Journal of Investment and Management

2018; 7(5): 143-150

http://www.sciencepublishinggroup.com/j/jim
doi: 10.11648/j.jim.20180705.12
ISSN: 2328-7713 (Print); ISSN: 2328-7721 (Online)

Role of Financial Institution on the Growth of Small and

Medium Enterprises:-The Case in North Shewa Zone,
Amhara Region, Ethiopia
Alebachew Goshim Azeref1, Yohanes Tefera Gelagil2
1
Department of Accounting and Finance, Debre Birehan University, Debre Birehan, Ethiopia
2
Department of Logistics and Supply Chain Management, Debre Birehan University, Debre Birehan, Ethiopia

Email address:

To cite this article:

Alebachew Goshim Azeref, Yohanes Tefera Gelagil. Role of Financial Institution on the Growth of Small and Medium Enterprises:-The
Case in North Shewa Zone, Amhara Region, Ethiopia. Journal of Investment and Management. Vol. 7, No. 5, 2018, pp. 143-150.
doi: 10.11648/j.jim.20180705.12

Received: October 12, 2018; Accepted: October 29, 2018; Published: November 26, 2018

Abstract: The objective of this study was to investigate the role of financial institutions on the growth of small and medium
enterprises and to give recommendations based on the problems. Despite the tremendous increase in number of SMEs, little
research exists that examines role of financial institutions; banks and microfinance institutions; on the growth of small and
medium enterprises in developing countries, especially in Ethiopia specifically in north shewa zone of Amhara region. SMEs
occupy a prominent position in the development agenda of many developing countries like us. Primary data were collected
from 102SMEs in north shewa zone. Data from the respondents was tabulated for descriptive purpose and analyzed and
translated into useful information using the statistical package for social sciences (SPSS). Therefore the study identifies size of
loan, lower borrowing cost and saving account has positive relationship with growth of small and medium enterprise and the
influence of these variables was significant. On the other hand there was positive relationship between duration of loan,
simplicity of criteria, follow up & supervision and growth of SMEs. But the influence is relatively insignificance. The study
recommends that the government and financial intuitions to make credit available and affordable to SMEs reducing the
traditional barriers to SMEs financing, make financial intuitions products & services without unattainable criteria and at lower
borrowing cost, setup mechanisms of training for SMEs before and after the loan. The study also recommends that make
saving account easily accessible facilitated with technology for their growth.
Keywords: Growth, Small and Medium Enterprises (SMEs), MFIs, Banks, Financial Institutions

growth. They conducts financing the small scale sector,

1. Introduction development and support service in the form of loans &
1.1. Background of the Study grants to different agencies, availability of financial services
to households &individuals, insurance and financial services,
Small and Medium Enterprises (SMEs), and financial managing risks by a diversity of financial instruments.
institutions are very critical to the development of an Furthermore, financial institutions create financial assets for
economy. SMEs provide the vast majority of employment in their customers and sell those assets to other market
developing countries and are keystones in the productive participants for a definite emolument. In addition to all these
structures of emerging economies, such as; improvement of functions, financial institutions are also involved in providing
local technology, output diversification, development of investment advice to market participants and managing the
indigenous entrepreneurship & forward integration with large portfolios of market participants [1]. Financial institutions
scale industries. Similarly in addition to providing substantial play an extremely important role in economic development.
employment financial institutions play very prominent roles Financial institutions cater to important needs of society such
in firm’s growth and industry productivity and economic as taking care of small savings at reasonable rates. Everyday
144 Alebachew Goshim Azeref and Yohanes Tefera Gelagil: Role of Financial Institution on the Growth of Small and
Medium Enterprises:-The Case in North Shewa Zone, Amhara Region, Ethiopia

working men and women have the option of putting their USA. Thus the development of SMEs is the key component
savings into a number of alternatives such as Government of Ethiopia’s industrial policy direction that will contribute to
small saving schemes, deposits into a saving account provided the industrial development and economic transformation in
by their bank, recurring, deposits, time deposits and also the Ethiopia. The development goal is specially secured on
alternative option of investing in mutual funds or stocks. stimulating the rapid growth and structural transformation of
In Ethiopia, the Ministry of Trade and Industry defined the SMEs in ways that advance wealth creation and
micro enterprises as business enterprises found in all sectors expansion of employment opportunity [20].
of the Ethiopian economy with a paid-up capital of not more A crucial element in the development of the SME sector is
than Birr 20,000 but excluding high-tech consultancy firms access to finance, particularly to bank financing, given the
and other high-tech establishment while Small Enterprises relative importance of the banking sector in serving this
are defined as business enterprises with a paid-up capital of segment. Firm-level data collected by the World Bank show
more than Birr 20,000 but not more than Birr 500,000 but that access to finance is perceived as one of the main
excluding high-tech consultancy firms and other high-tech obstacles to doing business [14, 21]. A number of studies
establishments have shown that financing is a greater obstacle for SMEs
The role that finance has as a lubricant for the real than it is for large firms, particularly in the developing world,
economy thus likewise exacerbates the effect of financial and that access to finance adversely affect the growth of the
fragility on the real economy. The evidence has shown that SME sector more than that of large companies [17, 2].
finance has a more important impact on growth through There are several factors that hinder potential growth of
fostering productivity growth and resource allocation than SMEs. Such factors are titled as growth barriers. It is argued
through pure capital accumulation [2]. Specifically, the that SMEs are more likely to face entry barriers and growth
availability of external finance is positively associated with barriers compared to their large counterparts. Commonly
entrepreneurship and higher firm entry as well as with firm addressed barriers for small businesses include institutional
dynamism and innovation. Finance is the life wire of any barriers and financial barriers. Institutional barriers are
economy, whether developed or developing countries. mainly discussed with the focus on firms’ interaction with
Because of this financial institutions are one important drive government, including legalization, taxation, and government
for the growth of SMEs. Though human resources are the support amongst others. Based on consistent results from
tool that propels any economic endeavor, but finance is very both theoretical and empirical data, certain institutions
prominent after human resources. Finance is also known as intentionally discriminate against the growth of SMEs which
capital, credit and so forth. Finance is to commercial pursuit in turn act as a growth barrier. It is not difficult to imagine
as blood is to the human body. Finance is important to the that SMEs would have a tough period when they face
survival and growth of SME [16]. On the other hand, there is unfavorable tax system, discriminatory regulations and
limited evidence that confirms the role of financial complicated laws. Financial barriers represent lack of
institutions for the growth of SMEs. There for this research financial resources. It has been argued that credit constraints,
will significantly examine the role of financial institutions for lack of external debt, and equity capital are the main
the growth of SMEs in north shewa zone. obstacles to the growth of SMEs. Evidence suggests that
banks are more conservative when they provide loans to
1.2. Statement of the Problem SMEs. Due to the information asymmetries, SMEs are more
Noticeably, SMEs are one of the leading forces of likely to be charged relatively high interest rates and asked
economic development particularly in the developing for high collateral and loan guarantees. Furthermore, SMEs
economies. This is because an energetic SMEs sector is vital could also face external barriers, internal organizational
to stimulate growth and job creation. SMEs are also flexible barriers and social barriers which cover aspects of market
and can more easily be adapted to the demands of the market. position of a firm, access to qualified human capital, and
They further generate jobs more rapidly than any other access to network. Availability of financial capital is found to
businesses, are highly diversified and contribute to exports be crucial to firm growth [5, 8, 12, 18].
and trade [21]. It is possible that firm growth is also affected by different
Long time in history development and expansion of SMEs types of barriers. These barriers can be divided into internal
was widely considered as sign of backwardness and lack of barriers, such as the motivation to grow, and external barriers.
another alternative in all segments of the society. However; it The most important external barriers for UK firms are the
is resulted from misunderstanding that SMEs are basis for a availability and cost of funding [19]. Many commentators have
number of developments in technology sector of these days. postulated a “financing gap” for SMEs, meaning that there are
With in this context SMEs is one of the institutions given significant numbers of SMEs that could use funds productively
recognition in the country’s industry development plan and is if they were available, but cannot obtain finance from the
the fact that it serves as vehicles for employment formal financial system. This study analyses the “financing
opportunities at urban center and as it emphasize the gap” concept, seeks to determine how prevalent such a gap
economic development. SMEs serve as sources for may be — both in organization for economic cooperation &
sustainable job opportunities not only for developing development [OECD] countries and non-OECD economies,
countries like ours, but also for developed countries like and recommends measures to foster an improved flow of
 Journal of Investment and Management 2018; 7(5): 143-150 145

financing to SMEs. While some surveys show that growth is 2. Method

not an objective for all small and medium sized firms, the
ability of firms to grow is important, because it has been 2.1. Research Design
suggested that firms with low or negative growth rates are The primary aim of this study is to examine the role of
more likely to fail [11, 13]. financial institutions in SMEs growth. To achieve this
This study differs from previous literature because of the objective a mixed method (both quantitative and qualitative)
variety of independent variables represented in the database. were adopted. The purpose of using such methods is to
The growth rate with this paper is defined as growth of gather data that could not be obtained by adopting a single
annual sales volume. A similar approach has previously been method and for triangulation so that the findings with a single
adopted. But that author used limited independent variables; approach were substantiated with others wherever possible.
provision of credit, training of the entrepreneur, and savings
account, in addition that study excludes the role of banks [8]. 2.2. Population and Sampling Design
However in this study includes the role of banks, because
mostly accessibility of loan from MFIs benefited the MSEs The sampling frame for the planned research was 815
and banks loan access for medium and large firms. Firm size, small and medium enterprises out of the total population of
age of the firm and loan from banks are also used in the 11,244 SMEs which were registered in north shewa zone.
previous empirical studies as the measure of independent Stratified random sampling technique was used in selecting
variables with panel data [4]. SMEs. This sampling technique enables the researchers to
While most studies in the field investigate growth in generalize their findings and make inferences from a sample,
employment. The researcher chooses the measure sales thus enabling one to draw conclusions about a population.
volume, because firms rarely select employment growth as Finally 102 SMEs were proportionally selected from each
their goal per se. It could also be argued that the sample of business activities.
SMEs justifies this choice even more due to the excessively 2.3. Types and Sources of Data
high labor cost imposed on local employers, these costs are
often stated to be a major barrier for small firms to increase the The necessary data for this study were collected from
number of their employees. SMEs provide the vast majority of primary sources. The primary data were obtained through
employment and key stone in the productive structure of questioner, which contains open and closed ended questions.
emerging economies in developing countries, but the growth A structured questionnaire designed to collect the required
of such firms is being hindered by scarce financing. data for this study on a likert type scale. The 5-point rating
SMEs to be the major pivot of economic growth and scale of strongly agree, agree, I have no idea, disagree and
development of the country must be adequately financed. In strongly agree.
order to provide consumers and commercial clients with a wide
range of services and different types of banking, especially to 2.4. Specification of Empirical Research Model
small business, the Ethiopian government has evolved a wide To estimate the impact of financial institutions; banks and
variety of financial institutions both at the national and regional MFIs on the growth of SMEs, the following general
level as an effective means of fighting unemployment and empirical research model is developed:
income inequality. Based on this the purpose of this study were
to determine and identify the role the financial institutions in the Y=βo + βkX + Є
growth of SMEs and how provision of credit, training,
simplicity of criteria, follow up and supervision, borrowing cost, Where:
size of loan, duration of loan and savings account influences the Y represents the mean value of dependent variable- fiscal
growth of Small and medium enterprises. sales volume
βo is the intercept
1.3. Objectives of the Study βk represents the coefficients of the X variable
X represents the explanatory variables (Simplicity of
1.3.1. General Objective criteria, Borrowing cost, size of loan, Duration of loan,
The general objective of the study is to find out the role of Training, Savings account and follow up supervision)
financial institutions, especially on banks and Microfinance Є is the error term
institutions on the growth of small and medium enterprises in
north shewa zone. 2.5. Dependent and Independent Variables of Factor
Considerations
1.3.2. Specific Objectives
2.5.1. Dependent Variables
Specific Objectives of the study are:- Dependent variables in this study are the variables which
a) To assess the products of financial institutions are are used to measure the growth of small and medium
reasonably priced for the SMEs. enterprises such as sales volume. This is because growth in
b) To find out the effect of different variables on the sales reflects both short term & long term changes in a firm
growth of SMEs & it easy to obtain.
146 Alebachew Goshim Azeref and Yohanes Tefera Gelagil: Role of Financial Institution on the Growth of Small and
Medium Enterprises:-The Case in North Shewa Zone, Amhara Region, Ethiopia

2.5.2. Independent Variables branches, neither does it have the capacity for lending, nor the
Simplicity of criteria: -Determined by different processes information technology platforms and human resources
which is time taking, and difficult to understand. requirement. The Bank does not even address the issue of how
Accessibility to credit affects financial performance of Small to get credit to the SMEs [15]. The prospective of
enterprises positively. The easier it is to access credit, the microfinance is to broaden access to financial services for
higher the financial performance of the Small and medium lower income levels and increases the amount of undertaken
enterprises [8]. productive projects. By inclusion into the financial sector,
Duration of loan:-non availability of medium or long term improved income-generation is predicted. MFIs are supposed
credit particularly for medium size enterprises is a major to be different from other financial institutions in that they are
constraint for those enterprises that wish to expand their believed (and particularly established) to serve the
activities [3]. microfinance needs of those who are underserved by banks [4].
Size of Loan: -Ensuring adequate access to finance so that
Small and medium enterprises can grow and achieve their Table 1. Access to Bank and MFIs loans.
full potential is central to achieving the objectives of the Access to Banks MFIs
renewed Lisbon partnership for growth and jobs [2, 17]. loans Frequency Percent Frequency Percent
Borrowing cost: - the cost which is paid by the borrower to Yes 32 31.4 92 90.2
No 70 68.6 10 9.8
get the loan small firms face specific constraints in raising
Total 102 100 102 100
external finance. It difficult to obtain outside capital in small
amount and when they are able to obtain debt capital, it is at Sources: SMEs survey, 2018
high interest rates. A major constraint of small business is its
inability to obtain adequate financing, either in an absolute As indicated above in table 1 of the second column
sense or because the cost; in terms of interest rates is often indicates that 31.4% of SMEs respondents had access to
prohibitive. He further argues that the high cost of small financial resources, and the remaining 68.6% had no access
business borrowing has put considerable pressure on small to financial resources from banks. And third column
business marginal profits [2, 17]. indicates that 90.2% of SMEs respondents had access to
Savings account: Adverse saving behavior and low savings financial resources, and the remaining 9.8% had no access to
present a crucial reason for a country being kept in a poverty financial resources from MFIs.
trap. The image of a microfinance institution produced by Table 2. Reasons for not having access to Bank & MFIs Loans(Multiple
experience can increase local trust, which can enhance the answers were possible).
willingness to accept credit and therefore promote savings, as
Reasons for not Banks MFIs
well. If these factors (and first and foremost microcredit) have
having loans from Frequency percent Frequency percent
a significant effect on savings, then microfinance institutions Inadequate collateral 25 78.1 36 39.1
do contribute to development within a country [9]. Fear of loan repayment 1 3.1 10 10.9
Training and assistance: Which is given by Banks and MFIs Higher interest rate 6 18.8 46 50
to small and medium enterprises is crucial for successful Sources: SMEs survey, 2018
performance of enterprises. Management competence
encompasses functional knowledge, management skills and The respondents were also asked to justify reasons for not
managerial behavior. Thus, competencies such as marketing, having bank and MFI loans. The study result in the above table
financial control, training and networking among others, are 2 shows in the second column, that 78.1% respondents justify
management functions, although in many studies, the success thatthe collateral required by banks from the borrowers is not
of the informal sector pivot on the managerial skills of the adequate. That means it does not consider the economic
entrepreneurs who are attracted to the sector due to the relative capability of borrowers. The lending interest rate is the second
low investment and service costs required. Training was found highest factor that hinder borrowers access to loan from banks
to be playing a crucial small and medium enterprise in growth (which constitute 18.8% of total respondents). The remaining
of small and medium enterprises, especially in assisting the 3.1% of respondents fear the loan repayment so they do not
businesses to repay back their loans in order to get more credit want to borrow money from banks.
in future[8, 10]. At the same table with column three related to MFIs,
Follow up and supervision: Which is made by financial 39.1 % of respondents justify that there is high collateral
institutions to confirm the SMEs uses the loan based on the requirement by MFI which is inadequate for borrowers and
proposal. 50% of respondents said that since the lending interest rate of
MFI is high even above the lending interest rate of most
3. Result and Discussion banks in Ethiopia it hinder us to borrow money from MFI.
The remaining 10.9% of respondents fear the repayment of
3.1. Role of Banks and MFIs in the Growth of SMEs loan and this become a cause for them not to ask borrowing
even if they are in working capital shocking.
Borrowing from the commercial banks is herculean to the
Generally as indicated from the table 2 above the collateral
SMEs. The bank does not also have the reach in terms of
requirement by banks hinder SMEs to access loan from
 Journal of Investment and Management 2018; 7(5): 143-150 147

banks than MFIs, this is mainly because MFIs have group maturity period of the loan. The remaining 1.1% have no idea
lending mechanisms for SMEs, if individual have no about the issue. Generally the loan repayment period given
collateral. To the reverse the interest rate of banks was not by banks and MFIs to SMEs is not enough. This indicates
much the reason for not having loan from banks than MFIs. that banks and MFIs found in the study area are not
This is because the interest rate of MFIs is higher than Banks. contributing to the growth of SMEs as expected.

Table 3. Contribution of Banks & MFIs loan to SMEs Growth on Sales Table 5. Simplicity of Banks & MFIs Loan Criteria.
Volume.
Banks MFIs
Simplicity of Criteria
Contribution of loan to SMEs Banks MFIs Frequency Percent Frequency Percent
growth on sales volume Frequency Percent Frequency Percent Agree /Strongly agree 4 12.5 31 33.7
Agree/ Strongly agree 29 90.6 88 95.6 I have no idea 0 0 2 2.2
I have no idea 0 0 1 1.1 Disagree/ Strongly disagree 28 87.5 59 64.1
Disagree/ Strongly disagree 3 9.4 3 3.3 Total 32 100 92 100
Total 32 100 92 100
Sources: SMEs survey, 2018
Sources: SMEs survey, 2018
The table above shows the inquiries result about simplicity
As can be seen from table 3 of second column, SMEs that of banks and MFIs loans criteria,
applied and received loan were asked about the contribution As shown at second column 87.5% respondents strongly
of loan for their growth, to distinguish whether the loan had disagreed and disagreed. That means criteria set by banks to
contribution to their growth or not. Based on this 90.6% of provide or to give loan to SMEs is complex, time taking and
respondents strongly agreed and agreed that contribution of difficult to understand. This will result banks not to
bank loan is very high for the growth of SMEs. On the other contribute to the growth of SMEs as expected. Only 12.5 %
hand 9.4% of respondents said that contribution of bank loan of respondents agreed and strongly agreed that the criteria set
to the growth of SMEs is nothing. by banks is simple and understandable to borrowers (SMEs).
The respondents were also asked to justify the contribution On the other hand the majority respondents (64.1%) justify
of MFIs loan on the growth of their firm. The result in the that the criteria set by MFIs to give loan to SMEs is still not
third column shows that, 95.6% of the total respondents simple and understandable. Thai is they disagreed and
believe that the contribution of MFIs loan to the growth of strongly disagreed. Off course relative to banks loan criteria,
SMEs is very high that is MFIs loan has positive influence on the loan criteria set by MFIs is relatively simple and
growth of SMEs. On the other hand 3.3 % of respondents understandable but it does not mean that loan criteria of MFIs
strongly disagree and disagree on the contribution of loan by is good. On the other hand 33.7% of respondents believe that
MFIs to the growth of SMEs. And the remaining 1.1% of the criteria set by MFIs are simple and understandable to
respondents have no idea about the impact of MFIs loan on borrowers (SMEs).
the growth of SMEs.
Table 6. Size of Banks & MFIs Loans.
Table 4. Duration of Banks & MFIs Loans.
Banks MFIs
Size of loans
Enough duration of Banks MFIs Frequency Percent Frequency Percent
loans repayment Frequency Percent Frequency Percent Agree /Strongly agree 9 28.1 32 34.8
Agree /Strongly agree 7 21.9 30 32.6 I have no idea 0 0 5 5.4
I have no idea 0 0 1 1.1 Disagree/ Strongly disagree 23 71.9 55 59.8
Disagree/ Strongly disagree 25 78.1 61 66.3 Total 32 100 92 100
Total 32 100 92 100
Sources: SMEs survey, 2018
Sources: SMEs survey, 2018
Ensuring adequate access to finance so that Small and
Non availability of medium or long term credit particularly medium enterprises can grow and achieve their full potential
for medium size enterprises is a major constraint for those is central to achieving the objectives of the renewed Lisbon
enterprises that wish to expand their activities [3]. In this partnership for growth and jobs. Kauffmann suggests that
regard as the study result indicate in the table 4 above the securing suitable financing remains an obstacle for Small and
repayment period given by banks and MFIs is not enough. Medium Enterprises, especially for the growth of innovative
With this regard 78.1 % of respondents Disagreed/ Small and Medium Enterprises, In this regard as indicated in
Strongly disagreed and only 21.9 % of respondents Agreed the table 6 above majority SMEs in the study area does not
/strongly agreed that the maturity period given by banks for have adequate amount of loan from banks. As shown in the
loan repayment is enough. Also while they are looking to table above only 28.1 % of respondents can get adequate size
column three of table 4 above 66.3% of respondents of loan from banks the remaining 71.9 % SMEs does not
Disagreed/ Strongly disagreed with regard to duration of loan have adequate size of loan from banks which are found
repayment. This means that the loan repayment period given around them.
by MFIs to the borrowers is not enough. On the other hand The number of SMEs that can get adequate size of loan
32.6% of respondents are agreed and strongly agreed on the from MFI is also not more than 34.8% as indicated in the
148 Alebachew Goshim Azeref and Yohanes Tefera Gelagil: Role of Financial Institution on the Growth of Small and
Medium Enterprises:-The Case in North Shewa Zone, Amhara Region, Ethiopia

table above. Still 59.8% of SMEs does not have adequate size important for the growth of SME. In this regard the survey
of loan from MFIs found around them. This shows the result in table 8 of the second column shows that 48% of the
contribution of financial institution for the growth of SMEs is respondents were strongly agree and agree with follow up
very low and poor and need to be improved. and supervision offered by banks. Whereas 42% of
respondents were disagree and strongly disagree with the
Table 7. Trainings offered by Banks & MFIs. statement.
Banks MFIs Table 8 of the third column shows that 52.2% of the
Trainings offered
Frequency Percent Frequency Percent respondents were strongly agree and agree with follow up
Agree /Strongly agree 9 28.1 26 28.3 and supervision offered by MFIs. Whereas 45.6% of the
I have no idea 0 0 0
respondents were disagree and strongly disagree with the
Disagree/ Strongly disagree 23 71.9 66 71.7
Total 32 100 92 100 statement.

Sources: SMEs survey, 2018 Table 9. Lower Borrowing Cost of Banks & MFIs.

Banks MFIs
That training which is given by Banks and MFIs crucial Lower borrowing cost
Frequency Percent Frequency Percent
for the growth of small and medium enterprises since it is an Agree /Strongly agree 3 9.4 7 7.6
input for the successful performance of enterprises. The I have no idea 0 0 0 0
financial institutions may deliver training for borrowers Disagree/ Strongly disagree 29 90.6 85 92.4
(SMEs in our case) in regard to management competence Total 32 100 92 100
encompass functional knowledge, management skills and Sources: SMEs survey, 2018
managerial behavior [8, 10]. According to respondents
opinion the basic problems of banks and MFIs found in the As can be seen from the table 9 of column two, for the
study area is they does not provide continuous training and inquiry lower borrowing cost of the bank, 9.4% of the
supervision for SMEs. Only 28.1% of SMEs respondents are respondents strongly agree and agree. 90.6% of the
agreed and strongly agreed that the bank provide continuous respondents were disagree and strongly disagree. Which
training and supervision for SMEs.. The remaining 71.9% of implies that to acquire the bank loan most of SMEs were
SMEs respondents are saying banks does not provide incurred very higher cost.
continuous training and supervision for SMEs. Also the survey result in the table 10 of column three, for
Similarly only 28.3 % of SMEs respondents are agreed and the inquiry about lower borrowing cost of the MFIs, 7.6% of
strongly agreed that MFIs are providing continuous training the respondents strongly agree and agree. 92.4% of the
and supervision for SMEs. The remaining 71.7% of SMEs respondents were disagree and strongly disagree. Which
respondents are dissatisfied (disagreed and strongly disagreed) implies that to acquire the MFIs loan most of SMEs were
by MFIs training and supervision since it was not continuous incurred higher cost.
and helpful for their business. Generally the result shows that The study shows that there is higher borrowing costs
the contribution of financial institutions especially banks and incurred, which negatively affect the growth of SME.
MFIs to the growth of SMEs in providing continuous training
and supervision were very poor. 3.2. Regression Results

Table 8. Follow Up & Supervision of Banks& MFIs.

This section employs econometric analysis to ascertain the
role of financial institutions. Although statistical computation
Banks MFIs has been used, the compelling reason for using a regression
Follow up & supervision
Frequency Percent Frequency Percent
technique is that it estimates the impact of each explanatory
Agree /Strongly agree 8 25 48 52.2
I have no idea 0 0 2 2.2 variable after allowing variations in the dependent variables.
Disagree/ Strongly disagree 24 75 42 45.6 The regression is the result of questionnaire results of
Total 32 100 92 100 dependent variable & independent variables. In this section
Sources: SMEs survey, 2018
the researchers tries to analyzing the impact of each
independent variable on the dependent variable.
Follow up and supervision made by financial institutions is
Table 10. Regression Result of Multivariable.
Model Summary

Multiple R R Square Adjusted R Square Standard error of the estimate

0.824 0.678 0.642 0.63195

ANOVA (Analysis of variance)

Sum of squares Df Mean square F Sig.

Regression 52.814 7 7.546 18.893 .000a
Residual 25.160 63 .398
Total 77.973 70
 Journal of Investment and Management 2018; 7(5): 143-150 149

Coefficients of Variation

Variables B Std. Error Beta T Sig. VIF

Duration of loan 0.146 0.099 0.151 1.481 0.145 2.016
Criteria to be met 0.022 0.095 0.023 0.222 0.827 1.971
Size of loan 0.242 0.091 0.281 2.672 0.011 2.145
Follow up and supervision 0.103 0.090 0.101 1.149 0.256 1.486
Lower borrowing cost 0.198 0.077 0.204 2.585 0.013 1.203
Saving account 0.386 0.099 0.400 3.928 0.000 2.017
Training 0.022 0.068 0.029 0.305 0.763 1.645
(constant) -.764 0.0.83 -1.996 0.051

Duration of Loan Lower Borrowing Cost

As can be seen from the table the coefficient or beta value As can be seen from the table, lower borrowing costs
of duration is positive, but its influence on SMEs growth was Banks and MFIs have a positive effect on the growth of
insignificant. In addition, the t-value and p-value support this SMEs. Lower borrowing cost explains the variation of the
argument. Which means t-value is 1.481 which is less than 2. growth of SMEs with a coefficient of or beta value of 0.204
As the p-value indicated it is 0.145 which is much greater which is statistically significant at 5% level of significance.
than 0.05. These two tests support that the Impact of duration This means holding other variables constant for a unit
of loan is statistically insignificant. decrease of the borrowing cost there is a 20.4% change
Criteria to be Meet (growth) in SMEs. In addition, the t value and p value
The result indicates that, simplicity of criteria has a support its statistical significance. According to 2-t rule of
positive effect on the growth of SMEs. Simplicity of criteria thumb the t-value should be greater than 2 to be statistically
explains the variation of growth of SMEs with beta value of significant. Here its t-value is 2.585 which is greater than 2.
0.023, which is positive but insignificant, also the t-value When we see the P-value, which is 0.013, it is less than 0.05.
0.222 which is by far less than 2, which is the rule of thumb These two tests support the statistical significance of the
to test statistical significance using t-value. Moreover, p- impact of lower borrowing costs on the growth of SMEs.
value 0.827is greater than 0.05. Although simplicity of Saving Account
criteria associates with SMEs growth positively, it is As it is seen from the regression result, saving account
insignificant based on t and p values. from Banks and or MFIs have a positive effect on the growth
Size of Loan of SMEs. Saving account explains the variation of the growth
As can be seen from the table, size of loan has a positive of SMEs with a coefficient of or beta value of 0.400 which is
significant contribution on the growth of SMEs next to statistically significant at 5% level of significance. This
saving account among the variables included in this model. means holding other variables constant for a unit increase in
Size of loan explains the variation of the growth of SMEs saving account there is a 40% change (growth) in SMEs.
with a coefficient of or beta value of 0.281 which is Also the t-value 3.928 which is greater than 2, it is the rule of
statistically significant at 5% level of significance. This thumb to test statistical significance using t-value. Moreover,
means holding other variables constant for a unit change of p-value 0.000 indicates that greater than 0.05. These two tests
the size of loan there is a 28.1% change (growth) in SMEs. In support the statistical significance of the impact of saving
addition, the t value and p value support its statistical account on the growth of SMEs.
significance. According to 2-t rule of thumb the t-value Training
should be greater than 2 to be statistically significant. The result indicates that, training has a positive effect on
Here its t-value is 2.672 which are greater than 2. The P- the growth of SMEs. Training explains the variation of
value in the above table, which is 0.011, it is less than 0.05. growth of SMEs with beta value of 0.029, which is positive
These two tests support the statistical significance of the size but insignificant, also the t-value 0.305 which is by far less
of loan on the growth of SMEs. than 2, which is the rule of thumb to test statistical
Follow Up & Supervision significance using t-value. Moreover p-value 0.763 is greater
As it is seen from the regression result, though than 0.05. Although training associates with SMEs growth
insignificant, it has a positive contribution to the growth of positively, it is insignificant based on t and p values. It is
SMEs. Follow up and supervision explains the variation of advisable that accessibility of training should positively
the SMEs growth with a coefficient or beta value of 0.101 related to the growth of SMEs [8].
which is statistically insignificant at 5% level of significance.
In addition, the t-value and p-value support its statistical 4. Conclusion
insignificance.
The t-value is 1.149 which is less than 2, which is used a t-test This study investigates the role of financial institution on
for statistical significance according to rule of thumb of 2-t. By the growth of SMEs by taking evidence from SMEs, which is
the same token the p-value is 0.256 which is greater than 0.05. in north shewa zone.
Thus, there is an insignificant positive relationship between Based on the results of descriptive statistics, correlation
Banks & MFIs follow up & supervision and SMEs growth. and regression analysis, the researchers made the following
150 Alebachew Goshim Azeref and Yohanes Tefera Gelagil: Role of Financial Institution on the Growth of Small and
Medium Enterprises:-The Case in North Shewa Zone, Amhara Region, Ethiopia

conclusions: [2] Beck et al., [2005, 2006] Financial and legal constraints to
The primary contribution to existing literature by this firm growth.
study is an indication of a relationship between role of [3] Dagva Boldbaatar, (2005) Role of central bank in promoting
financial institutions, particularly, banks and MFIs in terms SME.
of duration of loan, simplicity of criteria, size of loan, follow
[4] Dereje Workie Nigussie, February, [2012] Role of Financial
up and supervision, lower borrowing cost, saving account Institutions in the Growth of Small and Medium Enterprises in
and training, and SMEs growth in terms of sales volume. Not Addis Ababa.
much research has been done to examine the role of financial
institutions in the growth of SMEs in our country. In that [5] Haibo Zhouh, Gerrit de Wit, February [2009] Determinants &
Dimensions of firm growth; Zoetermecr.
sense, the result best serves as an input for discussion on
financial institutions products and services accessibility for [6] James Milford, [2014] what is the role of financial institutions
policy makers and FIs itself. in economic development?
The study findings indicated that, there was positive [7] James Wambua Nganda, Kadian W. Wanyonyi and Elizabeth
relationship between duration of loan and growth of SMEs. M. Kitili, 21 January [2014] Determinants of growth of small
But the influence is relatively insignificance. Simplicity of and medium enterprises in Kakamega central sub-county,
criteria is one of the variables in the study and the study Kenya, University of Nairobi, Kenya.
result revealed that there is positive relationship between the [8] Kepha Momany, Osoro Jomo, [2013] The role of Micro
growth of SME and this variable but the influence of the Finance Institution on the growth of SMEs in Kenya; a case
variable remain insignificant. Similarly the follow up and study of MFIs in Kisi Town; IOSR Journal of Humanities and
supervision provided by financial institutions to SME also social science[IOSR-JHSS-pp 83-93].
have positive effect on the growth of SME even if the [9] Amelie Brune, August 21,[2009] An empirical study on the
influence is insignificant. Training also has the same impact of microfinance institutions on development.
relationship and influence like duration of loan, simplicity of
criteria and size of loan. On the other hand size of loan, lower [10] Naituli, G., Wegulo, Francis N. &Kaimenyi, B., [2006]
Entrepreneurial Human Capital and Growth of Micro and
borrowing cost and saving account has positive relationship Small Scale Women enterprises in Rural Kenya.
with growth of small and medium enterprise and the
influence of these variables was significant. [11] OECD, [2006] Organization for Economic Cooperation &
Development; The SME Financing Gap; Theory and
Evidence.
5. Recommendations
[12] Per Davidsson and Magnus Henerksson, [2002] Institutional
The SMEs, for it to be the major axle of economic growth determinants of the prevalence start ups and high growth
and development of the country, must be adequately firms.
financed. Financial institutions need to strengthen their [13] Phillips, B., and B. Kirchhoff, [1989] Formation, growth and
accessibility of products and services for them. survival; Small firm dynamics in the US economy, Small
The study recommends that financial institutions assist Business Economics 1, 6567.
SMEs without strict and unattainable criteria or make the [14] Pieto calic, Victor M. Chando & Sofian Sekioua, March
criteria simple and attainable, also at a lower borrowing cost [2012] Bank Financing to SME in East Africa; Findings of
to make their products accessible and available. Financial survey in Kenya, Tanzania, Uganda & Zambia.
institutions employ creative procedures to hold down their
[15] Radwan, A., [2009] An evaluation of the challenges and
costs. Set up mechanisms of training where all SMEs should prospects of micro and small scale enterprises development in
be trained before advanced with loans and after to enhance Nigeria. American international journal of contemporary
growth and reduce rates of default. The study recommends research, 2, 4, 174-185.
further on financial institutions develop follow up and
[16] Robinson O. Owenvbiugie; [2014] Role of finance on the
supervision system after the loan provided to SMEs. Make growth of SMEs. In Edo state of Nigeria.
savings account cheaper and easily accessible facilitated with
technology. The government should also establish special [17] Shiffer & Wede, [2001] Firm size and business Environment;
fund for SMEs, which will be easily accessible and worldwide survey results.
attainable. In order to promote the development andgrowth of [18] Stiglitz & Weiss, [1981] Credit rationing in markets with
SMEs financial institutions must access loan adequately. imperfect information; American Economic Review.

[19] Storey, D., [1994] Understanding the small business sector,

Routledge, New York.
References
[20] UNDP, June [2012] Entrepreneurship Development Program
[1] Mehreen Mishah; [2014] what is the role of financial in Ethiopia; Addis Ababa Ethiopia.
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[21] World Bank Report [2005, 2014].