An empirical study on access to finance of Small and Medium Scale Enterprises

Abstract

Small and Medium Scale Enterprises (SMEs) play a vital role in any economy through a number of channels such as contributing to the growth of GDP, providing employment opportunities, generating foreign earnings, reducing regional imbalances and alleviating poverty. SMEs perform a strategic role in Sri Lankan economy, too. As data reveals vast majority of Sri Lankan industries are included in this sector. Shortage of capital or access to finance is identified as the single largest constraint, among others, for the development of SME sector in Sri Lanka. Although banking sector of the country has introduced a range of financing facilities for SMEs, as evidence shows, these facilities are not adequately accessed. Hence, the focus of this study is why SMEs do not access adequately these facilities in order to fulfill their financial requirements? The main objective of this study is to examine the causes for inadequate access of SMEs to the formal financial sector. To achieve the assigned objectives, primary as well as secondary data were used. Primary data were collected from 50 manufacturing SMEs in Kalutara Divisional Secretariat Division by administering a questionnaire survey and conducting brief interviews with the entrepreneurs. As the main focus was to examine the causes for inadequate access of SMEs to the formal financial sector, ?Accessibility? was employed as the dependant variable while six other variables namely Education level, Experience, Attitude about the interest rates, and Collateral needs, Finance knowledge of the entrepreneur and perception regarding the procedures of the formal sector were employed and tested as independent variables. Since the variables are nominal scale, cross tabulations were used to assess the relationship between the dependant variable and the independent variables. Four independent variables namely Education level, Experience, Attitude about the interest rates and Collaterals of the entrepreneurs depicted a significant relationship with Accessibility while other two variables did not reveal a significant relationship.