Empirical Investigation of Access to Micro-Credit in an Emerging Economy

Abstract This study examines factors, internal and external to micro-enterprises, which affect their participation in the credit market in Nigeria. Data were collected from credit institutions (excluding the commercial banks) and enterprises for analysis. Both descriptive, probit as well as regression analyses were carried out. The results show that 61.3% of the firms obtain loans from informal sources while 30% did not apply for loans because of inadequate collateral security, difficult loan-processing procedures (25%) and high interest rates (20%). Income levels of firm owners and the values of initial capital were found to decrease the likelihood of firms demanding credit while the type of enterprise and the level of sales increase the likelihood of firms demanding credit. Furthermore, interest rates, collateral security and minimum balance requirements decrease the volume of loan delivered by credit institutions. Altogether, credit institution's lending policies account for 81% of the amount loan advance by institutions. The findings imply that entrepreneurs need to acquire substantial amount of initial capital and increase their sales volume to be less depended on external sources of funds for operation. Credit institutions should charge equilibrium interest rates, reduce the processing and application period in order to encourage patronage by entrepreneurs while at the same time keeping an eye on sustainability.