Research On Small And Medium Enterprises Financing Constraints In Africa

The potential of SMEs in promoting economic growth in both developed and developing countries is widely accepted and documented by both scholars and policy makers. It is therefore important to study how they finance themselves, as this may have a direct impact on the overall growth rate of the economy. A firm can choose whether to finance its activities with equity, debt, or both. An optimal capital structure is that mix of internal and external finance that optimizes the value of a firm. Therefore, the question of how to finance or equivalently from where to borrow becomes a crucial decisionHowever, SME sector is constraints by a number of factors which include among others difficulty in accessing credit. Lack of access to sufficient financing for SMEs, especially in African countries, has been identified as a major bottleneck in realizing this potential. Bank credit is one of the major ways of addressing the challenge of inadeauate funding that exists in the SME sector.The objectives of the study are to evaluate the financing policies of African SMEs: to discuss factors which limit African SMEs access to credit from the formal hanking system; to identify which types of credit are easily obtainable to African SMEs;to distinguish between financially constrained and unconstrained firms:to assess the determinants of financing obstacles; to determine more precisely the most important firm-level predictors of financing obstacles; and to make relevant policy recommendations to enhance the financing of African SMEs.The research is conducted with a survey dataset on a sample of 1559 firms from 16 African countries taken from the World Business Environment Survey (WBES). Given that Financing Obstacle is a polychotomous dependent variable with a natural order, we use the ordered probit model to estimate all the regression models. We assume that the disturbance parameter has normal distribution and use standard maximum likelihood estimation.We find that, size and ownership predict financing obstacles best; smaller and domestic firms report higher obstacles; categorizing firms by their size and ownership is therefore most useful when considering the effect of financial and institutional development on firms'financing obstacles; some of the a priori classifications used in the literature to distinguish between financially constrained and unconstrained firms are more useful than others; given the limitations of existing methods to estimate financing constraints directly from firm-level data, our results based on survey data are an important contribution in improving our understanding of which firm attributes.predict best firms'financing obstacles.