This paper presents evidence on the state of micro and small enterprises (MSE) finance in Ethiopia from a survey of 1000 MSEs in six major towns conducted by the authors. The survey generated a rich data set in terms of coverage and detail on MSEs in Ethiopia, allowing in depth analysis of issues. This paper deals with the issue of MSE finance and is the first empirical work on trade credit in Ethiopia. It suggests a new venue to channel funds to MSEs by linking support to MSEs, suppliers credit and bank lending.
It shows that friends/relatives, suppliers credit, and Iqub (rotating saving and credit associations) are the most important sources of finance in that order, with moneylenders used very rarely. Default on informal loans, contrary to the common view, is high. Participation (i.e. receiving and/or extending) in trade credit is wide spread. The amount involved (in both stock and flow terms) is also relatively high. Trade credit appears to be used as a substitute for bank loans. Contrary to the common belief that trade credit occurs between people with strong social ties, most MSEs that granted trade credit and those that received suppliers credit characterised their relation as 'business only'. More than half of the MSEs that granted trade credit also received suppliers credit whose amount exceeded what they received, suggesting that suppliers credit is being passed on to customers. Suppliers credit thus avails itself as a potential instrument for banks to channel finance to MSEs to improve their access to modern machinery/equipment/tools. This established practice could be extended to equipment-supplier-credit and/or equipment-leasing.