Informality and Financing of Small and Medium Enterprises in Eswatini
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Date
2022-10
Authors
Olusegun, Ajetomobi Joshua
Graham, Dlamini Sotja
Vusanani, Dlamini Daniel
Porrie, Dlamini Bongiwe
Journal Title
Journal ISSN
Volume Title
Publisher
African Economic Research Consortium
Abstract
Access to finance by small and medium-scale firms is essential for their growth,
development, and innovation. In many developing nations, policy makers are
worried because many of the small and medium-scale firms are financed through
informal financial institutions. In addition, informality of the firms seems to impose
some restriction on the nation's institutional, legal and financial frameworks for the
growth of the firms. This country case study, therefore, is an attempt to investigate
how informality of small and medium-scale firms in Eswatini affects their productivity
and access to finance. Specifically, the study used firm-level data from World Bank
Enterprise database to: (1) investigate the link between informality of small and
medium firms and their productivity, and (2) analyse the relationship between their
informality and access to finance. The results show that informality of the small and
medium-scale firms in Eswatini reduces their labour productivity irrespective of their
gender differences. Women operating formal firms are more productive than their
male counterparts, on the average. Their average labour productivity is 1.33 and 1.07,
respectively. Female-owned firms are more financially constrained and rely more
on non-bank and informal credit than male-owned firms. The relationship between
informality of the small and medium firms and their reliance on bank financing is
negative and statistically significant at 5% level regardless of gender differences. In
contrast, the probability of relying on informal credit (money lender, friends, and
relatives) increases by about 19.5% for informal firms compared to formal firms. The
results suggest that bank and informal credit are likely substitutes in the kingdom of
Eswatini. Tax administration problem, bribery, and lack of title-deed to land reduce the
probability of using bank credit in the country, and female-owned firms are worse off.