Determinants of access to formal credit by small and medium scale enterprises in the East African Community

Abstract

The East African Community has registered a proliferation of financial institutions. These are widely spread across the region and aim at increasing access to financial services. However, access to credit is still limited and this continues to hinder the growth of small and medium enterprises yet these enterprises play a major role in reducing unemployment and poverty as well as providing a breeding ground for innovations. This study aims at exploring the determinants of access to credit by Small and Medium Enterprises (SMEs) in the East African Community. The study uses the World Bank Enterprise Survey data and employs a Heckman Probit Model. The study explores the key determinants of access to credit among which include the following; Firm size, Ownership by gender, Export status, Location, Age of the firm, Innovation, Riskiness, Legal status, and Sales. Findings indicate that Innovation increases the likelihood of access to credit by 4.2 percent and this is statistically significant at all conventional levels. Furthermore, results show that the presence of risk in form of crime reduces the chance of receiving a loan by around 1.9 percent which is statistically significant at 5 percent conventional level. This indicates that an increase in innovation and risk reduction are crucial in increasing access to credit by SMEs in the EAC. The study, therefore, recommends an increase in both product and process innovation by firms, strengthening of security by both the government and privately by firms to guard against crime, and promoting the growth of firms to boost their likelihoods of access to credit.