The Impact of Financial Access on Firm Growth: Evidence from Ethiopian Grain Traders and Millers

Abstract

Although both formal and informal financial institutions exist in developing economies, firms are often constrained by lack of access to financial services. Grain traders and millers in Ethiopia need a lot of finance to pay their suppliers (e.g. farmers) but it is not clear whether or not which sources of credit matter most for their growth and expansion. Using firm survey data collected for the purpose, we assessed access to and the impact of different sources of finance on growth of traders and millers in Ethiopia. Descriptive and econometric methods (e.g. ordered probit) were employed to address the issue. The results indicate that both formal and informal sources of credits are accessed by a small number of firms on a sporadic basis. With credit from commercial banks is mainly channeled to large businesses while microfinance institutions (MFIs) are designed to assist small and micro enterprises as part of a poverty alleviation strategy, medium firms such as most grain traders and millers have limited access to finance. Bank or MFI credit was found to have no impact on growth and expansion in the econometric analysis. Access to informal credit is also limited and largely used to meet short-term emergency cash requirements. Without improved and regular access to finance, grain traders and millers cannot make the necessary investment to provide effective marketing services for the transformation of agriculture.

Key words: finance, financial access, Growth, Grain, Grain traders and millers, Ethiopia