Impact of Credit Constraints on Financial Performance of Small and Medium Size Enterprises

Abstract

Small and medium-sized enterprises (SMEs) are fundamental to national economic development through poverty alleviation and employment creation. However, credit constraints severely challenge small and medium-sized enterprises’ (SMEs) performance. Therefore, this study aims to establish the link between credit constraints and the financial performance of SMEs. The paper further examines whether the differences in performance between constrained and unconstrained firms can contribute to poverty reduction. To this end, the endogenous switching regression was applied to the cross-sectional data from a firm-level survey involving 520 SMEs from Cameroon. The paper considered four credit constraint categories: risk, quantity, price, and transaction cost. Results reveal that 74% of SMEs are credit constrained, and the majority (43%) are quantity constrained. Interestingly, risk and price-constrained SMEs are mainly more profitable than unconstrained SMEs, while quantity and transaction-cost-constrained SMEs are less profitable than their counterparts. Consequently, the impact on poverty reduction is equally varied. The scholarly and policy implications of the study are that alleviating credit constraints among SMEs does not always augment the profitability of the SMEs and contributes towards poverty eradication.