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

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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.

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