INFORMAL FINANCE AS ALTERNATIVE ROUTE TO SME ACCESS TO FINANCE: EVIDENCE FROM ETHIOPIA

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Abstract

The problem of SME financing has received attention of policy makers and academics in recent years owing to the role of the sector in reducing unemployment, narrowing income gap and alleviating poverty. Alternative financing schemes were suggested but their success depends to a large extent on the development of legal, informational, and institutional frameworks. Existing body of literature grossly undermines SME ability in reacting towards financial restraint and generally assumes they are passive participants in the credit market. Through a survey of 102 randomly selected firms across 10 industrial sectors in the manufacturing sector, we examined how the Ethiopian manufacturing SMEs reacted to acute shortage of formal credit. We found that SME owners actively react towards financial restraint by resorting to alternative schemes such as iqqub(variant of rotating saving and credit association), customer advances, and trade credit. Although the alternative financing schemes are not the best but they are useful in evading the impact of credit restraint on their operation and growth.

Keywords: Trade Credit, Smes, Iqqub, Informal Finance, Ethiopia, Customer Advances

How to cite this paper: Fanta, A. B. (2015). Informal finance as alternative route to SME access to finance: Evidence from Ethiopia. Journal of Governance and Regulation, 4(1-1), 94-102. https://doi.org/10.22495/jgr_v4_i1_c1_p1