Which firm characteristics determine access to finance for SMEs within the East African Community?

Abstract

Financial constraints among SMEs are generally more prevalent in the developing world than in the developed world, but SMEs in sub-Saharan Africa stand out as being particularly constrained. Previous studies also show causal links between access to finance and company growth and increased prosperity. By applying a logit regression model to company-level survey data of companies within the EAC, this study examines which company characteristics significantly affect access to formal external credit. The study is conducted on both the sub-regional and country level. The multiple comparisons problem is addressed by controlling the false discovery rate. On the sub-regional level, the study finds significant effects of size, managerial experience and legal status, of which size is used as a proxy for information asymmetry. Concluding policy suggestions for the EAC member nations include creating an SME database, to help close the informational gap between creditors and debtors; and providing aid to small, growing companies, to help them reach the size at which they can finance further growth through formal external credit.