Deconstructing involuntary financial exclusion: a focus on African SMEs

• Published in: Small business economics 2024, Vol.62 (1), p.285-305
• Main Authors: Simba, Amon, Tajeddin, Mahdi, Dana, Léo-Paul, Ribeiro Soriano, Domingo E.
• Format: Article
• Language: English
• Subjects: Access; Alleviation; Assets; Business and Management; Business ownership; Collateral; Collaterals; Commercial credit; Community development; Companies; Credit ratings; Debt financing; Entrepreneurial finance; Entrepreneurship; Finance; Financial inclusion; Financial services; Financing; Gender; Industrial Organization; Involuntary; Management; Manufacturing; Markets; Microeconomics; Motivation; Owners; Poverty; Securities markets; Small & medium sized enterprises-SME; Social development; Value; Ventures
• ISSN: 0921-898X; 1573-0913
• DOI: 10.1007/s11187-023-00767-1

Small and medium-sized enterprises (SMEs) struggle to obtain credit when credit ratings and collateral are used as criteria to assess their credit applications. In the context of Africa, the financial markets have gaping institutional voids, and contextual insights into SMEs’ experiences remain underdeveloped. Drawing on the stakeholder-agency theory of debt financing, this paper advances the scholarly conversation by theorising about how collateral security, collateral security value and the gender of SME owners lead to the involuntary financial exclusion of many manufacturing businesses in Africa. Analysis of the World Bank Enterprise Survey (WBES) dataset reveals that collateral security and collateral security value, together with gender biases in Africa’s financial markets, reduce credit access potential. Consequently, SMEs’ perceptions of the likelihood of obtaining credit for business purposes are reduced. Empirical results for 13,783 SMEs across 41 African countries indicate that the motivations to apply for credit also diminish. These observations contribute to entrepreneurial financing and SME research. Plain English Summary Although the manufacturing sector is declining in the West, it remains important in Africa. For most African countries, it helps alleviate poverty by creating jobs that enable the economic and social development of citizens. However, manufacturing SMEs face involuntary financial exclusion, even though access to financial facilities helps them develop their ventures and enhance their role in community development. This study uses cross-country data on 13,783 manufacturing SMEs across 41 African countries. The aim is to understand the extent of this problem. This paper presents empirical analysis of how collateral security, collateral security value and the gender of SME owners influence the ability of SMEs to obtain credit in Africa. It provides an understanding of how lenders use collateral security, collateral security value and gender to evaluate the creditworthiness of SME owners. Factors affecting SMEs’ ability to convince lenders in Africa to finance their businesses include their size, lack of assets or value of assets and owner’s gender. This scenario affects their confidence to apply for credit. Consequently, their motivation is undermined, despite the economic and social importance of their businesses for Africans. This understanding has implications for policy institutions in Africa. They must reconcile the needs of