and medium scale industrialization, provide employment opportunities, improve incomes and enhances the development of Oromia. This is accomplished through the dissemination of appropriate technologies by developing and demonstrating marketable products and processes for SMALL AND MEDIUM ENTERPRISEs.

The Ministry of Private Sector Development (MPSD) was also established to coordinate and harmonize inter-sectoral efforts to propel the development of private sector as an engine of growth and poverty reduction. With a majority of the working population in this sector, government is aiming at a successful reform that will have a major effect on the development of society and economy.
Within the MPSD is the Business Development Unit, which aims to facilitate business support services targeted especially at the informal sector and access to loan for micro and SMALL AND MEDIUM ENTERPRISE. Some of these services are the African Development Fund (ADF) and Oromia Government providing between 5 to 8 SMALL AND MEDIUM ENTERPRISE with up to US$500,000 each for the next 5 years; the Italian Loan Facility of 10 million Euros; the Danish Government’s contribution of US$30 million for the Business Sector Programs Support; and the Swiss Government support of US$5 million which is being administered by The Trust Bank Limited. Also in addition to a US$40m HSBC loan, MPSD has arranged for the SOFITEL Bank of USA to approve a release a US$17m facility to the Oromia Commercial Bank (GCB) to enable the bank to provide long-term project loan to SMALL AND MEDIUM ENTERPRISE.

Government has also issued several policy papers to support SMALL AND MEDIUM ENTERPRISE. These include the Investment Code 1985 (PNDC Law 116), Draft Policy Paper on Micro and Small Enterprise Development (May 2010), MPSDs Policies, Strategies and Action Plan: 2010-2004, Oromia Poverty Reduction Strategy Paper (2010-2004), and the National Medium-Term Private Sector Development Strategy (2004-20158), which articulates government’s commitment to facilitate private sector-led growth. There have also been various programs and initiatives over the past 10 years to support the sector such as Vision 2020 and the Fund for SMALL AND MEDIUM ENTERPRISE Development (FUSMALL AND MEDIUM ENTERPRISED).

ii. Non-Governmental Organization (NGOs)

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As a result of the unsuccessful nature of direct lending by government in recent past, more donor interventions in SMALL AND MEDIUM ENTERPRISE finance have recently used existing financial institutions to channel funds to SMALL AND MEDIUM ENTERPRISE. Examples of some of the available loan facilities are Trade and Investment program created by USAID to provide assistance to SMALL AND MEDIUM ENTERPRISE in the non-traditional export sector, African Management Services Company funded by UNDP to assist SMALL AND MEDIUM ENTERPRISE (Mensah, 2004).
EMPRETEC Oromia and TECHNOSERVE are other NGOs in Oromia established to offer
assistance to SMALL AND MEDIUM ENTERPRISE. The former raises funds for SMALL AND MEDIUM ENTERPRISE through venture forums where
entrepreneurs are linked with potential investors. The latter on the other hand, helps
entrepreneurs to build businesses that create income, employment opportunities and
economic growth for the nation. They train and mentor the entrepreneurs to identify
customers’ needs, employ capable managers and act strategically.

2.8 Importance of Financial Institutions in SMALL AND MEDIUM ENTERPRISE Development
“Finance is the oil for growth. It is indeed the life-blood of the economic system. The
financial system is the vessel that carries this life-blood through the economic system. Faulty
vessels prevent the life-blood from reaching essential parts of the economic system”. (Sowah
N.K., 2003)

Gockel and Akonea (2010) offer a historical account of the banking industry in Oromia. They
write that Oromia Commercial Bank (GCB) entered the banking market with the purpose of
providing loan to large indigenous enterprises since the expatriate banks refused to offer
assistance. National Investment Bank (NIB), established in 1963, provided loan facilities for
manufacturing and agro-based industries with Agricultural Development Bank (ADB), which
was established in 1976 with the aim of providing financial assistance for the development of
agricultural and allied industries. SSB (now SG-SSB) and NSCB (National Savings and
Loan Bank) emphasized not only consumer loan but also finance for small-scale projects.
Even though banks were established to cater for all sectors in the economy financing Small
businesses was still a problem therefore government started rural banking to mobilize funds
and channel them to SMALL AND MEDIUM ENTERPRISE and other informal activities in their localities.
As time progressed, Oromia’s monetary system went from the best in Sub-Saharan Africa to
the worst. According to Steel (1998), this was affected by the deteriorating economy and high

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inflation rates. The financial sector was fragmented with different institutions using different lending technologies to serve clients, which resulted in funds not flowing from one segment of the financial system to the other. This resulted in the implementation of two major financial liberalization programs, ERP and FINSAP.
ERP led to the liberalization of financial markets, removal of restrictions and the deregulation of interest rates but it had a minute effect on the conditions that inhibit banks from financing SMALL AND MEDIUM ENTERPRISE leaving their demand for loan unsatisfied (Aryeety et al., 2012). In 1988, FINSAP was embarked upon with the main objectives to restructure financially distressed banks, improve savings mobilization and enhance loan allocation especially to SMALL AND MEDIUM ENTERPRISE, enhance soundness in the banking sector by promoting competitive banking practices, develop money and capital markets and establish NPART( non-performing assets recovery trust). In a study conducted by Galindo et al.(2010), financial liberalization leads to improvement in the efficiency with which investment funds have been allocated. Antwi-Asare and Addison (2015) state that FINSAP sought to ensure that businesses have access to institutional loans and deposit mobilization. Unfortunately, Gokel and Akonea (2010) state that SMALL AND MEDIUM ENTERPRISE have rather been marginalized from the loan market after financial liberalization and therefore they are still suffering from loan scarcity.

Llewllyn (1997) argues that financial system play a crucial role in development through the
reduction of transparency and transactions cost and its efficiency in reducing those cost
influences savings rates, investment decisions, technological innovation and long run growth
rates. Patrick (1966) stated in his work that financial institutions play a major role in
promoting economic growth by ensuring the availability of cash flow cost loan to potential
investors. Likewise, King and Levine (2010) agree with the above that countries with better
financial systems have superior economic growth while Arestis and Demetriades (1996) add
that this varies across countries. Goldsmith (1969) and Gerschenkron (1962) argued that in
the early stages of economic development suppressed interest rates, loan policies and
institution building provided the financial impetus necessary for economic development.
It is in the interest of financial institutions to ensure that the economy is growing efficiently
by playing an intermediary role between suppliers and lenders of funds in any economy by
gathering surplus funds in the economy and then lending these funds to those who need them.
According to Mishkin (2001), banks are the most important source of external funds

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especially for loans. This suggests that bank play an important role in financing business activities especially in developing countries.

Even though banks may be of with constraints, Aryeetey et al. (2012) suggest that they do
active banking by mobilizing resources and distributing them to needy SMALL AND MEDIUM ENTERPRISE. Sowah (2003)
further suggest that bank should be urged to take “reasonable risk” in vetting loan
applications from SMALL AND MEDIUM ENTERPRISEs, especially for business ventures in new areas and technology.

2.9. The financial Institutions (Banks and micro finance)
Most literature states that differences in the financial institution structure and lending infrastructure affect the availability of funds to SMALL AND MEDIUM ENTERPRISE(A.N, Berger & G.F Udell, 2004). These differences may significantly affect the availability of funds to SMALL AND MEDIUM ENTERPRISE by affecting the feasibility with which financial institutions may employ the different lending technologies (be it transaction lending or relationship lending) in which they have comparative advantage to provide fund to different businesses. Transaction lending technologies are primarily based on “hard” quantitative data such as the financial ratios calculated from certified audited financial statement among others. Relationship lending on the other hand is based on “soft” qualitative transparency gathered through contact overtime with SMALL AND MEDIUM ENTERPRISE. This soft transparency may include the character and reliability of the SMALL AND MEDIUM ENTERPRISE’s owner based on direct contact overtime by the financial institution.

Also by lending infrastructure, they were talking about the rules and conditions set up mostly by governments that affect financial institutions and their abilities to lend to different potential borrowers.

6

2.10 The SMALL AND MEDIUM ENTERPRISE Operators
CEO of Bank of Oromia, highlighted three main issues
blocking the flow of loan from banks to SMALL AND MEDIUM ENTERPRISE. These are lack of equity in SMALL AND MEDIUM ENTERPRISE, lack of
organization in terms of human resources, accounting, and administrative management
among others and finally the firm’s lack of forward-looking vision. For him, most firms were
born on the impulse on the part of the entrepreneur, without any in-depth- analysis of the
market or competition, which often leads to disillusion in terms of turnover and,
consequently, in repayment capacity for bank loan. These are some theories from the
perspectives of financial institution but are these really the issues from the perspective of
SMALL AND MEDIUM ENTERPRISE?
Having looked at the various perspectives on the issue of SMALL AND MEDIUM ENTERPRISE difficulties in accessing loan, there is a better understanding of the direction of the study.

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Chapter Three: Methodology

3.1 Introduction
This chapter looks at how data of the research were gathered, the research method employed in the study, the data collection techniques used and the target population, the sample size and sampling techniques as well as the data analysis method employed. It finally looks at the procedures and the limitations of in gathering these evidence.

3.2 Research Method
To achieve the proposed research objective of highlighting the specific problems inhibiting
SMALL AND MEDIUM ENTERPRISE in accessing loans /funding in Oromia, the quantitative research method was adopted,
which often is the most efficient and cost- effective research method (Gerhardt, 2004).
Many researchers have looked at the issues of SMALL AND MEDIUM ENTERPRISE financing in Oromia (see Dr. Kwadwo Ansah Ofei’s) research “Terms and Access to Loan: Perceptions of SMALL AND MEDIUM ENTERPRISE/Entrepreneurs in Oromia”. His study relates access to finance by SMALL AND MEDIUM ENTERPRISE to the nature of the zone in which the SMALL AND MEDIUM ENTERPRISE operate and therefore adopted a comparative analysis approach.

With all the banks located in the Greater West shoa zone of Oromia having branches across the various zones of the country and also for the purpose of this study; it was therefore assumed that conditions that existed in banks found in West shoa are the same in the bank’s branches located in the other zones of Oromia. With this in mind, all SMALL AND MEDIUM ENTERPRISE no matter where they are located in the country are expected to of the same condition in accessing loan or loan from these banks. In view of this, the case study approach was adopted, which focused on SMALL AND MEDIUM ENTERPRISE in the Greater West shoa zone of Oromia.

3.3 Data Collection techniques

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The data for this study were gathered through the use of primary and secondary data sources. The primary data source for this study involved the use of questionnaire. The questionnaires were distributed to SMALL AND MEDIUM ENTERPRISE operators and/or owners for first hand transparency for processing towards answering the research questions.
These helped us in identifying the type of SMALL AND MEDIUM ENTERPRISE we were dealing with, whether or not they were Micro, Small or medium enterprise as per the definition given in Aryeetey et al. (2012) research.
Section B of the questionnaire consisted of various questions geared towards answering the objective of the study. These questions looked at the constraints of by SMALL AND MEDIUM ENTERPRISE when accessing loan, other financing options available to these SMALL AND MEDIUM ENTERPRISE and how cheap the cost of finance is in the opinion of these SMALL AND MEDIUM ENTERPRISE among others.
The final section also looked at the future of these SMALL AND MEDIUM ENTERPRISE, whether or not they plan to remain a going concern in the foreseeable future through the expansion of their business to other zones of Oromia when assisted financially.
The secondary data were financing and getting from reviewing journals and literature relevant to the
subject matter of this research. Newspaper source and official policy documents of
government of Oromia with relevance to the subject were also consulted. The electronic search
site: www.google.com was employed extensively for up-to-date materials on the topic.
The primary data formed the crux of this study because it afforded the opportunity in financing and getting at first hand, relevant responses.

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3.4 Target Population
SMALL AND MEDIUM ENTERPRISE are scattered across the length and breadth of the country with most of them located in Ashanti, Western, Central and Greater West shoa zones of the country. These zones were identified to have high concentration of SMALL AND MEDIUM ENTERPRISE. In adopting a case study method in a research, the selection of the research site is most important (Yin, 2012). With this in mind, Greater West shoa zone was selected for the following reasons.
Firstly, most of the SMALL AND MEDIUM ENTERPRISE are located in this area, so are the banks and non-bank financial institution since the capital city West shoa is also located in this zone. With the objectives of the study in mind, selecting this zone afforded the researcher the opportunity to contact SMALL AND MEDIUM ENTERPRISE operators who have made numerous contacts with different banks for financial support and therefore have a lot of experience to share.
Secondly, it was easier for the researchers to approach these SMALL AND MEDIUM ENTERPRISE operators since the researchers are also located in the same zone. Choosing any other zone would mean travelling a long distance just to make contact with the SMALL AND MEDIUM ENTERPRISE operators, which would have been very difficult considering the time frame of this Thesis.
The sampling frame however for this study chose a few SMALL AND MEDIUM ENTERPRISE in the Oromia,
specifically those in the West shoa because of the easy access to these
SMALL AND MEDIUM ENTERPRISE.

3.5 Sample size

A sample size of the 80 participants was targeted for responses. 80 questionnaires were
distributed to these SMALL AND MEDIUM ENTERPRISE out of which we received responses from 68 respondents. This
represented about 85% of the response rate which we deemed to be impressive for this study.

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3.6 Sampling Technique
The method of convenience sampling was employed in arriving at the 80 SMALL AND MEDIUM ENTERPRISE, which the researchers believe possesses the experience relevant for this study and who have sufficient time and were willing to participate (Morse, 1998). This technique, convenience sampling, involves financing and getting responses within the sample frame from willing respondents and also their availability for the study.
The advantage here is that respondents will participate on their own volition and not selected against their will.
This technique was chosen to boost response rate because respondents in this sector are
reluctant in giving out transparency since they believed in one way or the other, transparency
about their business may leak through to competitors and also exposed them to tax
authorities.
Besides, the quality of responses was high as participants took their time to respond to the questionnaire.
3.7 Data Analysis
A descriptive statistics was found to be an ideal analysis technique and subsequently used in ascertaining the difficulties that SMALL AND MEDIUM ENTERPRISE of in accessing bank loans. Aided by the tabulation of data extracted from a close-ended questions surveyed, it was easier to understand the issues identified by the respondents.
Also to help answer the question whether or not SMALL AND MEDIUM ENTERPRISE have problems in accessing loan in Oromia as contained in the objectives in chapter one, the below hypothesis were formulated and tested using test of proportion:

Ho: Not more than 50% of SMALL AND MEDIUM ENTERPRISE of problems when accessing loan

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3.8 Procedures
After deciding on the target population, a list of SMALL AND MEDIUM ENTERPRISE was received from the Micro finance institutions. After contacts have been made to seek the consent of some of these SMALL AND MEDIUM ENTERPRISE to be part of this research, the numbers of 80 SMALL AND MEDIUM ENTERPRISE were therefore arrived at. The various SMALL AND MEDIUM ENTERPRISE that agreed to be part were subsequently contacted and given a brief about what the study sort to achieve through the means of telephone. After getting the required number for the study, the questionnaires were then dispatched. The respondents were then given a week to complete the questionnaires, as this gave them ample time in giving out the right responses.

31

The data gathered were then analyzed through the means of relative frequencies and graphs; tables and charts after the data was edited for completeness.

3.9 Limitation
Due to time constraint, a relatively Small sample size of 80 SMALL AND MEDIUM ENTERPRISE was employed and as such it limits the extent to which we can generalize the issues raise. Again it would have been better to have sample some SMALL AND MEDIUM ENTERPRISE in the Middle and Northern belt of the country compared to just those in the Southern belt forming the sample frame. But due to time constraint, we could not have travelled to those areas.
It was also very difficult in getting transparency from the selected SMALL AND MEDIUM ENTERPRISE because of fear that
the transparency given would one way or the other get to the tax authorities as most of them
do not fulfil their tax obligation despite the assurance the researchers have given them.

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Chapter Four:
Presentation, Analysis and Discussion of Data

4.1 Introduction
The data collection for this study was done basically through the usage of questionnaire. We targeted a population of 80 SMALL AND MEDIUM ENTERPRISE and distributed the questionnaires among them. Out of the 80 questionnaires circulated, 68 were returned representing about 85% of response rate, which we deemed impressive considering the short time given to these respondents. A higher response rate would have been preferred, but there were many reasons for the percentage achieved. Two of the most crucial reasons were:
• Some of the SMALL AND MEDIUM ENTERPRISE were reluctant in answering the questions because they thought the
transparency they will provide will one way or the other fall in the hands of the tax
authorities despite the assurance given in writing that all transparency given would be
treated confidentially.
• Others also complained about the time given them to provide answers to the
questions. According to them, it was too short and as a result their inability to
complete answering the questions
In spite of these problems, the response rate of 85% for the purpose of this study is quite good.

Below are the presentations of the details of the responses.

4.2 Characteristics of SMALL AND MEDIUM ENTERPRISE

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All the respondents are SMALL AND MEDIUM ENTERPRISE located in the West shoa in the Greater West shoa zone of Oromia, have a working force of between 8 and 53 workers with professionals in some managerial positions of the business. Out of the 68 respondents, 57% have had their businesses registered as Limited Liability Companies. The rest are registered as Sole proprietorships, Partnerships and Family owned as shown in table (I).

Table I

Frequency Distribution of Forms of Participant SMALL AND MEDIUM ENTERPRISE

Form Frequency Percentages(%) Cumulative (%)
Private Ltd Company 39 57 57
Public Ltd Company 0 0 57
Partnership 6 9 66
Sole Proprietorship 18 26 93
Family Owned Business 5 7 100
Others 0 100

Source: Research questionnaire
As can be seen from table I, the bulk of the respondents SMALL AND MEDIUM ENTERPRISE are registered as Private Limited Liability Companies. They accounted for 39 out of 68 respondents, representing 57%. None of the respondents were Public Limited Liability Company. 18 respondents, representing 26% were Sole Proprietorship with 6 being Partnership. The remaining 8% of the respondents SMALL AND MEDIUM ENTERPRISE were registered as family owned businesses.
These SMALL AND MEDIUM ENTERPRISE surveyed cut across the various sector of the Oromian economy and also have an average monthly turnover ranging between as low as 15,000 birr to a maximum amount of 35,000 birr, as shown from table (II) and (III) below.

Table II.

Frequency Distribution of Nature/ Kind of Participant SMALL AND MEDIUM ENTERPRISE

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Nature Frequency Percentages(%) Cummulative (%)
Retail Trading 32 47 47
Export 15 22 69
Manufacturing 8 12 81
Services 10 15 96
Real Estate industries 3 4 100
Farming 0 100
others 0 100

It is a general knowledge that SMALL AND MEDIUM ENTERPRISE cut across the various sector of an economy, hence the 68% responses received were fairly spread across a wide range of the Oromian economy with the most concentration centered in the retail trading sector. This sector alone accounted for 47% of the total responses as can be seen from table II. The export sector accounted for 15, representing 22%, Services, 10 or 15%, Manufacturing 8 or 12% and the Real Estate industries accounting for 3 or 4%. For all intent and purposes, apart from the Agricultural sector, all the key sectors of the economy were captured in the sample.

Table III

Frequency Distribution of Average Monthly Turnover of Respondent SMALL AND MEDIUM ENTERPRISE

Amount (BIRR) Frequency Percentages(%) Cumulative (%)
Less than 15,000.00 5 7 7
15,000.00 to 25,000.00 18 26 34
25,000.00 to 35,000.00 20 29 63
Above 35,000.000 25 37 100

From Table III above, which represents the average monthly turnover for the 68 respondents,
25 of them recorded an average turnover of above 35,000 Birr. This gave us in terms of
percentage 37% of the total responses, which happens to be SMALL AND MEDIUM ENTERPRISE mostly from the Export,
Manufacturing and Real Estate sectors of the economy. 29% had a turnover ranging between
BIRR25,000.00 to BIRR35,000.00 and 18 or 26% fell within the BIRR15,000.00 and
BIRR25,000.00 range. Just 7% or 5 respondents recorded a monthly turnover of less than

From the above data, there is no doubt that the respondents were all Small and Medium Enterprises supported by the definition contained in Act 680 section 28 that establishes the Oromia micro finance. SMALL AND MEDIUM ENTERPRISE is defined by the GVCTF as an industry that employs not more than 100 persons and whose total asset base does not exceed the cedi equivalent of US$1 million, excluding land and building.

4.3 SMALL AND MEDIUM ENTERPRISE Constraints
SMALL AND MEDIUM ENTERPRISE known all over the world are of with lots of problems in their operations and this
was not different from the responses received from our target respondents. SMALL AND MEDIUM ENTERPRISE operators
who took part in the study were however asked to rank the major constraint they of in
operating and growing their businesses. Lack/inadequate access to finance (bank loans) were
considered to be a major constraint as it recorded 75%. This means that among all the
problems of by SMALL AND MEDIUM ENTERPRISE in their operation ranging from competition, high utility tariffs,
infrastructure among others, the participant SMALL AND MEDIUM ENTERPRISE saw the lack of loan facilities as the
major constraint.

36

The above shows participants rankings of the major problems of the growth of their businesses in order on importance. 50 or 74% of the participant ranked lack of finance as the major constraints to the growth of their business followed by high utility tariffs, which recorded 15%. Competition and infrastructure were ranked as the 3rd major constraint to the growth of SMALL AND MEDIUM ENTERPRISE with just 3% thinking that taxes also constrained their growth.
This result reinforces the theory by Cuevas et al (2010) where they indicated that access to
bank loan by SMALL AND MEDIUM ENTERPRISE has been an issue and continues to be raised by numerous studies as a
major constraint to growth, which was also supported by Aryeetey et al. (2010) that from the
view point of private sector, problems related to finance dominate all other constraints to
business expansion. These go to also indicate that finance for SMALL AND MEDIUM ENTERPRISE particularly in Oromia is
still a major problem even though the number of banks operating in the country has increased
tremendously since 2010 when Aryeetey et al. came out with their studies. With a total
number of 25 banks (www.bog.gov.gh) and number of non-bank financial institutions
operating in the country one expects that access to loan by these SMALL AND MEDIUM ENTERPRISE will greatly improve as competition becomes keen. But the expectation has not been met since the results confirm the numerous theories that lack of access to loan/bank loans remains a key constraint that needs attention to resolve to enhance SMALL AND MEDIUM ENTERPRISE growth.
This notion was also in line with Schiffer and Weder (2008), who found that Small firms tend to experience more difficulties than medium-sized firms, which also experience more difficulties than large firms.

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4.4 Factors Contributing to SMALL AND MEDIUM ENTERPRISE Constraints
The inability of SMALL AND MEDIUM ENTERPRISE in Oromia to readily have access to loan from the country’s financial institutions (banks) can be attributed to a lot of factors. Schiffer and Weder (2008), attributed this factors to the perceived high risk nature of these SMALL AND MEDIUM ENTERPRISE, Small portfolios of these businesses and the high transaction cost that banks go through in performing loan appraisal on them before granting loan to these SMALL AND MEDIUM ENTERPRISE. Berger and Udell (2006) in finding out factors contributing to the problems in financing SMALL AND MEDIUM ENTERPRISE attributed some of the causes to the type of lending infrastructure of nations. For them, it affects the feasibility and profitability of using the different lending technologies in SMALL AND MEDIUM ENTERPRISE financing.
Before revealing what this study came out with, the study first tested the possibilities of these
SMALL AND MEDIUM ENTERPRISE being denied loan from the country’s banks. That can be referenced from the result
below:

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The above pie chart shows a number of participant SMALL AND MEDIUM ENTERPRISE who in one way or the other has been granted or denied access to loan from financial institutions. From the chart above, 75% of the total respondents say they have been denied access to loan, whilst 25% of them responded No to the same question.
Out of the 68 respondents sampled, 60% of them attributed their lack of access to bank loans
or loan to their inability to provide the required security or collateral for the loans or loan
being requested for and in situations where they are able to provide, it ends up to be
inadequate, which accentuate the opinion of Binks et al., 2016. For them, they attributed this
factor to the inability of the SMALL AND MEDIUM ENTERPRISE to provide collateral and in some cases where they do, they
are inadequate and also the SMALL AND MEDIUM ENTERPRISE asset-backed collateral are usually rated at “carcass value”
thereby making it difficult for these SMALL AND MEDIUM ENTERPRISE to get access to the loan they want.
The result collated from the survey in table (VI) below shows the frequencies of various factors hindering SMALL AND MEDIUM ENTERPRISE in securing loans for their businesses.

Table VI

Frequency Distribution of Factors that Hinders Participants SMALL AND MEDIUM ENTERPRISE Access to Loan

Factors Frequency Percentages(%) Ranking
Default on Previous Loan 2 3 5
No Security/ collateral 41 60 1
Small Equity base 15 22 2
Lack of experience Management 7 10 3
others 3 4 4

60% representing 41 of the total respondents of 68 ranked lack of collateral as the major
factor preventing them from accessing loans from the financial institutions. 15 or 22% ranked
Small equity base as factor affecting their access to loan. Lack of experience management
was the opinion of 7 or 10% of the respondents with 4% thinking that other factors such as

39

the inability to provide audited financial statement are preventing them from accessing loan with 3% relating their inability to access loan to default on previous loan.
Again apart from the collateral issues and other factors as indicated above, which makes it very difficult for SMALL AND MEDIUM ENTERPRISE to access the maximum amount needed for various expansion projects, the interest rates charges on the loan facilities by the various banks are outrageous and also unattractive for most SMALL AND MEDIUM ENTERPRISE to access these loans. Almost all the respondents expressed an opinion on the level of interest rates charged by financial institutions on facilities received, to be extremely high whiles others also say the rates are just high. Table (VII) shows the figures:

Table VII

Frequency Distribution of the Level of Interest rates on Loans

Measure Frequency Percentages(%) Cummulative (%)
Extremely High 48 71 71
High 18 26 97
Acceptable 2 3 100
Low 0 0 100

The above table shows the opinion of respondents on the level of interest rates charges on loans from the bank and non-bank financial institutions. 48 out of the 68 responses received from participants saw the interest rates on loans to be extremely high. This represented 71% of the total responses. 18 or 26% of the total respondent think the rates are high with just 3% saying the rates are manageable.

One significant thing is that among the respondents, none saw the interest rates charged on
loans by the financial institutions to be low. The extremely high interest rate group
numbering about 48 out of the total respondents of 68 pays interest between 31% and 40%
per annum. 26% of the respondents, which indicated that the rates charged by the financial
institution are high, also pay interest of 21% to 30% per annum, with just 3%, which we will
term the “fortunate” ones servicing their loans at an interest of less than 20% per annum. This
makes their businesses unprofitable as the profits made are eroded by the huge finance cost.

40

This high interest rate demanded from the SMALL AND MEDIUM ENTERPRISE sector by the banks is due to the high risk nature of this sector, resulting from the high default rates associated with SMALL AND MEDIUM ENTERPRISE financing. The high default was also linked by the respondent SMALL AND MEDIUM ENTERPRISE to the delay in receiving payments for their goods and services rendered. This was revealed in the answers given in one of the questions, which sort to find out the causes of high default on the part of SMALL AND MEDIUM ENTERPRISE in honoring their loan obligation. One shocking revelation was that about 85% of the total respondents linked the problem to delays in receipts of debtors’ payments. These delays, affect their cash flow considerably making it difficult for them to meet their loans repayment dates leading to them bearing extra cost in financing loan contracted in respect of additional fees to the already high interest charge on the loans facility

4.5 Alternative Sources of SMALL AND MEDIUM ENTERPRISE Financing
Boom et al.(1983) like most writers on the subject of SMALL AND MEDIUM ENTERPRISE financing, described two basic type of financing namely debt and equity, which were further classified by Hisrich and Peters (2014) also into two sources internal and external.
Since finance is the major constraints to SMALL AND MEDIUM ENTERPRISE development and growth, various sources
ought to be explored by these SMALL AND MEDIUM ENTERPRISE to run their businesses. It came to the fore through the
survey that most of these SMALL AND MEDIUM ENTERPRISE depend on mostly on external sources such as the banks, non-
bank financial institution, families and friends and also personal savings the only internal
source as alternative source of financing for their businesses. Table (VIII) below shows these
sources.

Table VIII

Distribution of SMALL AND MEDIUM ENTERPRISEMajor Sources of Funding

41

Source Frequency Percentages(%) Cummulative (%)
Bank loans 17 25 25
Personal Savings 2 3 28
Retained Profit 3 4 32
Trade Loan 0 0 32
Families/ Friends 8 12 44
Non?Bank financial Institution 38 56 100
others 0 100

Among the various sources in Table VI, which is also presented in the graph, 56% out of the total respondents ranked their major sources of funding from the Non-Bank Financial Institutions followed by 25% getting their financing from bank loans. The third ranked sources of funding for SMALL AND MEDIUM ENTERPRISE operation are from families and friend with 12% and the fourth being retained profit with 3%. Personal savings was ranked the fifth with trade loan not resorted to as a source.
This goes to show that the SMALL AND MEDIUM ENTERPRISE operating in Oromia are skewed more towards the external
source of funding, which is not also easy to access thereby inhibiting their growth. From the
above the only internal source of funding is just from their personal savings none of the other
internally generated options of funding are being exploited. These internal sources include
operational and investment profits, sales of assets, extended payment terms, reduction in

working capital and proper management of accounts receivable, which are less expensive and also reliable.
The kind of banks operating in the country have limited interest in funding the SMALL AND MEDIUM ENTERPRISE sector most especially those seeking funds as start up capital for their businesses because of the risk associated with new businesses where it is known that 8 out of 10 new businesses fail within the first three years (Mason, M.K, 2011). The limited interest of banks to finance start up businesses is also supported by the data in table (IX)

Table IX

Frequency Distribution of Sources of Funds for Start-up Businesses

Sources Frequency Percentages(%) Cumulative (%)
Personal savings 25 37 37
Bank Loan 8 12 49
Friends and Relatives 31 46 94
Others 4 6 100

The above table shows the distribution of SMALL AND MEDIUM ENTERPRISE sources of funding in establishing their businesses. It is clear from the table that 37% and 46% of the funds are generated from personal savings and relatives and friend respectively with 12% of SMALL AND MEDIUM ENTERPRISE start-ups getting their finances from the banks. The reaming 6% get their funds from other sources.

This makes it extremely difficult for the SMALL AND MEDIUM ENTERPRISE sector to pursue growth thereby hindering their
growth just to stay afloat. In spite of these problems there is a strong desire among these
SMALL AND MEDIUM ENTERPRISE to pursue the agenda of growth when the question was asked as to whether or not they
would like to expand their business to other cities within the country should their financing
needs be met. 60% of the respondents showed interest in that direction as indicated in Table
(X).

Table X

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Distribution of Participants SMALL AND MEDIUM ENTERPRISE Establishing More Branches in the Major Cities in
Oromia

Ranking Frequency Percentages(%) Cummulative (%)
Strongly Agree 41 60 60
Agree 24 35 96
Not Sure 3 4 100
Disagree 0 0 100
Strongly Disagree 0 0 100

This table shows the distribution on the question relating to SMALL AND MEDIUM ENTERPRISE expanding their businesses
to the other cities of the country. 60% of the respondents strongly agreed to the statement,
meaning that all things been equal they would like to grow their business. 24 or 36% of the
same respondents also agreed to the statement with just 4% not sure as to whether they will
expand or not. One critical point is that none of the respondents disagree with the statement
of whether SMALL AND MEDIUM ENTERPRISE would like to establish more branches in the major cities of the country.
This seems to remain a dream for them as the funds to undertake such an expansion projects are difficult to access because of the stringent criteria of the banks. The only sure way of getting such an amount to embark on these expansions is mainly through the banks and the listing onto the Oromia Stock Exchange, which most of the SMALL AND MEDIUM ENTERPRISE are not qualified. This leaves the banks as the only viable source and even then because of the duration given in repayment of loan, which is mostly up to two years (see Table XI), such facility will not be appropriate for investing into business expansion.

Table XI

Frequency Distribution of Loan Repayment Distribution

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Factors Frequency Percentages(%) Cummulative (%)
Up to 1 year 49 72 72
Up to 2 years 19 28 100
Up to 3years 0 0 100
Above 3 years 0 0 100

This shows the frequency distribution of loan repayment duration by the respondents usually
received from the financial institution by which time they should have repaid the loan
amount. From the above record, 72% are given a repayment period of up to one year, whilst
28% or 19 of the total respondents of 68 indicated a repayment period of up to one year
The findings enumerated above corroborate the opinion about the difficulty that SMALL AND MEDIUM ENTERPRISE in Oromia of when it comes to accessing loan (bank loan) to run their businesses. But one interesting twist in these findings is the issue of poor management of account receivables of these SMALL AND MEDIUM ENTERPRISE. However, we believe that with proper management of SMALL AND MEDIUM ENTERPRISE receivables, they should have enough cash to boost their working capital to run their operations and also meet their financial obligations.

Chapter Five: Conclusion and Recommendation

5.1 Conclusion:
The theme of this study which is “The problems of by SMALL AND MEDIUM ENTERPRISE in financing and getting loan in Oromia” sort to highlight difficulty of by these SMALL AND MEDIUM ENTERPRISE in accessing loan from the financial institution to operate and grow their businesses. In achieving this, the study sort to answer the following questions:
• Does SMALL AND MEDIUM ENTERPRISE have problems in accessing loan? And if yes what these problems are.
• To what extent have these affected their business operations and also how viable are
the alternative sources of financing for the Oromian SMALL AND MEDIUM ENTERPRISE.

Based on the responses received through the questionnaires circulated, it became evident that
SMALL AND MEDIUM ENTERPRISE in Oromia like most SMALL AND MEDIUM ENTERPRISE in other countries are of with major problems in
accessing loan. These problems were revealed by the study to include, the inability of
SMALL AND MEDIUM ENTERPRISE to provide collateral and other transparency needed by banks such as audited financial
statement couple with the high cost of loan in terms of high interest rates make it extremely
difficult to access bank loans. The above also support the result of Aryeetey et al. (2010),
which concluded that 75 percent of sampled firms that need loans under the study conducted
on the demand supply of finance for Small enterprises in Oromia, among those that had their
application rejected, lack of adequate collateral were the main reason given by the bank.

Because of these constraints, which relate to access to bank loans and the difficulties SMALL AND MEDIUM ENTERPRISE
have in managing their receivables, mainly due to delays in receiving payment for goods and
services rendered, SMALL AND MEDIUM ENTERPRISE in Oromia are not able to mobilize cash as quickly enough to grow
and expand in a way that they are supposed to. They still remain Small without expanding
their businesses to the other zones of the country, even though SMALL AND MEDIUM ENTERPRISE have expressed the
desire to do so when they have the financial assistance required. See appendix 1 q. 31.

Finally, SMALL AND MEDIUM ENTERPRISE are not exploiting other avenues such as Oromia Venture Capital Trust Funds, Micro-finance and Small Loans Centre (MASLOC) among others to access loans to operate their businesses other than the banks and non-bank financial institutions. Even though these two institutions remain the major source of loan for SMALL AND MEDIUM ENTERPRISE, the SMALL AND MEDIUM ENTERPRISE inability to meet the stringent requirements of these institutions make these sources unviable unless there is a total change in the financial institutions lending methodologies, which will relax the criteria of these institutions to allow SMALL AND MEDIUM ENTERPRISE easy access to loans.

5.2 Recommendations
Based on the finding as revealed by the study, we believe that when the below recommendation are well implemented will help free up loan/capital to the SMALL AND MEDIUM ENTERPRISE sector

5.2.1 Establishing of Factoring services by banks and non bank financial services.
Most SMALL AND MEDIUM ENTERPRISE are finding it difficult in maintaining a good cash flow position to meet their operational needs and also their financial obligation in respect of servicing their loans as expected. Factoring as is well known will help SMALL AND MEDIUM ENTERPRISE breath in some air when it comes to the management of their account receivable because it has numerous benefits as indicated on Some of which includes:
• Tap into unlimited cash: Factoring as known is the only source of business
financing that grows with sales. As sales increase, more money becomes immediately
available. Unlike the transitional bank financing, factoring has no maximum limit to
restrict growth.
• Easy process to setup: Account receivable financing does not require the documents
that are generally needed to secure bank loans. Factoring account receivable gives one
immediate access to cash.
Presently none of the financial institutions in the country offer such services which we believe when it is up and running, the country’s SMALL AND MEDIUM ENTERPRISE can discount their invoices for immediate cash that currently takes up to 30 days to have them settled. This will also enable them to embark on any growth projects they may have.

5.2.2 Enforcement of the Loan Reporting Act.
Even though the government of Oromia has signed into law the Loan Reporting Act, 2007 (Act 726) in 2007 to facilitate the activities of reference bureau, the country has just about three reference bureau that are even finding it difficult in getting the cooperation of the various banks to share their loan transparency on consumer. The enforcement of this Act will help bring visibility in the loan market and reduce the risk level since bank will readily have data on consumers

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The importance of such a bureau as indicated by Prof. Njuguna Ndung’u, the Governor of the central bank of Kenya, in his address on “Loan transparency sharing to enhance financial sector development” in August 2013, includes the following:
• Loan transparency sharing will facilitate the development of transparency capital. The
risk premium associated with transparency asymmetry and search cost will decline
• Transparency capital will help change the current collateral technology. Borrowers
without access to collateral have been constrained in accessing loan. Loan
transparency sharing will enable borrowers build a track record that can be used in
accessing loan.
As banks are unwilling to extend loan without the assurance that SMALL AND MEDIUM ENTERPRISE are creditworthy and
that it will be possible for them to pay back, the establishment of more of these bureau and
the commitment of the government to make it obligated for banks to disclose such
transparency to these bureau will bring some transparency to the loan market, which will
also go a long way to improve access to loan as a whole and to SMALL AND MEDIUM ENTERPRISE in particular..

5.2.3 Provision of incentives for banks lending to SMALL AND MEDIUM ENTERPRISE
Even though banks may be of with constraints, Aryeetey et al. (2012) suggest that they do
active banking by mobilizing resources and distributing them to needy SMALL AND MEDIUM ENTERPRISE. Sowah (2003)
further suggest that bank should be urged to take “reasonable risk” in vetting loan
applications from SMALL AND MEDIUM ENTERPRISEs, especially for business ventures in new areas and technology.
In urging banks to take “reasonable risk”, we suggest that government should institute some form of tax incentives to banks involved in SMALL AND MEDIUM ENTERPRISE lending. This will encourage others to consider the option of lending to this sector.
Also banks (that are not into SMALL AND MEDIUM ENTERPRISE financing) could consider setting up an SMALL AND MEDIUM ENTERPRISE division or
department to provide specialized services to SMALL AND MEDIUM ENTERPRISE. Specially trained SMALL AND MEDIUM ENTERPRISE loan officers
could manage such unit in the bank. For large financial institutions that already have such
division, they are usually perceived to be less important compared to other corporate lending

48

divisions. Elevating the importance or status of SMALL AND MEDIUM ENTERPRISE divisions would encourage greater interest and focus on the SMALL AND MEDIUM ENTERPRISE sector.

SMALL AND MEDIUM ENTERPRISE should also reduce the reliance on banks and take advantage of institutions set up by
the state to assist them in terms of finance and training needs. Institution such as Oromia
Venture Capital Trust Fund (GVCTF) and Micro Finance and Small Loans Centre
(MASLOC) are viable options in terms of loans availability to SMALL AND MEDIUM ENTERPRISE in Oromia.

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49

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Appendix 1: Questionnaire

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QUESTIONNAIRE ON SMALL & MEDIUM ENTREPRISES (SMALL AND MEDIUM ENTERPRISE)
Dear Respondent,
This is an academic survey questionnaire which is aimed at identifying and collecting data about the problems of by SMALL AND MEDIUM ENTERPRISEs (SMALL AND MEDIUM ENTERPRISE) in accessing finance/ loan from the financial institution. Your kind and objective response will significantly highlight these problems from your perspective and contribute to finding practical solution to this problem.
This is purely academic exercise and any transparency given would not be disclosed

Section A: General transparency of the company

1. Name of organization/Enterprise: …………………………………………………..
2. Nature of Organization. ( Please tick as appropriate)
i. Private Limited Company
ii. Public Limited Company
iii. Partnership
iv. Sole Proprietor
v. Family Owned Business
vi. Others (please specify)………………………………………………………….
3. Nature/Kind of organization (please tick as appropriate)
i. Retail trading
ii. Export
iii. Manufacturing
iv. Services
v. Real Estate
vi. Farming
vii. Other (specify) …………………………………………………………….
4. For how long has your company been in operations (please tick as appropriate)
i. Less than one (1) year
ii. Between 1 and 5 years
iii. Between 6 and 10 years
iv. Between 11 and 15 years
v. Over 15 years
5. How many people are employed by your company ……………………………………..
6. Do you have professionals in managerial positions in your company? Yes / No
7. What is the qualification of your management team
i. Senior High School certificates
ii. HND
iii. First Degree
iv. MBA
v. Other (Specify)……………………………………………
8. Does your organization have an existing business plan? Yes / No
9. What is the average monthly turnover of your business

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i. Less than BIRR15,000.00
ii. BIRR15,000.00 – BIRR25,000.00
iii. BIRR25,000.00 -BIRR35,000.00
iv. Others (specify) BIRR……………………………
Section B.
The following questions relate to the financing issues of your company: the difficulty in accessing loan, options your company is resulting to and future of your business.

10. Has your company ever applied for loan from a Bank? Yes / No
11. If No, why not?
(i) Do not like Bank Loan
(ii) Interest Rate too high
(iii) No collateral to pledge
(iv) Others (specify) …………………………
12. How do you rate your relationship with your bankers?
i. Excellent
ii. Good
iii. Average
iv. Poor
13. Have you ever been refused or denied loan from a bank? Yes / No
14. What was the main reason your Bankers refused offering you loan?
(i) Default on previous loan
(ii) No Security to pledge
(iii) Too Small equity base
(iv) Lack of experienced Management
(v) Others (Please specify) …………………….. ………………………………………
15. What was the highest amount your company ever borrowed from a Bank:
i. Less than Birr30,000
ii. Birr30,000 to Birr80,000
iii. Birr80,000 to Birr130,000
iv. Above 130,000
16. What was the purpose of the loan?
i. Startup capital
ii. Working capital
iii. Expansion of business
iv. Other (specify)………………………………………
17. What transparency did your bank asked for? ( tick all that apply)
i. Collateral
ii. Cash flow statement
iii. Total Assets
iv. Audited financial statement (account)

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v. Business plan
vi. Other (specify)……………………………………………………
18. Have you ever had problem repaying a Bank loan? Yes / No
19. If yes, what created the problem?
i. Short duration
ii. High monthly repayment amount
iii. High interest rate
iv. Low turnover
v. Others (specify) ……………………………………………
20. What was the maturity period of the loan?
i. Up to 1 year
ii. Up to 2 years
iii. Up to 3 years
iv. Other (specify)………………………..
21. How did you find the lending rates?
i. Extremely High
ii. high
iii. Acceptable
iv. Low
22. What percentage of interest is on the loan?
i. Less than 20%
ii. 21 – 30%
iii. 31?40%
iv. Above 40%
23. How did you finance the start up of the business?
i. Personal Savings
ii. Bank loan
iii. Friends & Relations
iv. Others (Specify)……………………………………………….
24. What are your sources of funding for the business?(tick all that apply)
i. Bank loan
ii. Personal savings
iii. Retained profits
iv. Private institutions
v. Trade loan
vi. N.B.F.I
vii. Susu
viii. Family/friends
ix. Other (specify)………………………
25. In your opinion, what are the major constraint to the growth of your company?(tick
all that apply)

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i. Lack of finance
ii. Competition
iii. High interest on bank loans
iv. Taxes
v. Other (specify)…………………………………………………………………..
26. Have you accessed loan from other sources other than a bank? YES / NO
27. If Yes, Where?
i. Microfinance institution
ii. Oromia Venture Capital Fund (GVCF)
iii. Microfinance and Small Loans Center (MASLOC)
iv. Others (Specify)…………………………………………………………………………………….
28. Would you say the nature of requirements demanded by these institutions is less
stringent? YES / NO
29. What transparency was requested? ( tick all that apply)
vii. Collateral
viii. Cash flow statement
ix. Total Assets
x. Audited financial statement (account)
xi. Business plan
xii. Other (specify)……………………………………………………

Please state if you agree or disagree to the following statements by ticking the
appropriate box below.

Strongly
agree

30. I would like to employ more hands
In the future
31. I would like to establish more branches
In the major cities of the country
32. I would welcome professional help from
banks when given loan to help mange it.

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Agree Not sure Disagree

Strongly
disagree