Informality and Financing of Small and Medium Enterprises in Eswatini

Ajetomobi Joshua Olusegun, Graham Dlamini Sotja, Vusanani Dlamini Daniel and Dlamini Bongiwe Porrie

Working Papers from 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.

Date: 2022-10
Note: African Economic Research Consortium
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