Determinants of Firms' Access to Formal Credit and Intensity of Loan in Ethiopia

Abstract

Availability of credit is crucial for business survival and growth, especially in emerging nations like Ethiopia. Launching new firms, meeting working capital requirements, and growing current companies all require credit. As a result, the purpose of this paper is to examine factors that impact access to and amount of credit from a financial institution in Ethiopia. The 2015 round of the World Bank's Enterprise Survey, which drew responses from 848 enterprises, provided the information. Both descriptive and econometric data analysis techniques were used. For an estimate, the Heckman selection model (two-step process) was used. The descriptive finding showed that 488 people (57.75%) did not have access to credit, while 360 (42.45%) of the entire sample did. Similarly, over 67% of businesses encountered financial challenges in obtaining loans from financial institutions, and 59.3% of companies were unsatisfied with their access to external finance. The Heckman two-step technique revealed that IMR is significant at a 1% probability level, implying that simultaneously estimating the selection and outcome equation was correct. Furthermore, the Heckman two-step estimation result showed that firm size, manager experience, annual sales, product innovation, informal competition, and website influence the amount of credit given to firms, whereas manager experience, annual sales, product innovation, sex of owners, and region of operation determine the ability of firms to access credit. Grounded on the findings of the study, easing access to credit, controlling informal competitions, smoothing collateral conditions, and close collaboration between the government, enterprises, and financial institutions will be significant in easing access to credit and the amount of loans given to firms.