THE FINANCING OPTIONS FOR MICRO AND SMALL ENTERPRISES FROM INCEPTION TO OPERATION IN ETHIOPIA

Abstract

This thesis examines the financing options for Micro and Small Enterprises (MSEs) from inception to operation in Ethiopia. The study focuses on describing sources of finance that had been accessed by MSEs, and examines the extent to which MSEs fulfill requirements that are put up by commercial banks, micro-finance institutions, and angel investors to access finance. In tackling this topic, a mixed research approach design was adopted. Specifically, the study uses survey of 384MSEs from Addis Ababa, Amhara, Oromiya, SNNPR, Tigray, Harare and Somalia regions and 108 potential angel investors, and in-depth interviews with two bank managers and two micro finance institution loan officers. Survey data were quantitatively analyzed through descriptive statistics and the interview results were thematically analyzed. Results show that MSEs found under study frequently accessed finance from personal and partner’s savings, loan from family and friends, Iqub and micro financial institutions and commercial banks in that order. While the current source of finance for MSEs are Iqub, personal and partners’ contribution, loan from families and friends, micro finance institutions and commercial banks, in order. Specifically, lack of collateral, bad previous record and high interest rate become the obstacle factors for MSEs to use commercial banks and micro finance institutions as source of finance. While these obstacle factors to be at the lowest level while using angel capital market ownership, availability and exiting route (liquidity) were identified as the obstacle factors. Further, it identifies that the practice of accessing finance from the new alternative and innovative source of finance: angel capital market is more accessible than the existing and traditional sources of finance: commercial banks and micro financial institutions to MSEs from inception to operation in Ethiopia. Finally, the thesis recommends a serious of measures which should be performed by the policy makers and stakeholders. These include for supply side: designing and implementing effective regulatory framework to address lack of liquidity, mix of policy instruments and training on skills, mentoring and coaching while for demand side to launch investment readiness programs.