Factors affecting to neglect formal financing sources by the SMEs; with special reference to Badulla district
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Date
2015
Journal Title
Journal ISSN
Volume Title
Publisher
Uva Wellassa University of Sri Lanka
Abstract
In terms of need for finance, the International Finance Corporation IFC defines an SME as ‘Small
Enterprises’ with loan size of $10,000 to $100,000 and ‘Medium Enterprise’ with loan sizes of
$100,000 to $1 million (UNEP, 2007). According to the Central Bank of Sri Lanka (1998), the
cottage and Small Scale Industries (CSSI) sector plays an important role in economic development
through creation of employment opportunities, the mobilization of domestic savings, poverty
alleviation, income distribution, regional development, training of workers and entrepreneurs,
creating an economic environment in which large firms flourish and contribute to export earnings.
According to Kihimbo et al.,(2012), SMEs financing constraints are attributed by high transaction
costs, high collateral requirements and lack of guarantee credit instruments, deficiencies in legal
systems, regulatory and policy problems and asymmetric information. In order to operate
efficiently, SMEs require easy access to short and long term capital. In general terms, it appears that
lending to SMEs is seen as a high risk business since most of these enterprises lack collateral.
Since, that is a major obstacle faced by SMEs, may be badly affected on the country’s economy as
well. In accordance with Wahab and Hassan (2012), despite the importance of (SMEs) in the
national economy in general, they face many obstacles that hinder their development; one of which
is evident in the aspect of financial access. The primary objective is to identify the relationship of
the formal financing dimensions that influence to the SME owners’ formal financing decision.
Secondary objectives are to determine the impact of the formal financing dimensions on formal
financing decision of SME owners and to determine the most and least important formal financing
dimension factor that influence to the SME owners’ formal financing decision.
Methodology
All the SME owners in Badulla district were considered as the population of the study who are
registered in Badulla District under the Chamber of Commerce and Industry of Uva Province.
Therefore, the sample of 60 SME owners is selected from metropolitan and rural areas, who are
doing their businesses in Badulla district. The sample has been selected using stratified sampling
method. Data was collected by using a structured questionnaire. In addition, Cronbach Alpha
reliability test was employed to assess the validity of the questionnaire and 0.822 of Conbrach’s
alpha value indicated that the internal reliability and validity of questionnaire was acceptable since
that these levels are exceeding the general acceptable level. Hence, it was suitable for the further
processing. Data were analyzed using descriptive statistics, correlation analysis and multiple linear
regressions.
Description
Keywords
Management, Entrepreneurship and management, Entrepreneurship, Financial Management, Accounts