The Financial Linkages as an Antecedent of Access to Debt Finance for Small and Medium Enterprises

Abstract

The study examined the effectiveness of financial linkage on SMEs' access to debt finance. The study was motivated by the importance of SMEs in economic development and employment creation in the country; therefore, access to debt finance from formal financial institutions is vital for SMEs to play their roles effectively. Information asymmetry theory was used to guide the study. Data for the study were collected from the SMEs served by Private Agriculture Sector Support (PASS). The organization provided a list of 1000 SMEs and obtained a sample size of 278 SMEs using the Sample determination formula by Cochran (1963). Questionnaires were distributed to 278 SME managers, and 262 questionnaires were returned filled out. Data were coded into SPSS, checked for outliers and model fit, and analysed using a linear regression model. The correlation matrix indicated that financial linkage variables were correlated with access to debt finance variables, and the regression results showed that 2% of the change in access to debt finance was contributed by financial linkage. It also implied that financial linkages play a pivotal role in SME development through their connection to financial institutions. Therefore, the study recommends that the BDS providers extend and enhance financial linkage services to ease SMEs' access to debt finance.