GAGE COLLEGE

An Assessment of Inventory management in Textile

Industry: A case study of KK Textile Industry

A research proposal Submitted to Accounting department

in Partial Fulfillment of The Requirement for B.A Degree
in Accounting.

Prepared by:
1.AbayaAmenuHailu------------DB/ACF460/08
2.SefuMitiku------------------------DB/ACF0439/08
3.SamrawitZalalem--------------HDM/052/2010
4.BarahaAssefa--------------------453/08
5. EmebetTasfaye------------------DB449/10

Advisor:

March , 2019
Addis Ababa, Ethiopia
 Table of Content
Table of content ---------------------------------------------------------------------------- I

Chapter One: Introduction

1.1. Background of the study --------------------------------------------------- 1
1.2. Background of the organization --------------------------------------------------- 2
1.3. Statement of the problem ----------------------------------------------------------- 4
1.4. Research Question ----------------------------------------------------------- 5
1.4.1. General Research Question-------------------------------------------------------------5
1.4.2. Specific Research Question-------------------------------------------------------------5
1.5. Objective of the study ------------------------------------------------------- 5
1.5.1 General objective ----------------------------------------------------------------------5
1.5.2 Specific Objective ----------------------------------------------------------------------5
1.6. Significance of the study --------------------------------------------------- 6
1.7. Scope of the study ----------------------------------------------------------- 6
1.8. Structure of the study -------------------------------------------------------- 6

Chapter two: Literature Review

2.1. Definition of inventory management ------------------------------------- 8
2.2. Nature of inventories ----------------------------------------------------------------9
2.3. Why inventory hold by organizations ----------------------------------------------9
2.4. Type of inventory ----------------------------------------------------------- 10
2.5. Requirement for effective inventor management ----------------------- 11
2.6. Inventory management techniques --------------------------------------- 12
2.7. Inventory control procedures ---------------------------------------------- 16
 Chapter Three: Research Methodology & Design
3.1. Data type --------------------------------------------------------------------- 17
3.2. Subject of the study ------------------------------------------------------- 17
3.3. Source of data Collection -------------------------------------------------- 17
3.4. Method of data collection ------------------------------------------------- 17
3.5. Sample size ----------------------------------------------------------------- 18
3.6. Sampling technique- -------------------------------------------------------- 18
3.7. Data processing and Analyzing ------------------------------------------- 18
3.8. Method of presenting the outcome --------------------------------------- 18
 CHAPTER ONE
INTRODUCTION
1.1. Background of the study
Inventory consists of the most important element of any system dealing with the supply,
manufacture and distribution of goods and service. The concept of inventory management is very
old but it came in light when harrieF.W, published his work on classical order size model and the
work was extended by raymend F.F (1991) and Wilson R.M (1934). But only after the second
world war with the development of operational research and computer technology that the
theoretical concepts got a practical application.

Holding inventory is often interpreted as carrying an asset, but also means carrying risk in terms
of obsolescence deterioration axed quality faults in financial terms inventory impacts the balance
sheet, cash flow, profit and loss account. Operationally inventory affects production efficiency
and on time delivery (coldratte, 1999) identifies inventory a key component for measuring
business performance in manufacturing environment. Thus good management of inventory,
essential to achieving business objective and building competitive advantage. Inventory
management refers to the events or activities that affect inventory during the process of trans
transferring in put resources and material to put goods. Achieving inventory management is a
precursor to inventory management which is concerned with the means used to balance inflicting
organizational objectives on the over all level of stock held to determine optimum inventory
level for each (Dabbker, 1982).
1.2. Background of the organization
KK private limited company was established in 1992 by Mr, KetemaKebede, a pioneer in the
economic policy of Derge Regime debilitated. In view of the in adequate of its initial assets the
company adopted for the short term a strategy of engaging in the business that requires minimum
resources both in cash and in kind. It merely stated as distribution of imparted and locally
manufactured textile products, as well as an exporter of agricultural commodities.
Simultaneously, it sought to promote its business connections and diversify its operations to
improve its financial and human resources. After two years in the business, the company was
able to register a definite sign of growth. It leased and completely furnished a two room office
space, employed one qualified secretary and two salesmen.
The company principles are credo, charter, vision and mission is based on long- lasting core
values and clear strategic framework. The company strategy builds up on this strong foundation
with a focus on continued successful development of the company. All these principles set
district standards of behavior and provide a high degree of transparency, therefore giving life to
the “spirit of private limited company.
The company vision aspire to see the KK private limited company attained a significant position
in the regional and international trading house, in supplying and rendering a wide range of
commodities and services respectively, and there by, gain a strong presence in the world wide
business area. We will earn our customers’ enthusiasm throughcontionus improvement driven
by the integrity, team work and innovation of KK private limited company people.
The mission of the company is together with our customers and partners, we develop,
manufacture, supply and render commodities and services which acquire, transmit, control and
record precess information enabling our customer to operate and manage processes in a safe
reliable economical profitable and environmentally responsible manner.
The company mainly purchase its raw materials and other trading items for its textile factories
from well known suppliers in Korea, Indonesia, and Chaina. Chemicals and other dyestuffs are
acquired from European countries like Germany, Switzerland, Spain, and Belgium. The
company sales and distributions are composed of five sales shops within the capital, Addis
Ababa, two branch offices in Shashemene, Dessie, three big ware houses, about ten delivery
trucks and competent personnel and more than 100 well known distributors through out the
nation.
One of the most produce in KK private limited company blankets these item the major
institutional buyers are ministry of defense, federal polices and Addis Ababa police, Ethiopian
red cross, Oxfam, trade union, associations and other regional offices. The company of facilitate
its business activity and fulfill its working capital requirement has relation ship with the well
known financier of Ethiopia, these are commercial bank of Ethiopia, Abyssinia bank, Awash
international bank and united bank.
The management and organizational structure of KK private limited company has been
characterized by several district trends interms of its organizational evaluation. As most of the
private business companies KK private limited company used to be managed by the far-signted
and visionary owner Mr. KetemaKebede. But due to the increase in the volume of business
transaction and the size of workable, the need to compete with huge local and forign
multinational business company it came to believe that it is necessary to have well-organized and
staffed organizational structure.
1.3. Statement of the problem
As the researcher browse the website related to inventory management, hold the following facts
that necessitate for this study to be conducted which has a research topic of assessment of
inventory management in textile industry, particularly KK textile industry. In the first place
inventory management is the process of tracking product orders keeping adequate amount of
products on hand and organizing products in warehouse and retail location. And also inventory
management is the active control program which allows the management of sales, purchases and
payments with good inventory management, companies are able to monitor what shipments they
have coming in and going out to customer, allowing them to keep just enough inventory in stock
to meet demand.
Then inventory management lets companies enjoy many benefits which include achieving
inventory balance, using resource wisely, cutting costs, saving time and becoming more efferent
and planning a head for seasonal changes in demand.
1.4. Research questions
1.4.1 General Research questions
According to these evidence this study is emphasize on how KK textile industry performs the
activity to come up with a good result along with attaining the main objective of the industry.
1.4.2 Specific Research questions
1. Does the industry manage it’s inventory in appropriate way?
2. Does the industry inventory management policy, procedure and techniques are to
maintain the optimum level?
3. Does the industry very carful to buy the right items, at the right price and in the right
quantity?
4. Does the industry interrelated theoretical aspects of inventory management with the
actual practice of inventory management?
 1.5 Objective of the study
1.5.1. General Objective
The main objective of the study is to assess the inventory management of KK textile industry.
1.5.2. Specific Objectives
- To examine the industry inventory management in appropriate way.
- To compare and contrast the actual practice of KK textile industry inventory management
with the theoretical aspects of inventory management.
- To determine the industry strength and weaknesses with regarding to inventory
management .
- To give some constructive suggestions and recommendation based on the fact of the
study.
1.6. Significance of the study
The researchers has an expectation, the study will be provide a clear picture about the value or
importance of inventory management in KK textile industry and to identify problem
concerning inventory management. It is believed that the study was clearly reflect, what to see
any opportunities to utilize, to give relevant recommendation, suggestion and solution that help
top management as well as the organization to make good decision concerning about inventory
management and help in designing a better systematic form for inventory management system.
In addition, to give an overview of the factory use of inventory management industry to external
bodies.

1.7. Scope of the study

Since the main objective of the study is the assessment of inventory management in textile
industry particularly, KK textile industry, the study delimited to examining store department,
production department and purchasing department of the industry in order to investigate the issue
in-depth and to make the study manageable.
1.8. Structure of the study
The study will be containing three chapters. The first chapter deals with the introductory part
mainly about back ground of the study, background of the organization, statement of the
problem, research question , objective of the study, significance of the study and scope of the
study. The second chapter concerned with related literature review describes the detail
theoretical aspect of the study. The third chapter deals with data collection methods and
methodology
CHAPTER TWO
LITERATURE REVIEW
Literature review means locating literature in variety of sources reading it carefully and
thoroughly organizing it information themes along with the line of investigation. This purpose is
literature review to establish a familiarity with a body of knowledge and establishes credibility.
A review tells a reader that researcher knows the research in an area and knows the major issue
and also to show the path of prior research and how a current project is linked to it. So the
review shows application of inventory management which is given the information for use in
conducting the textile industry about inventory management and out lays in accordance with
accounting principle.
2.1. Definition of Inventory Management
The word inventory has been defined in many ways. Generally three definitions have been
chosen which to be more appropriate to the topic developed in this study.
Inventory are stock of raw materials, work in process and finished good. That appear at
numberous points throughout a firms production and logistic channel (Ballsu 2004, p.326).
According to chase Jocobs and Aquilando (2004, p.545) inventory is the stock of any item or
resource used in an organization. Where asMosich (1988 p.396) inventory is can be defined as
the amount of raw materials, finidhed goods and work in process to be stocked for the smooth
running of a plants operation. So a manufacture company will hold stocks as the adequate
amount of material resource in a transformation system. Many authors have defined the word
management in different ways. Plunket and Ather 1986 defined management as the process of
setting and achieving goals through the execution of five basic management functions (Planning,
organizing, staffing, directing and controlling that utilize human, Financial and material
resource. Therefore, inventory management is the process of tracking product orders keeping
adequate amount of products on hand and organizing products in Warehouse and retail location.
And also inventory management is the active control program which allows the management of
sales, purchases and payments.
2.2. Nature of inventories
Inventories consist of good held for sale to customers, partially completed goods, and material
and supplies to be used in production. Inventory items are acquired and sold continuing by a
merchandising enterprise or acquired, placed in production, converted to a finished product, and
sold by a manufacturing enterprise. The sale of merchandise or finished products is the primary
source of revenue for most non service business enterprises (Mosich 1988 p.397).
2.3. Why inventory hold by Organizations
Particularly stevenson (1999 p.77) the reason for hold inventories are discussed in detail in the
following paragraphs.
First, inventory helps to project against stock outs, delayed delivers and expected increase in the
risk of shortages lays can occurs because of weather conditions, supplies stock outs, delivers of
wrong materials, quality problem and soon. The risk of shortage can be reduce by holding safety
stock which are stocks in excess of average demand to compensate for variability in demand and
lead time.
Second, to decuple operations, historically manufacturing firms have used inventories as buffers
between successive operation to maintain continuity of production that would other wise
distributed by events such as breakdown of equipment and accidents that cause apportion at
operation to shutdown of temporarily. The problem is resolved, firms have used buffers from
supplies and finished goods inventory to buffer sale operation from manufacturing descriptions
more recently, company have taken a closer book at buffer inventories recognizing the cost and
spaces they require and realizing that finding and eliminating sources of description can greatly
decreased the need for decoupling operations.
Third, it also helps to smooth product requirements in a firm may experience seasonal patterns in
demand often build up inventories during at seasonal periods to meets very high requirement
during certain period.
2.4. Type of Inventory
Regarding types of inventory different literatures provide different description of inventory type
based on their own task objective. However, for this study the researcher favour the inventory
type provided by Stock and Manbert (2001, p 232-235)
Cycle stock is inventory that results from the replenishment process and is required in order to
meet demand under condition of certainty that is when the firm can predict demand and rends
times almost perfectly.
Inventories in transitare items that are in routs from one location to other. They may be
considered parts of cycle stock even through they are not shipment until after they arrive at the
destination.
Safety or buffer stock is held in excess of cycle stock because of uncertainty in demand or lead
time. The notation is that a portion inventory should be devoted to cover short range variation in
demand and lend time.
Seasonal stock is a form of respective stock that involve that accumulation of inventory before a
reason begins in order to maintain as table labour force and stable in runs or in the case of
agricultural products, inventory accumulated as the result of a growing season that limits
availability through out the years.
Dead stockis inventories that no one want at least immediately. The question is why any
organization would incur the costs associated with holding these item rather than simply
disposing of them. One reason might be that management expected demand to resume at some
point in the future.
2.5. Requirement for effective inventory management
Regarding requirements for effective inventory management different literatures describe in
different ways based on their own task objective, but for this study the researcher favor
particularly Stephenson (1999, p.561-562) describe in his book about requirements for effective
inventory management in to four distinct mechanisms that are:-
2.5.1. Inventory count (keep track) the inventory
This mechanisms to control the inventory, physical count has to be conducted. This count
enables to the manager to determine the quantity on hand. Then the manager estimate how much
will be demand period prior to the next delivery periods and bases the order quantity on that
information.
2.5.2. Demand for cast and lead time information
Inventories are used to satisfy demand requirement. So, it is essential to have reliable estimate of
the amount and timing of demand. Similarly, it is essential to know how long it will take for
order to be diverse. In addition, manager need to know the extend to which demand and lead
time (the time between submitting and order & receiving it might vary the greater the potential
variability the great or the need for additional stock to reduce the risk of shortage between
delivers. Thus, there is critical link between forecasting and inventory management.
2.5.3. Cost information holding inventories
Invites three basic cost holding transaction ordering and shortage costs holding or carrying costs
relates to physically having items in shortage costs.
2.5.4. Ordering cost
Are the cost of ordering and receiving inventory they are the cost that vary with the actual
placement on order. These includes determining how much is needed, preparing invoices,
shipping costs, inspecting goods up on arrival for quality and quantity and motive goods to
temporary storage ordering cost are generally expressed as fixed dollar amount per order
regardless of order size shortage costs result when demand exceed the supply of inventory on
hand.
2.6. Inventory management Techniques
Different literatures provide different description of inventory management techniques based on
their own task objective. However, for this study the researcher favor the inventory management
techniques provided by J.Gitman (1997, p.797-802).

2.6.1 Economic order quantity

One of the major inventory managements problem to be resolved is how much inventory should
be added when inventory replaced, if the firm is buying raw material. It has to decide lost in
which it has to be purchased on replacement. If the firm planning a production run the issue is
how much production to schedule (how much to make) these problems are called order quantity
problems. And the task of the firm is to determine the optimum or economic order quantity (or
economic /of size) determining on optimum inventory low involve two types of costs. i.e
ordering cost and caring cost.
Economic order quantity is that inventory level that minimize the toal ordering and caring cost.
Economic order quantity is that inventory level that minimize the total ordering cost and caring
(holding) cost. Ordering cost increase with the number of orders thus the more frequently
inventory, on other hand it the firm maintain large inventory levels there will be few orders
placed and ordering cost will be relatively small thus ordering costs decrease with increasing size
of inventory.
Caring cost vary with inventory size. This behavior is control to that of ordering costs which
decline with increase in inventory size, the economic size of inventory would thus depend on
trade off between caring costs and ordering costs.
Economic order quantity = 0 where C= Caring cost
 C O= ordering cost
Thus the formula to determine the recording point when safety stock is maintained as follows:
Reorder point = lead x average usage safety stock

2.6.2. Stock level

Is one of material cost management techniques. In order to saved over stocking or under
stocking most of the larger companies adapt scientific approach of fixing stock level. Under
stock is when the material in stock is below the required amount over stocking is when excess
materials are held in store by the business organization. Therefore each item of materials should
be kept with in the appropriate level of materials by fixing stock level. The stock level are re
order level, minimum level, maximum level and economic order quantity or re order quantity.
Maximum level is the material at the lowest rate of consumption which could be expected, if
delivery was received in shortest possible time.
The additional of the reorder quality shows the highest point of material which would be allowed
the formula that determine maximum level is as follows.
Maximum level is as follows:
Maximum level = reorder + reorder = minimum x minimum
Level quantity consumption reorder
Reorder point is the problem how much to order is solves by descrmining the economic order
quantity. Yet the answer should be thought to the record problem when to order. This is the
problem of determining the reorder point. The reorder point is that inventory level at which on
order should be placed to replenish the inventory. To determine the order point under certainty to
be should know lead time, average usage and economic order quantity.
Lead time is the normal takes in replenishing inventory after the order has been placed by
cersainty that means usage and lead time do not fluctuate under such a situation reorder point is
simply that inventory level which will be:-
Reorder point:- Lead x average usage safety stock. It is difficult to redicate usage and lead time
accurately. The demand for materials may fluctuate from day to day or from week to week.
Similarly the actual delivery time may be different the delivery problem of stock out. Some
minimum or buffer inventory as cushion against un expected increased and delayed on delivery
time.
Record level is the level of materials at which purchase requisition is inittated for fresh supplies
this level is fixed by reordering when materials fail to the minimum. The formula is :-
Minimum level = reorder - minimum x minimum
Level consumption reorder period.

2.6.3. Proper storage

In the internal procedure for purchasing materials are matched by similar procedures for storing
and issuing material in order to safeguard the investment. The procedure include storage and
ionsurance materials must be carefully identified stored. Reordered and preserved by the store
room clerk. Material requision is prepared by the factory supervisor and indieates the quantity
job number description etc. when the materials are transferred fom the store room.
2.6.4. Just –in-time inventory control:-
The just-in-time inventory control is more just on inventory control system, it is a production and
management system. Not only is inventory cut down to minimum, but the time and physical
distance between the various production operation are also reduced. In addition management is
unwilling to trade off costs to develop close relation ship with suppliers and promote speedy
replenishment of inventory in return for the ability to hold less safety stock (pewon p. 728). The
just in time inventory system depends on how well companies manage in suppliers the system
puts tremendous pressure on suppliers. They will have to develop adequate system and
procedures to satisfactory meet the need of manufactures.
2.6.5. Out sourcing
A few years ago there was atendency on the part of many companies to manufacture all
components in house now more and more companies are adopting the practice out sourcing.
Out sourcing is a system of giving attention to materials according to the degree of their
importance. It is not desirable take some degree of control on all the items. The firm should pay
maximum attention to those items whose value is highest for this purpose the item will be dried
in there catagories A,B and C the higher value items are classified as ‘A” items and would be
under the highest control ‘C” item represent relatively least value and would be under simple
control “B” items fall in between these categories and require reasonable attension of
management. The A, B, C analysis can contracts on important items and also known as control
by importance and exception.
The following steps are involved in implementing the A,B,C analysis classify the items of
inventories determining the expected use in units and the price per unit for each item.
1. Determine the total value of each item by multiplying the expexted units by its units
price.
2. Rank the item in according with the total value giving first rank to the item, with highest
total value.
3. Combine items on the basis of their relative value to form three categories A, B, and C
(impandey p. 633)
2.6.6. Inventory turnover
The inventory turn over ratio indicate the efficiency of the firm in producing and selling its
product. It’s product calculated by:-
Inventory turnover = Cost of good sold
Average inventory

Generally a high inventory turnover is indicate of good inventory management. If the absolute
inventories have to be written off this will adversely affect the working capital and liquidity
position of the firm. A high inventory turn over may be the result of over low level of inventory
replacements are costly for the firm thus to high and too low inventory turnover ratios should be
investigated further (impandey, p.123-125).
2.7. Inventory control procedures
One of the most effective of ensuring out investment in inventory under control is to check all
item inventory on regular basic once physical check has been carried the result can to be
compared with theoretical or book inventories any discrepancies noted and acted on there are
two chief method of inventory checking (Willamson, 1998). These are discussed in detail in the
following subsection paragraph.
2.7.1. Perpetual inventory
Is concerned with the recording at they occur of inventory in either quantity or quality and value.
The item perpetual inventory usually refers to a system of inventory monitor control rather than
an inventory taking procedure with prefectural inventory every item at inventory usually has it
own stores ledger card as any transaction affecting on item take place the store ledger card is up
dated wheather it be an issue or receipt or goods at any time there fore the balance in inventory at
the item is know and can simple be read from the stores ledger card.
2.7.2. Periodic inventory
This is the process of counting valuing , selected item at different items on routing basis. In this
way every inventory item has an equal chance of being checked at any time and in the long will
be checked at least once run all item in addition to the use of random numbers entering that all
item are checked at least once in accounting periods. In this way not only can the physical and
the theoretical balance be checked against each others , but also any discrepancies can be
corrected for after all investigation are carried out in to how they occurred any discrepancies that
arise must be reported and depict with immediately, the more serious discrepancies may be a
matter for a change of policy or policy action. Annual inventory check it is a periodic inventory
check and is most usually carried out as part of the annual audit all items is most usually carried
out as part of the annual inventory checked carried at one time because the annual inventory
checked usually carried out at part at the annual audit there will usually be an external auditors in
attendance at inventory check which insure that the results obtained are open to independent
security.
Analysis of investment in inventory it is a major responsibility of the finical manager to over see
the movement of inventory is an investment decision. The analysis should therefore, involve an
evaluation of the profitability of investment decision. The goal of the inventory policy will
maximize the firm value at a point the inventory policy will maximize at which intermental or
margional return from the investment in inventory equals the incremental or marginal cost of
funds used to finance the investment inventory.
The incremental analysis should be used to compute the value of operating profit investment,
inventory rate of return and cost of funds. A change in inventory policy is describe if the
incremental rate of return exceeds the required rate of return.
 CHAPTER THREE:
RESEARCH DESIGN AND METHODOLOGY

3.1 Research Design

The researchers will be used descriptive type of research Design. This research design
method allowed the researchers to describe the population characteristics using frequency
and percentage. The methods are used to describe how the existing inventory management
and control system function.

3.1. Data type

The study will be used both primary and secondary data. The data willbe gathered from
both primary and secondary data.

3.2. Source of data collection

The researchers will be used the primary data and secondary data sources but the researchers
will be more focuses on primary data because obtained enough information in great depth, avoid
on interpretation of the answer for the question. And also, avoid refusal to give the right
information as well as it is flexible. The primary data source of this study included the
employees and the related departments such as, purchasing department, production department ,
store department and also the management. Besides of primary data source, secondary data
source and also included in this study. These information has been obtained through last five
years for financial statement.
3.3.Method of data collection
The data will be obtained from two types of source. These are primary and secondary data
source. The researcher used the primary data collection technique in order to get first hand
information from the respondents. And the primary data can be collected by preparing a
questionnaire. The questionnaire types which the researcher used are structured questionnaire.
These types of questionnaire were used to in value close ended questions and open ended
questions. And also the researcher widely used direct observation and unstructured interview
method in order to get reliable information because flexibility of questions to questioning and
the researcher is allowed tomuch freedom. The researcher in addition used the secondary data
collected from the consecutive last five years (2007-2011) financial statement of the industry.
3.4Population, Sample Size and Sampling Technique
The population for this research is the management and staff of the warehouse, part sales,
finance and General Service Department. The total population of the study is 138. The
sample size taken is 30% of the population that is 42 samples were taken based on
purposive sampling technique. Because the department selected based on directly related
the study area .Furthermore, random sampling was used in selecting the sample
respondents and this gives equal chance to every one in each strata.

3.5. Sampling technique

In this study the sampling method used to acquire the respondents will be random sampling
technique. This technique will be used sampling method, because to selected respondents that
have the expected good knowledge about the inventory management in the industry as well as
the researchers permit to have complete freedom of selecting individual who can provide
relevant data and to chose sample element according to the researcher wish/desire.
3.6. Data Processing and Analyzing
After the necessary data will be collected from both primary and secondary sources of data, the
next assignment will be data processing and analyzing. Thus, the researchers was used tabulation
and percentage which helps the researchers to present all the collected information in the
simplest form to arrive at effective conclusions and possible recommendations. Data processing
is an activity which involves editing, coding and classifying data to make it suitable for further
analysis, then the compiled data will be processed. After all relevant data will be collected and
processed, theywill be analysis the processed data groups. Finally, the outcome of the project
will be presented on written material and detailed oral presentation.
3.7. Method of presenting the outcome
After collecting of both primary and secondary data, the researchers will be classified,
processed, analyzed and interpreted the data thoroughly. Before going through analysis,
the researchers edited coded, classified and made data in tabulation form for analysis part.
The researchers will be used descriptive analysis techniques.
Chapter one
1.1 Background of study
Ethiopian Commodity Exchange (ECX), established in 2008, is a new initiative for Ethiopia and
the first of its kind in Africa. In Proclamation 2007-550, which created the ECX, its stated
objective was "to ensure the development of an efficient modern trading system" that would
"protect the rights and benefits of sellers, buyers, intermediaries, and the general public. The
ECX is set up as a private company owned by a partnership of the market actors, members of the
exchange, and the Ethiopian government, led by Eleni GebreMedhin a former economist for the
International Food Policy Research Institute and the World Bank. As of July 2019, the physical
presence of the ECX consists of 57 warehouses in 23 regional locations.
It is a trading platform where buyers and sellers come together to trade, assure quality delivery
and payment. ECX is a state owned public –private partnership enterprise established as a
demutualized corporate entity with clear separation of ownership, membership and management
and governed by a Board of Directors constituted by relevant public institutions and ECX private
members operating through the sale of membership seats, which are privately owned by
wholesalers, cooperatives, exporters, processors and food agencies. It is Ethiopia’s latest attempt
to enhance the performance of agricultural markets. Conceived as a meeting point for buyers and
sellers of grains (sesame, haricot beans, maize, and wheat) and coffee, ECX seeks to organize
efficient and transparent market operations and thus contribute in solving the country’s
longstanding problem of starvation. Before ECX was established, agricultural markets in
Ethiopia had been characterized by high costs and high risks of transaction forcing much of
Ethiopia in to global isolation. With only one third of output reaching the market, only buyers
and sellers tended to trade only with those having close information, to avoid the risk of being
cheated. This is done on the basis of visual inspection because there was no assurance of product
quality or quantity, this drove up market costs leading to high customer prices. Small-scale
farmers who produce around 95% of Ethiopia’s output came to the market with little information
and are at the mercy of merchants in the nearest and only to the market they know; unable to
negotiate better prices or reduce their market risk.
ECX is developing a new method of exchange/marketing system that coordinates better, links
faster, and protects of both side of the trade. The exchange is unique partnership of market
actors, members of the exchange, and its main promoter, the government of Ethiopia, where
buyers and sellers come together to trade, assured of quality, delivery and payment. ECX
represents the future of Ethiopia by bringing integrity, security, and efficiency to the market
there by creating opportunities for unparalleled growth in the commodity sector and linked
industries such as transport and logistics, banking and financial services, and others. Its mission
is to provide a modern efficient, transparent and reliable market platform to serve the national
development goals through adaptation of technology excellence in innovation and integrity.
Important values in ECX are to create market integrity between product, actor, and transaction,
build balance between all actors, create modernization, and market transformation. The vision of
ECX is to become a leading and dynamic exchange in Africa and to revolutionize Ethiopia’s
tradition bound agriculture. The ECX is a unique partnership of market actors, the Members of
the Exchange, and its main promoter, the Government of Ethiopia. ECX represents the future of
Ethiopia, bringing integrity, security, and efficiency to the market. ECX creates opportunities for
unparalleled growth in the commodity sector and linked industries, such as transport and
logistics, banking and financial services, and others.

ECX assures all commodity market players the security they need in the market through
providing a secure and reliable End-to-End system for handling, grading, and storing
commodities, matching offers and bids for commodity transactions, and a risk-free payment and
goods delivery system to settle transactions, while serving all fairly and efficiently.

ECX creates trust and transparency through aggressive market data dissemination to all market
actors, through clearly defined rules of trading, warehousing, payments and delivery and
business conduct, and through an internal dispute settlement mechanism. ECX provides market
integrity at three important levels: the integrity of the product itself, the integrity of the
transaction, and the integrity of the market actors.

The Ethiopian Commodity Exchange was started to benefit and modernize the way Ethiopia was
trading its most valuable assets, its commodities. Ethiopia needed a change from the traditional
means of trading to better support the needs of all those involved in the trading and production.

Before ECX was established agricultural markets in Ethiopia had been characterized by high
costs and high risks of transacting, forcing much of Ethiopia into global isolation. With only one
third of output reaching the market, commodity buyers and sellers tended to trade only with
those they knew, to avoid the risk of being cheated or default. Trade is done on the basis of
visual inspection because there was no assurance of product quality or quantity, this drove up
market costs, leading to high consumer prices. For their part, small-scale farmers, who produce
95 percent of Ethiopia’s output, came to market with little information and are at the mercy of
merchants in the nearest and only market they, know, unable to negotiate better prices or reduce
their market risk.

A marketing system that coordinates better, that links faster, and that protects the interests of
both sides of the trade. It is time for a marketing system that is transparent, efficient, and
innovative, that will take Ethiopian agriculture into the new Millennium. Ethiopia, once a
commercial trading hub in antiquity linking markets of East and West, can again claim a place in
the global market arena.

The Ethiopia Commodity Exchange, (ECX), is a marketplace, where buyers and sellers come
together to trade, assured of quality, delivery and payment. The vision of ECX is to transform the
Ethiopian economy by becoming a global commodity market of choice. ECX’s mission is to
connect all buyers and sellers in an efficient, reliable, and transparent market by harnessing
innovation and technology, and based on continuous learning, fairness, and commitment to
excellence.

1.2 STATEMENT OF THE PROBLEM

It is well known that Ethiopia follows Agricultural Development Led Industrialization (ADLI)
policy. In order to attain such a development goal, there should be surplus market oriented
production as well as efficient and effective marketing system that will enable farmers or other
producers to gain the actual profit from what they produce. However, most of the Ethiopian
farmers do not receive the right profit due to inaccurate information about market price, middle
men, low bargaining power, low product grading, and quality standards. This has resulted in loss
of motivation for the farmers to produce surplus which leads to low household income and the
export earnings of the country (MoFED, 2009). Ethiopia’s agricultural markets are characterized
by high transaction costs resulting in only one-third of the output reaching the market. Buyers
and sellers tend to trade only with those they know to avoid the risk of being cheated. Trade is
done on the basis of visual inspection because there is no assurance of product quantity and
quality, which drives up marketing costs, leading to high consumer prices. Small scale farmers,
who produce 95 percent of Ethiopia’s output, come to nearest market with little information and
are at the mercy of merchants they know and are unable to negotiate better prices or reduce their
market risk (ECX, 2008). Major constraints to such market performance or failure can be
identified as either linked to weak infrastructure or to missing institutions. In terms of
infrastructure, major concerns are the weak access for smallholder farmers to roads, as well as
limited telecommunications and storage infrastructure. These weaknesses contribute to the high
cost of transport as well as of other physical marketing costs, such as storage, handling, etc.
Thus, marketing costs amount to some 40 to 60 percent of the final price, about 70 percent of
which is due to transport. However, beyond the infrastructural issues, studies also point to the
significance of transaction costs which are equally or more constraining to trade. These costs,
distinct from physical marketing costs are related to conducting or coordinating market
transactions between actors, such as the costs involved in searching for and screening a trading
partner, obtaining information on prices, qualities and quantities of goods, negotiating a contract,
monitoring contract performance, and enforcing contracts. In the Ethiopian context, the presence
of high transaction costs evidenced by the lack of sufficient market coordination between buyers
and sellers, the lack of market information, trust among market actors, contract enforcement, and
grades and standards, implies that buyers and sellers operate within narrow market channels, that
is, only those channels for which they can obtain information and in which they have a few
trusted trading partners. Ethiopian market behavior reveals that market actors conduct business
across short distances, with few partners, in few markets, and with limited storage, implying that
opportunities for expanding market activity, otherwise known as arbitrage across space
(transporting significant distances to market goods) and across time (storing for significant
periods), are limited (Eleni, 2003). It is pointed out that such a scenario reduces the
responsiveness of the market to changes in supply and demand and leads to the collapse of
market prices, significantly compromising rural incomes and leading to disincentives to further
technology adoption by farmers. In recognition of this, the Government of Ethiopia has
organized Ethiopian Commodity Exchange through proclamation number 550/99 in order to
eliminate market related problems and to facilitate, transparent, efficient and innovative
marketing system to protect the interests of both producers and consumers. ECX’s model is the
first of its kind in Africa with its end-to-end integrated system of central trading, warehousing,
product grade certification, clearing, settlement, delivery, and market information dissemination
(MoFED, 2009). In Ethiopia at present, the presence of high transaction costs, related to the
lack of sufficient market coordination between buyers and sellers, the lack of market
information, the lack of trust among market actors, the lack of contract enforcement, and the lack
of grades and standards, implies that buyers and sellers operate within narrow market channels,
that is, only those channels for which they can obtain information and in which they have a few
trusted trading partners. Despite market liberalization in the early 1990s, the persistence of high
transaction costs and contract risk have resulted in limited arbitrage and weak investments by
private traders, leading to limited market volumes, weak responsiveness to price signals and high
price volatility, all of which have a negative impact on smallholder producer livelihoods.

1.3 Objectives of the Study

1.3.1 GENERAL OBJECTIVE
The prime objective of the study will be to explore the prospects and challenges of commodity
exchange in Ethiopia.

1.3.2 SPECFIC OBJECTIVE

The study will to address the following specific objectives,
 Assess the challenges that affect the key market actors(infrastructure, macroeconomic
stability, commercial and financial sector) in the ECX
 Review the opportunity prevailing in operating commodity exchange in Ethiopia.
 To identify the main bottleneck and potential solutions of the ECX.
 To provide recommended solutions to help the program implemented successfully.

1.4 Significance of the Study

There is a need to address the issue a marketplace where buyers and sellers can come together to
freely trade and are assured of quality, delivery and payment. This study focuses on commodity
exchange, a strategy designed new marketplace that serves all market actors, from farmers to
traders to processors to exporters to consumers.
Accordingly, the study will assess the scenario of the program and identify determents of
Ethiopian commodity exchange. Therefore, the finding of this study will be useful to help policy
makers and Ethiopian commodity exchange to make clued-up decisions regarding their service
deliverance mechanisms for better. And also the study will contribute to the literature of the
country on the subject. Moreover, the study indicates the boulevard interested researchers to
carry out more extensive studies for further research work.

1.5 Research Questions

1. What are the challenges of Ethiopia commodity exchanges?
2. What are challenges that affect the key market actors the ECX?
3. How to identify the main bottleneck and potential solutions of the ECX?
4. What are the opportunities in operating commodity in Ethiopia?

1.6 Scope of the Study

In this study, the researcher will be evaluate the challenges of commodity exchange with respect
to infrastructure Development, Macroeconomic stability, Government Policies and Commercial
and Financial Sectors Development, challenges like political instability, social and
environmental factors that could affect the performance of commodity exchange of Ethiopian
Addis Ababa reign.

1.7 operation of commodity exchange in Ethiopia

The Ethiopia Commodity Excha nge started live trading on April 24th 2008. It provides a market
place where buyers and sellers can come together to trade and be assured of quality, delivery and
payment. The exchange is a private-public undertaking with capital investment from its main
promoter, the Government of Ethiopia, and membership seats privately owned by trading and
intermediary members. The Exchange is jointly governed by private – public Board of Directors
and managed professionally by an internationally recruited team.
The Ethiopian Commodity Exchange Authority (ECEA) is controlled by the Ministry of
Agriculture and Rural Development.
It was established by a capital budget amounting to 194 million US dollar financed by the
government and donor agencies and its head office is located in Addis Ababa. ECX has a board
of directors of eleven members, six members including the chairman are appointed by Ministry
of Agriculture and Rural Development and the rest are selected by members.

1.8 Organization of the Paper

The study will organize in to three chapters. The first chapter deals with the background of the
study, statement of the problem, objectives of the study, the research questions, the significance
of the study, and Scope of the study. The second chapter discusses Review literature of the study.
Finally the third chapter deals with methodology of the study.

Chapter tow

2.1 Review Literature

The review of will relate literature deals with definition of key concepts and terms, History of
commodity exchange, how does an Exchange Work, Experiences in commodity exchange in
neighboring East African countries, Overview of commodity exchanges in Ethiopia, The
Problem of Economic order, Ethiopia Commodity Exchange (ECX), why an exchange for
Ethiopia, The issues well be discussed in this chapter are relevant for the analysis of the study. A
commodity is defined as “an intermediate good with a standard quality, which can be traded on
competitive and liquid global international physical markets” (Clark et al., 2001, p. 3).

2.2 Definition of key Concepts and Terms of CX

Commodity Exchange is an exchange where various commodities and derivatives products are
traded. Most commodity markets across the world trade in agricultural products and other raw
materials (like wheat, barley, sugar, maize, cotton, coffee, milk products, oil, metals, etc.) and
contracts based on them. These contracts can include spot prices, forwards, futures and options
on futures (UNCTAD report, 2009)
Spot: Contracts to buy and sell the physical commodity resulting in (near) immediate physical
delivery (UNCTAD report, 2009).
 Futures: Contracts more commonly used as financial instruments for hedging, speculation and
arbitrage, which may result in the future delivery of commodities.
Membership Seat is a permanent and transferable right to trade on the Exchange. Members can
be any individual, company, public enterprise, or cooperative that meets the membership
requirements (www.ecx.com.et)
Clearing house Receipt a document certifying possession of a commodity in a licensed
warehouse that is recognized for delivery purposes by a commodity futures exchange (Gideon
Onumah, 2010).

2.3 History of commodity exchange

Exchange trading emerged in the 1840s, when Chicago became a commercial centre with
railroad and telegraph lines connecting it with the East of the United States of America. Prior to
that, grain traders in Japan had experimented with the idea in 1730. Chicago attracted Midwest
farmers hoping to sell their wheat for a good price. In 1848, a central place was opened where
farmers and dealers could meet to deal in "spot" grain - that is, to exchange cash for immediate
delivery of grains such as wheat. The Chicago Board of Trade (CBOT) was launched in 1864
and followed in 1877 by the London Metal Exchange. Though there were early initiatives in
India and Argentina to promote commodity exchanges, it was only in the 1990s that the number
located outside of the OECD countries grew very rapidly (Rashid et al. 2008).
A commodity exchange is an institutional response, at a basic level, to the fundamental problem
of achieving self-coordinating market order in the trade of agricultural products, which by their
nature, are risky. One of the world’s largest and oldest commodity exchanges, the Chicago Board
of Trade, was established in 1848 by 82 grain traders in what was then a small Midwestern town,
in conditions not too different from that of Ethiopian agriculture today, in response to a bumper
harvest when farmers who went to Chicago and could not find buyers had to dump their unsold
cereal in Lake Michigan.
This strikes a hauntingly familiar chord for those who recall that Ethiopian farmers left grain to
rot in the fields in 2002 as prices collapsed. The challenges that US markets faced 150 years ago
were not much different from what they face today, or what Ethiopian markets face today: to
coordinate the exchange of grains and livestock produced across dispersed locations and
dispersed producers to major markets hundreds of miles away (Tafara, 2005).
A brief history of the development of the Chicago market reveals that, while responding to the
initial problem of coordinating exchange in a low-cost manner, the market system itself evolved
as the sophistication of the market increased and as economic growth progressed. In other words,
the Chicago exchange did not start as the sophisticated market it is today. In the 1840s, as grain
production increased in response to technological innovations in the American Midwest, farmers
used to come to Chicago to sell their grain to traders, who would ship it all over the country.
When farmers came to the market, they came without prior knowledge of market prices and the
city had few storage facilities and no established procedures for weighing and grading the grain,
leaving the farmer at the mercy of the trader. In 1848, the Chicago Board of Trade (CBOT)
opened as a central place where farmers and traders could meet to exchange cash for immediate
delivery of wheat, but with certain established mechanisms by the Board for grading and
weighing the wheat, for storing it if no trade occurred, for bidding on its price, and for resolving
disputes that occurred. As both producers and buyers experienced the advantages of this system,
it was a matter of a few years before farmers and traders evolved the practice of forward
contracts in 1851. Thus, a farmer would agree with the trader on a price to deliver a certain
quantity of grain at a future time. The deal was advantageous to both parties in that the farmer
knew in advance his market price and the trader knew his costs. As these contracts common, they
began to be used as collateral against bank loans and began to exchange hands before the
physical delivery itself. Thus, a farmer might pass on his obligation to deliver to another farmer,
with the price going up or down depending on what was happening in the market. As these
“forward contracts” became common over a 15 year period, CBOT introduced in 1865 a
standard contract known as a “futures contract” with a pre-specified delivery date and a margin
requirement to act as a performance bond. This innovation reduced the risks and costs associated
with negotiating forward contracts on an individual basis (stiglitz, J.E., 1974). Alongside these
developments, CBOT was chartered officially by the state in 1859 (a decade after first opening),
and therefore mandated to set standards of quality, product uniformity, and undertake routine
inspections of the grain traded in the exchange, in order to maintain the integrity of the market. It
was not until 1922, some 74 years after the Chicago market first opened, that the government
established the Grain Futures Administration, as a regulatory body to oversee the expanding
grain market. It was not until 1967 that CBOT began the electronic display of market prices,
reducing the price reporting time to seconds. What is salient from this quick historical overview
is that the Chicago market was established and evolved to resolve the real problems of
transaction costs and risks faced by farmers in the market and the need to coordinate the
exchange of agricultural goods across actors, across space and time. It is also important to note
that state regulation, increasing in scope as the market grew, followed the market rather than led
it (UNCTAD Report, 2009).
Following the sweep of market liberalization across the globe, emerging exchanges are rapidly
growing in developing or transition countries to fill the gap left by marketing boards and fixed
price systems. There are currently more than 100 of these exchanges across developing
countries: 28 in Latin America (15 of them in Brazil), more than 20 in Asia, 3 in Africa, 4 in
Eastern Europe, and several in Russia (UNDP Report, 2006). Most of these exchanges have been
created since 1992.

2.4 How Does an Exchange Work?

Most exchanges, even when they have a virtual or electronic trading system, operate in a
physical place, with an exchange “floor” on which trading occurs. The exchange floor is
typically organized by commodity. A common misperception is that a commodity exchange
determines or establishes the prices of traded commodities.
Prices are determined solely by supply and demand conditions. If there are more buyers than
sellers, prices will be forced up. If there are more sellers than buyers, prices will be forced down.
Thus, buy and sell orders, which are channeled to the exchange floor for execution, are what
actually determine prices. The orders to buy or sell are done by public outcry, rather than by
private negotiation, and the prices at which transactions are made are recorded and released
publicly by the exchange as soon as possible, generating market transparency. In comparison to
an auction where the emphasis is on selling, trading on a commodity exchange is like a
continuous two-way auction, in which bids to buy are going on simultaneously with offers to
sell. This is possible because the graded product needs no description with a standardized
contract and because there is sufficient volume of both buy and sell orders. The exchange itself
does not operate for profit, but merely provide an organized market place for buyers and sellers.
Clearly, the key to a successful exchange is to bring about the needed highest possible
concentration of buyers and sellers into a single market mechanism in an efficient, low- cost, and
manner. To do so requires that the market operate with certain basic rules and with certain types
of actors. These characteristics or operating modalities are precisely what distinguish what is
known as a commodity exchange from a typical central wholesale or terminal market (Ethiopian
Development Research Institute, 2005)

2.5 A system that creates integrity and trust

A commodity exchange operates with a certain set of rules or conventions that are widely
known. These rules pertain to four key dimensions of the market: the product, its price
determination, the actors, and the contractual relations that bind them. These rules and modalities
together create much needed integrity and trust in the system. To begin, goods traded on an
exchange must be standardized according to known standards of quality and quantity. The
grading and certification of grade must be done by licensed inspectors that are qualified and
regulated. Grading can by do through a laboratory based at the exchange on a sample basis or by
other parties, such as the state or private actors. What is critical is that the product grades are
widely accepted by the market and are developed with the participation of all market actors,
including farmers, traders, processors, and consumers. The certification must be considered by
all to be fair and neutral. Thus, whether the grading is done by the exchange or not, a key
function of the exchange is to ensure that goods are brought to the market properly graded.
Second, an exchange operates a given system of price bidding that is aimed at publicly
displaying buy and sell offers in a transparent and low-cost manner. Some exchanges operate on
the basis of an “open outcry” system in which market actors in on the exchange floor cry out
their bids and orders in a public fashion. Alternatively, an exchange may operate with an actual
or a virtual “bulletin board” on which bids and offers are posted publicly. The key is that the
price bidding is done openly rather than privately.
Third, in order to ensure that the rules are followed, exchanges operate with membership- based
trading, where membership is based on the ability to comply with the rules of the exchange and
to meet certain standards. Moreover, since chaos would quickly result if membership were
continuously open to increasing numbers, membership in an exchange is fixed. In addition to an
annual fee, the actual seat or membership on an exchange floor is paid for with an initial price,
much like a share, and can be bought or sold on the market. This ensures that members have a
stake in the performance of the market and thus uphold its trust and integrity.
How then can large numbers of buyers and sellers be integrated into the market if the members
who trade on the exchange are limited? Brokers are the key set of actors on an exchange who, as
members of the exchange, trade on behalf of an unlimited number of buyer and seller clients.
The function of brokers, whose duty it is to advise their clients, whether buying or selling, as to
the best market opportunities and when and where these are likely to occur, provides significant
empowerment to market participants. However, because of their central role, brokers must be
specifically licensed and inspected in their function. The integrity of brokers is at the core of the
integrity of the exchange itself.
Exchanges are essentially self-regulatory systems which prescribe rules and codes of ethics to
which all market actors that are registered with them need to strictly adhere to (Ethiopian
Development Research Institute, 2005).

2.6 A system that generates market information

A core attribute of an exchange, implied within the four dimensions noted above, is that it
enhances market transparency through generating and disseminating information. Through its
own functioning, the exchange creates market information about the underlying supply and
demand conditions in the economy.
Thus, contrary to popular perception, a commodity exchange does not require an external market
information system as a pre-requisite to its proper functioning. An exchange becomes the market
information system as it undertakes its function of price discovery based on the public posting of
buy and sells orders. When the volumes of trade on the exchange are sufficiently large to justify
that price discovery according to true market fundamentals is occurring, then the dissemination
of that information of market prices provides a great service to the market, and the wider
economy. This fact alone is a compelling reason to justify an exchange (Eleni Z. Gabre-Madhin
and Ian Goggin, 2005)

2.7 A system linked to warehouse receipts

By storing their goods in a reliable warehouse, farmers can use the warehouse receipt that is
issued as loan collateral and thus access finance without selling their goods. A common
misperception is that a warehouse receipts system is primarily a price stabilization system. First
and foremost, it is a system of financing, which is its primary purpose.
However, it can have positive impacts on price stability by encouraging storage just after harvest,
but this is not guaranteed. However, while the receipt is an important mechanism for farmers to
reduce their cash constraint, it must be considered that it also entails speculative activity by
farmers, with high risk implications, because farmers who are receipt holders are thus taking a
position in the market with some judgment about the future direction of prices. This factor alone
has led to the demise of many inventory credit schemes over the past few years across sub-
Saharan Africa. To overcome this risk to farmers, warehouse receipts can be made transferable,
so that farmers can transfer the speculative risk through sale of the receipt. Thus, through linking
a receipt program to a commodity exchange, receipts can be traded on the exchange and enable
the transfer of risk in an organized fashion. The chances of success for a warehouse receipts
system are considerably higher if it is linked to a functioning exchange on which receipts can be
traded.
The viability of a warehouse receipts system depends on the extent to which there is discipline
and trust in the warehouse, like the commodity exchange, integrity is key. In addition, the
viability depends on the economies of scale to save costs of oversight and administration, the
reduction of costs of financing that are passed on to farmers, finding the correct balance of
regulatory oversight by state, and the bond and insurance requirements against default, loss or
theft. For a transferable receipts system to be viable, there needs to be specific licensing of
warehouse operators, a tracking system to register every change of ownership (to ensure only
one party has legal title), and the establishment of clear legal rights for receipt bearers and of
receipts as documents of title (mortgage able).
Clearly, a transferable warehouse system is highly complementary to the functions of the
exchange. The receipts system goes hand in hand with a commodity exchange in that:
Grades and standards are essential to warehouse operations as well as to a commodity exchange
with standardized contracts;
Price transparency is achieved because receipts indicate a specific grade, which generates price
information that can also be used on the exchange;
Risk is transferred by selling receipts on the exchange; and, Integrity and order: the legal
enforcement of quality and of the transferability of the receipt is vital for both the warehouse
receipts system (Eleni Z. Gabre-Madhinand Ian Goggin, 2005).

2.8 Experiences in commodity exchange in neighboring East African and

world countries
The gradual liberalization of agricultural trade combined with the reduction of government
support to agricultural producers outside the OECD, heightened the interest in the use of risk
management and other modern financial instruments, including commodity exchanges, in the
developing world (UNCTAD, 2006). In recent years, there is substantial growth in emerging
commodity markets driven by the continued growth of existing exchanges, particularly those in
China and India, and also by the rise of other exchanges situated in emerging markets.
In Africa, the Pan-African Commodities and Derivatives Exchange (PACDEX) initiative has
stimulated the development of national exchanges in a number of countries, including
Nigeria, Ethiopia, Kenya and Uganda (its establishment has been strongly supported by the
African Union). The PACDEX model comprises a hub in Botswana managing a common
exchange, as well as a back-office platform that links together various national exchanges and
warehouses to facilitate regional trade in contracts across the agricultural, metals, energy and
currency sectors. The experiences with the commodity exchange in Kenya and Uganda are
reviewed below

2.8.1 Kenyan Experiences in commodity exchange

Currently, Kenya has three commodity exchanges: The Nairobi Coffee Exchanges dealing with
coffee, the Tea Auction in Mombasa, and the Kenya Agriculture Commodity Exchange (KACE),
a spot exchange that deals with a variety of commodities but mostly maize and beans.
The Kenya Agricultural Commodity Exchange (KACE) is a private sector firm that has been in
operation in Kenya since 1994. KACE has been an important private sector initiative that has
made significant contributions to agricultural marketing in the country, and to smallholder
farmers in particular in two ways: linking producers and buyers of agricultural commodities, and
provision of market information for commercial actors within the subsector.
However, KACE faces several challenges among which the following two are the most
important: (i) the poor quality of produce that farmers deliver combined with the fact that most
small-scale farmers find it difficult to deliver in bulk which is ideal for an exchange; and (ii)
most of the commodities in Kenya are heavily regulated by boards and are grown and marketed
in an environment of struggling cooperatives, which are inefficient, mismanaged and have
cumbersome internal bureaucracies. (Mukhebi, 2004).
To overcome the stated challenges, KACE is supporting smallholder farmers to organize
themselves into marketing associations in order to cost-effectively access market and
information services provided by the exchange. This allows them to consolidate supplies of
marketable quality commodities for offer through the exchange, and purchasing of inputs in
volumes to achieve economies of scale. In addition, KACE‟s electronic market information
system, the Regional Commodity Trade and Information System (RECOTIS), is providing
market information throughout the eastern and central Africa region to promote regional trade.
In general, faced with fragmented markets, government intervention and significant
infrastructural deficiencies, trade through KACE has always been minimal. Instead, focus has
been on information dissemination with KACE acting as a provider of paid-for price
information, a business model supported by private sector partnerships and aid donor funding.
For June 2010, the Nairobi bourse plans to launch a commodities exchange by a joint effort of
the National Cereals Produce Board (NCPB), the Kenya Agricultural
Commodities Exchange (KACE), Eastern African Grain Council (EAGC) and Nairobi Stock
Exchange. It will consist of a platform where futures can be traded. The market will initially
trade major grains produced in East Africa, including maize, wheat, rice and beans but will
ultimately trade other agricultural commodities, including inputs such as fertilizers and seeds.
The plans have met with some criticism. Kenya Coffee Planters and Traders (KCPT), the
association that runs Nairobi Coffee Exchange, said the country has not established the
fundamentals for a credible commodities exchange. Experts reckon that for a commodities
exchange to work in Kenya, the government needs to back the initiative with sound legal and
regulatory frameworks such as enacting a Commodities Exchange Act and a Warehouse Receipts
Act. The system also requires major improvements in road networks connecting farms and a
substantial investment in NCPB facilities to fit them with modern equipment like sievers and
driers to enable hold grains for longer periods (Omondi 2010).

2.8.2 Ugandan experiences in commodity exchange

Uganda Commodity Exchange Limited (UCE) is a corporate entity registered in 1998 through
the initiative of private sector players with four founding shareholders namely, the Ugandan
Cooperative Alliance, Ugandan Coffee Trade Federation, National Farmers Association and
Commercial Farmers Association. The UCE became operational in 2002.
The commodities currently traded at the exchange are coffee, sesame, maize, beans, soya beans,
and rice with quantity specification of minimum 10 tons per lot for every commodity
(UNCTAD, 2006). UCE aims to serve several objectives. One objective is to help link producers
and buyers easily and cheaply and to make the process of price discovery more transparent. A
second objective is to ensure that only standard commodities are traded. The commodity
exchange is linked to the Warehouse Receipt System and UCE has been delegated the regulatory
function of warehouse receipts. Standards are being developed to ensure that farmers produce
what the market requires to avoid wastage that currently characterizes production of rural
producers. Once standard commodities are available in the rural areas, exporters will be assured
of supply and farmers will get good prices through the exchange
(DawitAlemu&GerdienMeijerink, 2010). There have been a few auctions on the floor of the
exchange with encouraging results, but operations had to be suspended to improve the system
with the assistance of the European Union. There are several initiatives aiming at enabling
farmers to access markets and have better bargaining power through bulking. One of these
initiatives includes the formation of Area Cooperative Enterprises (ACEs). These ACEs are
formed by primary societies to handle input distribution, bulking of farmers agricultural
commodities, which they sell to most the competitive buyer. In order to ensure predictable
quality, some have started value addition. It has been mainly the ACEs that have utilized the
services of both the UCE and WRS so far. A quick survey between 18 May and 8 June 2010 of
the UCE shows the level of activity of the UCE. The UCE appears to trade only in maize. On 18
May 2010, the total amount of maize open for sale was around 1.620 tonnes of maize (32 bids)
with an average price of 562 USh. One week later, the total amount for sale was 465 tonnes with
an average price of 433 (21 bids). Finally on June 8th, the total amount for sale was 1.335 tonnes
with an average price of 473 USH (32 bids). So it seems that the UCE is active, but that is
trading activities are limited (Omondi 2010).

2.8.3 The National Multi Commodity Exchange of India (NMCE)

In response to the Press Note issued by the Government of India during May'1999, first state-of-
the-art demutualised multi-commodity Exchange, National Multi Commodity Exchange of India
Ltd. (NMCE) was promoted by commodity-relevant public institution, viz., Central Warehousing
Corporation (CWC), National Agricultural Cooperative Marketing Federation of India
(NAFED), Gujarat Agro-Industries Corporation Limited (GAICL), Gujarat State Agricultural
Marketing Board (GSAMB), National Institute of Agricultural Marketing (NIAM), and Neptune
Overseas Limited (NOL). While various integral aspects of commodity economy, viz.,
warehousing, cooperatives, private and public sector marketing of agricultural commodities,
research and training were adequately addressed in structuring the Exchange, finance was still a
vital missing link. Punjab National Bank (PNB) took equity of the Exchange to establish that
linkage. Even today, NMCE is the only Exchange in India to have such investment and technical
support from the commodity relevant institutions. These institutions are represented on the Board
of Directors of the Exchange and also on various committees set up by the Exchange to ensure
good corporate governance. NMCE is a zero-debt company; following widely accepted prudent
accounting and auditing practices. It has robust delivery mechanism making it the most suitable
for the participants in the physical commodity markets. The exchange does not compromise on
its delivery provisions to attract speculative volume. Public interest rather than commercial
interest guide the functioning of the Exchange. It has also established fair and transparent rule-
based procedures and demonstrated total commitment towards eliminating any conflicts of
interest. It is the only Commodity Exchange in the world to have received ISO 9001:2000
certification from British Standard Institutions (BSI).
NMCE commenced futures trading in 24 commodities on 26th November, 2002 on a national
scale and the basket of commodities has grown substantially since then to include cash crops,
food grains, plantations, spices, oil seeds, metals & bullion among others. Research Desk of
NMCE is constantly in the process of identifying the hedging needs of the commodity economy
and the basket of products is likely to grow even further. NMCE has also made immense
contribution in raising awareness about and catalyzing implementation of policy reforms in the
commodity sector. NMCE was the first Exchange to take up the issue of differential treatment of
speculative loss. It was also the first Exchange to enroll participation of high net-worth corporate
securities brokers in commodity derivatives market. It was the Exchange, which showed a way to
introduce warehouse receipt system within existing legal and regulatory framework. It was the
first Exchange to complete the contractual groundwork for dematerialization of the warehouse
receipts. Innovation is the way of life at NMCE.
A close look at NMCENMCE facilitates electronic derivatives trading through robust and tested
trading platform, Derivative Trading Settlement System (DTSS), provided by CMC.
When an order is placed on the exchange, the server at NMCE scans through the orders posted
on it from all its trading terminals. It then locates and matches the best counteroffers/bids by
maintaining anonymity of the counter-parties. Anonymity helps is eliminating formation of
cartels and other unfair practices, thereby protecting the efficiency of price-discovery at the
Exchange. NMCE was the first commodity exchange to provide trading facility through internet,
through Virtual Private Network (VPN).
NMCE follows best international risk management practices. The contracts are marked to market
on daily basis. The system of upfront margining based on Value at Risk is followed to ensure
financial security of the market. In the event of high volatility in the prices, special intra-day
clearing and settlement is held. NMCE has also set up a Trade Guarantee Fund. Well-capitalized
in-house clearinghouse assumes counter-party risk of settlement. NMCE was the first to initiate
process of dematerialization and electronic transfer of warehoused commodity stocks. The
unique strength of NMCE is its settlements via a Delivery Backed System, an imperative in the
commodity trading business. These deliveries are executed through a sound and reliable
Warehouse Receipt.

2.9 Overview of commodity exchanges in Ethiopia

2.9.1 The Post-Reform Market Challenges

Like many other countries in sub-Saharan Africa, the Ethiopian grain economy underwent a
dramatic market reform in the early 1990s with the nearly complete liberalization of the grain
market. Prior to these reforms, for sixteen years until 1990, the Dergue government tightly
controlled trade, through cooperatives and its parastatal agency, the Agricultural Marketing
Corporation (AMC), initially set up in 1976 with World Bank support for the purpose of
purchasing grain and distributing it to consumers (Lirenso, 1993). In this period, policies
included fixed pan-territorial grain prices, restricted private inter-regional grain movements,
limited private sector participation, and a producer grain quota (Fisseha, 1994; Lirenso, 1987;
Franzel, Colburn, and Degu, 1989). Farmer quotas to the AMC amounted to 10 to 50 percent of
the harvest at fixed AMC prices that were consistently below market prices, which had the effect
of depressing rural incomes and production (Dercon, 1995). In March 1990, a dramatic market
reform lifted, overnight, all restrictions on private trade and eliminated official prices and quotas.
Subsequently, in 1992, the Transitional Government continued reforms through eliminating
wheat consumer subsidies and downsizing the AMC, through closing all eight zonal offices,
reducing its branch offices from 27 to 11 and its grain purchase centers from 2013 to 80. It was
renamed the Ethiopian Grain Trade Enterprise (EGTE) with a new mandate of stabilizing prices
and maintaining buffer stocks. Unlike most post-reform African states where marketing boards
continued to dominate trade, the EGTE plays a relatively minor role, with only a 2 to 5 percent
share of the domestic market (Jayne, Negassa, and Myers, 1998). In 1999, further reforms
involved merging EGTE with the Ethiopian Oil Seeds and Pulses Export Corporation (EOPEC)
and re-establishing it as a public enterprise, no longer required to stabilize grain prices, with the
major objective of operating for commercial profitability by focusing on exportable grains
(Bekele, 2002). Because market reforms resulted in the nearly total withdrawal of government
intervention from the market, it was considered by an MSU study in 1998 that the reforms
enacted in Ethiopia constituted a particularly important test of the hypothesis by the international
community that the liberalization of markets would reduce costs and catalyze growth in
production (Jayne, Negassa, and Myers, 1998). What then were the impacts of these market
reforms? Numerous studies have documented the effects of these policies (Dadi, Negassa, and
Franzel, 1992; Lirenso, 1993; Dercon, 1995; Negassa and Jayne, 1997; Dessalegn, Jayne, and
Shaffer, 1998; Gabre-Madhin, 2001, Gabre-Madhin et al, 2003). As predicted, these analyses
revealed that liberalization did indeed result in a significant re-engagement of the private sector
in grain trade, improved market integration, and the reduction of marketing margins. However,
very importantly, these studies also pointed out the reforms did not have the envisaged impact on
agricultural growth and poverty reduction. Why? First, despite the narrowing of price spreads or
margins, market reforms did not reduce the volatility of grain prices and may have indeed
exacerbated it. Linked to this, significant constraints to market performance remained which led
to the persistence of “thin” markets, defined as markets in which there are few purchases and
sales. Thus, because these market constraints limit the scale and Scope of market activity, they
ultimately limit the potential of the market to catalyze Production, growth and boost rural
incomes in the country. What are these constraints to market performance? Major constraints
can be identified as either linked to weak infrastructure or to missing institutions. In terms of
infrastructure, major concerns are the weak access of smallholder farmers to roads, as well as
limited telecommunications and storage infrastructure. These weaknesses contribute to the high
cost of transport as well as of other physical marketing costs, such as storage, handling, etc.
Thus, marketing costs amount to some 40 to 60 percent of the final price, of which some 70
percent is due to transport. However, beyond the infrastructural issues, studies also point to the
significance of “transaction costs” which are equally or more constraining to trade. These costs,
distinct from physical marketing costs, are costs related to conducting or coordinating market
transactions between actors, such as the costs of searching for and screening a trading partner,
the costs of obtaining information on prices, qualities and quantities of goods, the costs of
negotiating a contract, the costs of monitoring contract performance, and the costs of enforcing
contracts. Because these costs are difficult to identify and to measure, they are often overlooked,
yet they offer powerful explanations of the persistence of missing markets or of market failures.
In fact, these transaction costs also influence the extent of the physical, more observable,
marketing costs. For example, handling costs in Ethiopian grain markets are roughly 25 percent
of the margin, which is far above the norm in sophisticated markets. These costs are particularly
high in Ethiopia because the lack of grade and standards and the problem of contract
enforceability forces buyers of grain at every transfer of ownership in the chain to off-load the
shipment and re-sack every bag of grain. Similarly, because there is little coordination in the
transport sector and thus no information regarding whether trucks can load shipment on the
return trip, or “backhaul,” this results in very high transport rates. In the Ethiopian context, the
presence of prohibitively high transaction costs, evidenced by the lack of sufficient market
coordination between buyers and sellers, the lack of market information, the lack of trust among
market actors, the lack of contract enforcement, and the lack of grades and standards, implies
that buyers and sellers operate within narrow market channels, that is, only those channels for
which they can obtain information and in which they have a few trusted trading partners.
Extensive empirical analyses of Ethiopian market behavior thus reveals that market actors
conduct business across short distances, with few partners, in few markets, and with limited
storage, implying that opportunities for expanding market activity, otherwise known as arbitrage
across space (transporting significant distances to market goods) and across time (storing for
significant periods), are limited (Gabre-Madhin et al, 2003). This limited arbitrage in turn
reduces the responsiveness of the market to changes in supply and demand. The weakness of the
market was most starkly highlighted in the food crisis of 2002-2003, when a significant surplus
of grain in 2002 led to the collapse of market prices, significantly compromising rural incomes
and leading to disincentives to further technology adoption by farmers. The persistence of these
market constraints in Ethiopia points to the fact that market reforms alone, defined as the
removal of policy distortions, are necessary but not sufficient to enhance market performance.
This suggests that the new development agenda, not only in Ethiopia but throughout post-reform
Africa, is to move beyond market reform to market development. In addition to policy
incentives, key interventions are required to develop appropriate market institutions and build
needed infrastructure, defined together as the “3 I‟s of market development” (Gabre-Madhin,
2005). In recognition of this, the Government of Ethiopia restructured the Ministry of
Agriculture and Rural Development and established a state ministry on agricultural input and
output markets in 2004. At present, both the government and its international partners are
engaged in dialogue on a concerted set of interventions to enhance the performance of
agricultural markets.

2.9.2 The Problem of Economic Order

A fundamental concern of all societies is how the economy is organized, how market exchange is
coordinated. Merchants emerge to buy goods from sellers and sell them to buyers; factories
emerge to buy labor services and other factors of production and sell output to buyers. It is often
said that (Nobel-laureate Ronald Coase 1937) started a quiet revolution in economics when he
asked one of the most celebrated questions in modern economics: Why does the firm emerge in
the market economy? To extend this question: Why do we observe vertically integrated firms for
some goods and services and bazaar-type markets for others? Why do supply chains based on
long-term relationships emerge in some arenas in contrast to anonymous, non-repeated
transactions in others? Coases answer was that there are costs of using the market mechanism,
which may be reduced or eliminated by certain types of coordination in the market. Coase
pointed to two kinds of costs: the costs of discovering what the relevant prices are and the cost
that may be saved by making a single long-term contract for the supply of goods and services
instead of short-term successive contracts. At its core, then, the problem of economic order can
be conceived as essentially a coordination problem, depending integrally on both information
and on the nature of contracts. This fundamental concern for economic order has led to major
historical debates, extending to the present in different guises, on the role of central planning
versus the free market economy. In the early twentieth century, while advocates of central
planning had long cited the complexity of economic activity as an argument against what Karl
Marx described as the "anarchy of the marketplace," the Austrian economist Ludwig Nobel-
laureate Friedrich Hayek 1945 argued forcefully that it was precisely the complexity of the
economy that rendered it beyond human comprehension and therefore unable to be perfectly
planned, arguing that only by the competitive forces of the free market regime could the
decentralized elements of the economy be appropriately utilized. Thus, price signals and the
pursuit of profit lead the vast and varied lines of activity to be self-coordinating. In more recent
times, with the emergence of market fundamentalism, (Robert Heilbroner 1990) declared, "It
turns out, of course, that Hayek was right." How then to achieve this “self-coordinating” market
order? On the one hand, in form action seems to be at the heart of the institutional problem of
order. That is, the transmission of information on prices, quantities supplied, quantities
demanded, actors and their actions, product quality and attributes, and processes is the key to
market coordination. An important body of economic literature has focused on the problems of
imperfect, asymmetric, or incomplete information, which in turn lead to decision-making with
“bounded rationality” (Herbert Simon, 1982), missing markets and risk (Stiglitz, 1982; Akerlof,
1970), and high transaction costs (Williamoson, 1981). On the other hand, contracts and the costs
associated with negotiating and enforcing contracts are also at the heart of the problem of
economic order. Fundamentally, as Hicks (1969) noted, even the simplest exchange involves a
form of contract, where each party is abandoning rights over the things that he sells in order to
acquire rights over the things he buys. Thus, all exchange is trading in promises, which is futile
unless there is some reasonable assurance that the promises will be kept. Extending this concept,
Nobel- laureate Douglass North (1990) has forcefully argued that “the inability of societies to
develop effective, low-cost enforcement of contracts is the most important source of both
historical stagnation and contemporary under development in the third world.” To summarize,
then, the heart of the problem of economic order facing Ethiopia today is the central question of
how market exchange can be coordinated efficiently, at minimum transaction costs, among the
myriad of actors in the rural economy, the diverse and spatially dispersed producers and
consumers, in such a way as to enhance livelihoods and lead to the optimal allocation of
resources. In the post-reform era, rather than take the central planning route, the problem
confronting policymakers is how to bring about a “self-coordinating” market order. In order to
do so, two core aspects must be addressed: the transmission of vitally needed market information
and the low-cost enforcement of contracts among market participants (Ethiopian Development
Research Institute, 2005).

2.10 Ethiopia Commodity Exchange (ECX)

The Ethiopia Commodity Exchange (ECX) is the most recent Spot/Cash exchange in Africa,
which was launched in 2007. It is owned by the Government of Ethiopia, which funded the
initial capitalization of about US$20 million, with some contribution by external partners.
Government also underwrites all performance risks. However, ECX is run by a board
representing farmer cooperatives, the state-owned grain trading enterprise and trading members.
The trading platform involves the use of open outcry but an electronic trading system is being
developed and is expected to be launched in the near future. Coffee is the main commodity
traded by ECX but Maize, Wheat, Sesame and Beans are also listed for trading. The standard lot
size is five (5) tones – tailored to current average load per small trucks in rural Ethiopia and to
ensure broad participation, including small-scale market players. Clearing and settlement are
handled by seven (7) partner settlement banks and the contracts are for immediate delivery of the
physical commodities. The ECX owns and operates a network of 10 warehouses in the main
production areas in Ethiopia as well as additional 20 remote terminal centers in major market
centers. It also operates an electronic warehouse receipt (EWR) system controlled by the
Exchange Central Depository. The EWR represents legal title and is transferable and negotiable
on the exchange. It may be used for purposes of securing collateralized finance and may, upon
request, be materialized into a paper receipt (UNCTAD report, 2008).
2.11 The Ethiopia Commodity Exchange for agriculture
Agriculture is the backbone of Ethiopia’s economy. To bring millions of Ethiopians out of
poverty requires a fundamental change in the way agriculture is done. Substance agriculture
should be replaced with technology-driven and market-oriented production. As Ethiopia is
poised to transform its agrarian economy, so too must Ethiopia’s marketing system take the
country into the new millennium. It is time to enter the modern age of globally connected trading
systems, relying on technology and knowhow, while tailored to Ethiopia’s realities and
conditions. It is time to forge a new partnership between the private and the public in the new
arena created by market liberalization.
Currently, Ethiopia’s marketing system is traditional and backward (See Figure 1). It is mainly
characterized by high costs and high risks of transacting, forcing much of Ethiopia into global
isolation. The vision driving the Ethiopia Commodity Exchange is to revolutionize Ethiopian
agriculture through a dynamic, efficient, and orderly marketing system that serves all.
Figure 1 - Current Grain Market Structure

Source: Ethiopia Commodity Exchange

Ethiopia Commodity Exchange also provides standardized commodity based contracts. The
contract specifies the grade, delivery location, lot size, and other contract terms. The contracts
will be either for immediate delivery or at a pre-specified date in the future. Currently the
Ethiopia Commodity Exchange offers contract for immediate delivery. Ethiopia Commodity
Exchange implements two types of trading system at the physical trading floor located in Addis
 Ababa. Buyers and seller can participate in “open outcry” bidding for commodities or they can
use one of the electronic remote access trading system.
Ethiopia Commodity Exchange more than 23 branches and regional electronic trading centers in
different parts of the country, namely, Addis Ababa, Bure, Metema, umera, ,Awassa, Dire Dawa,
Jimma, Nekempte, Bahir Dar, Gondar, Dessie, Arba Minch, Asosa ,bonga,gimbi,dansha,wlayta
sodo, bedli, adama, kombolcha, asosa, pawi, siraro, dila, abrhajira. These centers will be equipped
with computers and high speed Internet connection. Via the Internet farmers/traders can get access to
live market information.

Chapter three

Research methodology

3.1 Methodology of the Study

This study employed both quantitative and qualitative types of data that obtained from primary
and secondary data sources. The reason being, the researcher gathered and analyzed qualitative
primary and secondary data to complement & elaborate the quantitative type of data. To generate
valuable and relevant data, the researcher will depend on both primary and secondary sources of
data. The primary source of data will be collected through a questionnaire and interview. In
addition to this, for background discussion and theoretical explanation, the researcher depended
on secondary source of data. Secondary sources of data will obtain from ECX, ECX reports,
ECX newspapers, ECX magazines. More specifically, closed-ended questionnaires, semi-
structured interviews based on open-ended questions will use. Interviews allow person-to- person
discussion will also use.

3.2 research Design

A research design is the road map that you decide to follow during your research journey to find answers
to your research questions as validity, objectively, accurately and economically as possible. It is
procedural cumbersome operational plan that details what and how different methods and procedures to
be applied during the research process. Based on these result the study will be applying quantitative and
qualitative approach (mixed method approach). The main justification for mixed methods approach is that
the combination of both forms of data depth, reliability, and validation of the finding (Ranjit kummar,
2014). By using both approaches, the data collection and analysis of data will employ descriptive type.
Because it wants to use this type is that, the study is fact finding study with adequate and accurate
interpretation of the finding.

Table -1 Ethiopia commodity exchange all employees

No Work type Number of employee

Male Female Total
1 Corporate office 12 5 17
2 operation 15 7 22
3 Facility management 32 13 45
4 Finance 12 5 17
5 Human recourse management 10 4 14
6 Internal auditor 4 1 5
7 Information technology 17 8 25
8 Market operation 23 10 33
9 Quality audit operation 202 87 289
10 Strategy $ corporate commotion 12 5 17
11 Warehouse operation 279 119 398
Total 618 264 882

3.3 Sampling method (Technique)

The researcher will used probability sampling in the questions distributed and collected from the
stratum random sampling and non-probability sampling will apply by the purposive sampling to
find deep information from interview. The level of accuracy and the characteristics of the
population will calculate by using Solvine (1960) n=N /1+ N (e)2

3.4 Sampling size determination

The sample size should be determined according to Solvien (1960) formula for calculating sample
sizes as follows. 95% confidence level and e =0.05

n=N /1+ N (e)2 = 882/1+882(0.0025)

=882/1+882(0.05)2 =
882/3.205
n = 275
The target sample size of the study will be 275 employees including managers.
Where n is the sample size, N is the population size, and e is the level of precision.
Table -2 Ethiopia commodity exchange sample size

NO Work division No of total No of selected

employees(N) sample
ni =n* Ni/N employees
1 Corporate office ni =275*17/882 5
2 operation ni =275*22/882 7
3 Facility management ni =275*45/882 14
4 Finance ni =275*17/882 5
5 Human recourse management ni =275*14/882 4
6 Internal auditor ni =275*5/882 2
7 Information technology ni =275*25/882 8
8 Market operation ni =275*33/882 10
9 Quality audit operation ni =275*289/882 91
10 Strategy $ corporate commotion ni =275*17/882 5
11 Warehouse operation ni =275*398/882 124
Total 275

3.5 Data Collection Techniques/ Instruments

The data inputs for the study will gather from both primary and secondary sources.

3.5.1 Primary sources

Primary data will be gathered through field survey by employing different methods. The researcher will
conduct questionnaire with multiple choices (closed –ended) and semi structured interviews department
heads based on open-ended questions. In addition a structured interview with officials of the concerned
department heads and members (participants) of ECX will conducted. Moreover, they will ask to
elaborate on the problems and achievements of the program and to forward their professional and
subjective opinions to be used as an input to the commodity exchange.

3.5.2 Secondary Sources

In order to augment the reliability of the data collect by the questionnaire and interview survey and to
supplement the data missing in the questionnaire survey, information will acquire from previous works
and from different publications will use. In addition, official but unpublished reports and summaries of
the ECX will use as sources of secondary data.

3.6 Data Analysis Techniques

The data gathered from primary and secondary sources would have been analyzed through statistical
descriptive techniques survey questionnaires will tally.

A level challenges in Ethiopian commodity exchange, the researcher decided to pursue a semi-
comparative research strategy. The researcher approach will decretive and unit of analysis is Organization
for Economic Cooperation and Development at particular.

A variety statistics such as percentages and frequencies will use as method of analyzing data. Moreover,
other methods of data analysis such as tables and charts will utilize in the study.

3.7 procedure of data collection

The researcher selected 3 data enumerators to effectively collect data from the sample respondents
through questionnaires. The researcher performed observation, reviewed documents from secondary
sources, interviewed respondents, coordinated the data gathering process and supervised data enumerators
in the field. The researcher will select employ stratified random sampling and simple random sampling.
Stratified random sampling is a sample obtained by separating the population into non-overlapping
groups, called strata and then selecting a simple random sample from each stratum. The possible
respondents of the researcher will be trading Member/the main membership, An Intermediary
Member/limited membership and the officers of Ethiopian commodity exchange. But due to the rationale
of the study the researcher will consider treading member and officers ECX in the sampling frame.
Thus, the researcher using the basics of this system will taken 882 total numbers ECX with male 618 and
female 264. The study will be conducted higher official, medium, and lower leader’s members who will
select by using stratified random sampling. For interviews, face-to-face interviews will conduct with
written confirmation from the concern office holders and members of ECX.

3.8 Anticipated Ethical Issues

Ethical issues are very important in research these days. Ethical emerged from value conflicts. In
research, these conflicts are expressed in many ways: individual rights to privacy versus the undesirability
of manipulation, openness and replication versus confidentiality, future welfare versus immediate relief,
and others. Each decision made in research involves a potential compromise of one value for another.
Researchers must try to minimize risks to participants, colleagues and society while attempting to
maximize the quality of information they produce (David F. Gillespie, 1989).

In favor of this study the researcher will familiar with the ethical issues of research. Thus, the researcher
will observe the principles of ethical issues like confidentially and dignity of the participants, integrity, on
no account plagiarism, and never fabricating and destroying data.

3.9 Time schedule and budget breakdown

In this part the researcher elaborates the major activities that will be done according to time series and the
estimated financial budget that will be used in the accomplishment of the study. Therefore, it is described as
follows.

3.9.1Time Schedule for Activities

No Action Year 2011 E.C

March April May Jun Jullay Aug

1 Topic selection
2 Proposal develop

3 Data collection
4 Data analysis
5 Report analysis
6 Adviser contact
7 Presentation
3.9.2 Budget breakdown
No Equipment Unit Quantity Unit Total Cent
Measurement price Cost of price
1 Computer 1 8500 8500 00
2 Transport 15 50 50 00
3 Paper Pack 1 250 250 00
4 Copy ---- 250 250 00
5 Tea and coffee ---- 200 200 00
6 Pen 10 6 60 00
7 Email and mobile card ---- 300 300 00
8 Flashes 1 250 250 00
Total 9860

Reference
 ^ "Ethiopia Commodity Exchange: Operations" (accessed 12 November 2010)
 "Ethiopia Commodity Exchange Authority Proclamation", Negarit Gazeta (accessed 12
November 2010)
 Gabre-Madhin, E.Z. (2007). The Ethiopian Commodity Exchange (ECEX): Making the market
work for all. Expert Meeting on the Trade and Development Implications of Financial Services
and Commodity Exchanges (Part I). September 3,UK
 Ethiopia Commodity Exchange. (2008). Addis Ababa. Ethiopia. Retrieved from: www.ecx.gov.et.
 ECX. 2010. ECX Direct Specialty Trade (DST). Addis Abeba: Ethiopan Commodity Exchange,
January 4.
 Ethiopia Commodity Exchange (ECX), The Rule of the Exchange Commodity Exchange, Rev
No.5/2010, ECX, July 2010. House of People Representative (HPR), A proclamation to provide
for the establishment of Ethiopia Commodity Exchange, Proclamation No. 550/2007 Federal
Negarit Gazita Addis Ababa, September 4, 2007.
 ECX Report, Assessment on ECX Membership Transfer, ECX Member Development Unit,
Addis Ababa, 2016.
 ECX Report, Annual Report 2015/16, ECX Strategy Planning Unit, Addis Ababa, 2016.
 T.S. Jayne et. Al, ―Agricultural Commodity Exchanges and the Development of UK Government: Food
Trade East and Southern Africa‖, Working paper 88, Indaba
 Agricultural Policy Research Institute (IAPRI), October, 2014
CHALLENGES OF SMALL AND MICROENTERPRISE IN ADDIS
ABABA AT KIRKOS SUB CITY.
A SENIOR ESSAY SUBMITTED IN PARTIAL FULFILLMENT FOR
THE REQUIRMENTS OF BARCHELOR OF ART DEGRREE IN
MANAGEMENT.
BY:ID No
1. WOGENE ZEGEYE-----------------------------09/046
2. RAIEY TESHOME-------------------------------09/034
3.YENENESH DEFABACHEW--------------------09/066
4.MESERET ADEB---------------------------------09/02
5.BERHAN HADDIS--------------------------------09/068
Advisor: Minbale (BA)

QUEENS COLLEGE
DEPARTMENT OF MANAGEMENT

June,2019Adds

Ababa,Ethiopia

Acknowledgements
It is the grace, mercy, charity, forgiveness, help and kindness of the almighty God - Jesus
Christ that made me still alive, achieve this success and strength and to go through all the
difficult time. While there are several people who have helped me in one way or another to
achieve the completion of this paper, it would have not been possible without the guidance
and support of our advisor Minbale. (BA) So, we would like to begin by thanking Mr.
Minbale for his constructive comments and outstanding help for the completion of this
paper. Next, we cannot afford to leave out the precious support of our families who helped
us in all aspects of our life. In addition, we would like to say thanks for all of our friends for
all the positive comments, supports and cooperation you gave us while doing this research.

Abstract
Micro and small enterprises (MSEs) are considered as an engine for development through
promoting entrepreneurial talents, creation of employment opportunity, self-employment
capability and fostering economic growth. This research aims to investigate factors
affecting the performance of MSEs in Kirkos sub city. For the sake of achieving the
objectives of the study, researcher employed both primary and secondary data. Primary
data was collected through questionnaire and interview as best instrument of data
collection; on the other hand secondary data was collected from office manuals and annual
reports. In order to collect reliable information which are relevant to the study, the
researcher used both probability and non probability sampling techniques. Accordingly
this particular study employed personal judgment and stratified sampling methods of non
probability and probability sampling techniques respectively. Descriptive method of data
analysis was employed to analyze the collected data. The data collected were presented in
tabular form with percentage computed values. Finally, based on the findings of the study,
recommendation and conclusion was forwarded to the concerned body.

Declaration
I ,the undersigned student ,hereby declare that, this senior essay is my original work, which has
not been presented for a degree in this/elsewhere university. All sources of materials used for this
study have been fully acknowledged.

Name: ______________________________________

Signature: _________________________________

Date:____________________________________

Confirmation:
This senior essay project work is conducted under my supervision and fulfills all requirements of
research standard of the program. I hereby approve the submission of this senior essay project for
examination.

Advisor name: ________________________

Signature: ____________________________

Date: _______________________________

CHALLENGES OF SMALL AND MICROENTERPRISE AT ADDIS ABABA KIRKOS

SUB CITY

Approved by Board of Examiner

Advisor Signature Date

________________________________________________

Examiner Signature Date

__________________________________________________

TableofContents

TitlePage

Acknowledgement---------------------------------------------------------------i
Abstact ----------------------------------------------------------------------------
Listoftables------------------------------------------------------------------------
Listoffingers---------------------------------------------------------------------------------------------iii

Chapterone:Introduction-------------------------------------------------------------1

1.1Backgroundofthestudy----------------------------------------------------1
1.2Statementoftheproblem---------------------------------------------------2
1.3Objectiveofthestudy-------------------------------------------------------3
 1.3.1.Generalobjective--------------------------------------------------------3
1.3.2.Specificobjective------------------------------------------------------3
1.4.Significanceofthestudy-------------------------------------------------3

1.5.Scope ofthestudy----------------------------------------------------------------3

1.6. Limitations of the study------------------------------------------------------------------------------3

1.7. Organization of the papers-----------------------------------------------------

Chapter Two: Literature Rivew-----------------------------------------------5

2.1EthiopiansmallEnterprise------------------------------------------------------5

2.2DeffinitionofMicroandSmallEnterprise---------------------------------------6

2.3CharactersticsofMicroenterprise----------------------------------------------8

2.4Marketingconstraintsonsmallenterprise-------------------------------------8

Chapter:ThreeResearchmethodolog-----------------------------------------------10

3.1ResearchDesign----------------------------------------------------------10

3.2PrimaryandsecondaryDatasource--------------------------------------10

3.3.Samplingtechnique----------------------------------------------------------11

3.4SamplePopulation------------------------------------------------------------11

3.5Methodofdatacollection------------------------------------------------------12

3.6Methodofdataanalysis-------------------------------------------------------12

ChapterFour:DataAnalysis,Results,Discussions-------------------------13

4.1Generalemployeesbackground----------------------------------------------13
4.2Demogirapiccharactersofrespondents---------------------------------13

Chapterfive:MajorFindings,ConclusionandRecommendation---------------------22
5.1Conclusion----------------------------------------------------------------------------22

5.2Recommendation---------------------------------------------------------------------24

Reference---------------------------------------------------------------------------25
Appendix---------------------------------------------------------------------------26

Listoftable page

Table4.1Agedistributionofowners------------------------------------------------------14

Table4.2Educationalstatus-------------------------------------------------------------14

Table4.3Beginningcapital---------------------------------------------------------------17

Table4.4Managerialofsmallenterprise------------------------------------------------17

Table4.5Managerialproblem------------------------------------------------------18

Table4.6Governmentalaction----------------------------------------------------------18

Table4.7ImpactofGovernment---------------------------------------------------------19
Table4.8Illegalbusiness-----------------------------------------------------------------19

Table4.9Impactofillegalbusiness------------------------------------------------------20

Table4.10Impactofmktproblem--------------------------------------------------20

Table4.11Workingcapitalamount-----------------------------------------------------21

Table4.12HowtoconfinedIfnoenoughcapital------------------------------------21

Listoffigures

Fig4.1sexofrespondents---------------------------------------------------------------13

Fig4.2yearofestablishment------------------------------------------------------------15

Fig4.3Bigningcapitalofenterprise-----------------------------------------------------16
CHAPTER ONE
INTRODUCTION

1.1Background of the study

Micro and Small Enterprises (MSEs) have become engines of poverty reduction, employment

creation and business development among others in various countries worldwide

(Chittithaworn,2011). In the current global economy, micro and small enterprises progressively

being regarded as powerful engines for economic performance and development of most economies

(Muzenda,2014). Industrial development policy authorities in most developing countries globally

have realized the substantial contribution made by MSEs towards attainment of sustainable local

economic development and poverty reduction through creation of job opportunities

(Swerczek,2003).
 In Africa the MSE sector provides certain benefits to the economy, key among them is the

recognized potential of the MSE sector to generate incomes and provide jobs to a large number

of peoples (Fjose, Grunfeld, & Green, 2010).

Microenterprise programs, therefore, are built around the philosophy that the unique ideas and

skills of entrepreneurs and would-be entrepreneurs should be provided business assistance and

small amounts of credit to support the development or start-up of a small business, primarily

through the Most organizations in the field also focus their services on

those micro entrepreneurs who, as defined , by federal government standards, are low-to-

moderate income. (Young, 2013 ). In terms of the numbers of employer business in Ethiopia are

clear like as; A Micro Enterprise is one which employees fewer than 10 employees a small

enterprise as one with 11-15 employees and larger and medium enterprises are those with more

than 50employees.

In Ethiopia, micro and small business sector is recognized as an integral component of

economic development and a crucial element in the effort to lift countries out of poverty

(Wolfe , 2007). The dynamic role of in developing countries as engines through which the

growth objectives of developing countries can be achieved has long been recognized. It is

estimated that micro and small enterprises employee 22% of the adult population in

developing countries (Fisseha,2006).

In developing countries, micro and small enterprises by virtue of their size, capital investment

and their capacity to generate greater employment have demonstrated their powerful
propellant effect for rapid economic growth. The micro and small enterprise sector has also

been instrumental in bringing about economic transition by providing goods and services,

which are of adequate quality and are reasonably priced, to a large number of people, and by

effectively using the skills and talents of a large number of people without requiring high-level

training, large sums of capital or sophisticated technology (ILO, 2008).

Several factors affect micro and small enterprise some of them are production technology,

availability of raw materials, finance, Market, government action. Existence of illegal business

and availability of in restructure (Burn & Hubert, 1996).

In light of the above justification in this study, the researchers is attempt to identify micro and

small enterprise in A.AbabaKirkos sub city.

 3

1.2. Statement of the Problem

Micro and small enterprise account for the vast majority of enterprise and contributed major

share to employment and economy growth in the European countries, Japan and US (Muller et

al., 2014). Similarly, many of the countries in Sub-Saharan Africa reported to have high number

of MSEs in the economy (Tvedten, Wende, Hansen, Jeppesen, 2014).

Small business has played a significance role to the advancement of human society. It was

largely through small business that civilization was speeded to all four corners of the known

world brought to the Jewish colander and Roman law (Nicholarc, 1994).

In Ethiopia Micro and small Enterprise create the Best condition for the efficient

functioning of an economy for maximizing national income and speeding economic growth

through enhanced capacity of domestics saving (Dinl,2003).

The study was conducted by Ethiopian CSA discloses that, the contribution of small

enterprises in creating job opportunities and in the development of our economy is vital

(Zeleke,2006). However, their contribution is very low in compared with that of other countries
due to financial problem, lack of qualified employees, lack of proper financial records, marketing

problems, lack of working premises and raw materials. Lack of information about market

opportunities and standards and regulations is one of the underlying factors that hinder their

performance (Mulu, 2009).

According to Zeleke study (2009) lack of integration between the vocational curriculum taught at

academic institutions and skills required at the workplace in small and enterprises is a major

obstacle to the growth and development of Micro and small Enterprises.

The performance of the Micro and small Enterprise sector in Ethiopia is poor in comparison with

similar sectors in other African countries such as South Africa, Kenya, Uganda and Tanzania.

Small business enterprises in Ethiopia are generally characterized by an acute shortage of

finance, lack of technical skills, lack of training opportunities and raw materials, poor

infrastructure and over-tax (Mulu, 2009).

After the business goes operational, the probability of becoming profitable and paying back

debts along with accrued interest is less. Besides, Micro and small Enterprises do not conduct

market research and develop/design a product or service as per the need of customers (Zeleke,

2009).

According to the study conducted in Addis Ababa University by Zeleke (2009) and Admasu

(2012) particularly in kirkos sub city concluded that marketing, infrastructural and

entrepreneurial factors are the basic variables which affects the performance of Micro and small

Enterprises s. But some other factors such as lack of commitment to their business, and lack of
awareness regarding to business plan is still uncovered. In addition to this, the study focuses not

only identifying factors which affect performance of MSEs, but also the researcher try to

assessed important opportunities which are currently available for MSEs in Addis Ababa kirkos

sub city.

In order to achieve the intended objectives of the study, the researcher have the following basic
research questions;

1 What are the problems that affect micro and small enterprise?
2 Does government action affect micro and small enterprises?
3 Does illegal business affect small enterprise?
4 What are the impacts of marketing activities? And
5 What are the roles of finance to run small enterprise?
 6

1.3 Objective of the study

1.3.1 General Objective

The main objective of the study is to assess the challenges of Micro and Small

Enterprise in Addis Ababa Kirkos sub city.

1.3.2 Specific objective

The specific objectives of this research are:

- To identify the problems that are affecting Micro and Small Enterprise Kirkos sub city.

- To identify the measures MSEs take to alternative their problems .

-To assess the role and contribution of government offices in supporting Micro and Small
Enterprises.

-To assess the impacts of marketing activities.

-To assessthe roles of finance to run small enterprise.

1.4 Significance of the study

Findings from this study help academicians for further study in the area by providing a deeper

understanding of the critical that affect the performance of MSEs. In addition, the regional

government uses the findings of this study to overcome critical challenge that affect the
performance of MSEs. Moreover, the findings of this study help the policy makers and financial

institutions in consideration to areas where the strategies should be focused so as effectively

promote MSEs performance.

1.5 Scope of the study

This study is focus on the challenges of Micro and Small Enterprise on Addis Ababa Kirkos sub

city. Therefore, the research was be concentrated in A.AbabaKirkos sub city on the issue of

Micro and Small Enterprise.

1.6 Organization of the paper

The study is organized in five chapters. Charter one deals with introduction part consists of

background of the study, statement of the problem general and specific objectives, significance

of the study as well as scope of the study. The second chapter deals with review of related

literature .The third chapter deals with methodologies which are key elements for this study. The

major findings and discussion part of this study was undertaken in chapter four, whereas

conclusions and recommendation has included in the last chapter which is chapter five.
 8

CHAPTER TWO

LITERATURE REVIEW

2.1. Introduction

This chapter reviews related literature under different sub-topics relevant to the study

objectives. This includes definition of Micro and small enterprises (MSEs), measurement of

performance of MSEs, contribution of micro and small enterprises to the economic development.

It also discusses the theoretical background and empirical study on micro and small-scale

enterprises (MSEs) included the challenge that influence performance of MSEs such as Finance,

marketing work premises, technology, infrastructure, and personal entrepreneurial characteristics

on MSEs performance. Finally presents the conceptual framework, which gives a grasp picture

of the study.

2.2. The Definition of Micro and Small Enterprises (MSEs)

The definition of micro and small enterprises around the globe vary from country to

country and depend on the phase of economic development as well as their prevailing social

conditions. The definition uses number of full time employee, total asset, net asset and paid

capital, and annual turnover as criteria independently or in combination (Haily,2007).

According to European Commission’s the recommended official definition of micro and

small enterprises base on criteria of the number of employees and one of the two financial

criteria,
 9

such as either the total turnover or total balance sheet. Based on this definition small enterprises

has number of employees less than 50 and micro enterprise has less than 10 employees (Efil,

2001).

Similarly, in Africa the definition of Micro and small scale enterprise is differing from countries

to countries. For instance, Kenya’s definition of micro and small enterprises used two criteria

such as number of employees and the company’s annual turnover. For enterprises in the

manufacturing sector, the definition takes into account the investment in plant and machinery as

well as the registered capital. Accordingly, for micro enterprise number of employees less than

10 and annual turnover is not exceeding ksh 500,000. And small enterprise has less than 50

employees and annual turnover between ksh 500,000 to 5 million (Khrystyna, Mirmulstein,

&Ramalho, 2010).

2.3. Measurement of Performance of MSEs

Performance definition is not common for all scholars. Global Entrepreneurship Monitor

defined performance as the act of performing; of doing something successfully; using knowledge

as distinguished from merely possessing it. However, performance seems to be conceptualized,

operational zed and measured in different ways thus making cross-comparison difficult (Gibbson

,1990).

The measure of performance of MSEs are performance indicators which are commonly used

10
to help an organization define and evaluate how successfully in terms of making progress

towards its long term organizational objectives (Gibbson 1990).

Therefore, quantifiable measurements agreed to beforehand, that reflect the critical success

factors of an organization.

The business performance is the phenomenon of multiple aspects that are difficult to quantify

(Sanchez & Marin, 2005). While qualitative measurements are often called as performance

indicators, performance measurement is using the approach of a certain scale of performance

variables such as knowledge and business experience, the ability to offer quality products and

services, the capacity to develop new products and processes, the ability to manage and work in

groups, labor productivity, and corporate responsibility to the environment. (Sanchez &

Marin,2005) measured the performance of small and medium enterprises with reference to the

three aspects namely profitability, productivity, and market.

While using performance effort represented by the growth venture consisting of sales growth, the

growth of the company's assets, and profit growth (Lee &Tsang ,2001)

Study conducted on micro and small enterprises (MSEs) result shows that performance of small

business determined by owner/manager personal value (Herath,2007; Lee and Tsang, 2001;

Street and Cameron, 2007; Nimalathasan,2008).

11
All of which stated that the owners/manager is a key factor in business performance.(Zoysa&

Herath,2007) examined the relationships among owner/manager with business performance at

different stages of business growth, when owner/managers of MSEs are more entrepreneurial

minded in the introductory and decline stages of growth, their performance tends to be higher,

and the same is true for the growth and maturity stages when they are more administrative

minded.

2.4. Contribution of Micro and Small Enterprises (MSEs)

Across the European Union countries at the end of 2013, 21.6 million SMEs in the nonfinancial

business sector employed 88.8 million people and generated euro 3,666 trillion in value added.

Expressed another way, 99 out of every 100 businesses are SMEs, as are 2 in every 3 employees

and 58 cents in every euro of value added(Muller,,2014).

Based on the review of the literature on the study area indicated that there is information gap on

the contribution of MSEs Sector all over the economy of the country.

2.5. Theoretical Background on Micro and Small Enterprises

A theory represents the coherent set of hypothetical, conceptual, and pragmatic principles

forming the general frame for reference for the field of enquiry. These are some of the theories

that have been, advanced for micro and small Enterprises, which are part of entrepreneurship.

Entrepreneurship considered as an approach to management, defined as a

12
process by which individuals either on their own or inside organizations pursue opportunities

without regard to the resources they currently control in an innovative, risk-taking and proactive

manner (Todorovic,2006)

From the above definitions, entrepreneurship covers an individual’s motivation and capacity

independently or within an organization to identify an opportunity and to pursue it in order to

produce new value or economic success Entrepreneurs pursue opportunities to grow a business

by changing, revolutionizing, transforming or introducing new products or services (Hansen,

2011).

The three important themes in this definition are (1) the pursuit of opportunities, (2) innovation,

and (3) growth link entrepreneurship to industrialization process.

Behavioral theory argues that the managerial skills such as ability to search business related

information, identify opportunities, deal with risk, establish relationships and networks, make

decisions under pressure and learn from experience are crucial for the success of an enterprises

(Veciana,2007). According to trait theory, entrepreneurs have different psychological profile

than the rest of the population, and successful entrepreneurs have a psychological profile distinct

from the less successful ones (Veciana,2007).

According to Kuratko and Hodgetts (2007), persistence considered as one of the most

important attributes of successful entrepreneurs and the decision to start a business a single time

but they must make the decision to persist with the venture many times.

13
 Often individuals make the decision to persist, almost automatically, with little thought for

alternative actions. Persistence is one of the essential characteristics for success entrepreneurship

(e.g. Kuratko and Hodgetts, 2007). As an entrepreneur considers whether to persist with an

existing venture or to pursue a new opportunity, a higher value of persisting will have a more

substantial impact on the decision when expectancy is low than when expectancy is high. Hence,

conditions that prompted a more serious evaluation will likely influence the way that expectancy

and value used in the decision policy (Grilli, 2011).

The concentration of a prospective entrepreneur’s network contacts in space, together with the

multifaceted influence of networks on the entrepreneurial process, implies that those

individuals most able to enter an industry reside in the regions that have concentrations of those

businesses already (Sorenson and Audia ,2000) .

According to Simpeh (2011), explaining personality traits means making inference from

behavior. Some of the characteristics or behaviors associated with entrepreneurs are that they

tend to be more opportunity driven, demonstrate high level of creativity and innovation, and

show high level of management skills and business knowledge.

In MSEs, the key entrepreneurs or founders function as the CEOs (Helmchen,2008) and play a

dominant role in the development of the firm and their powerful and influential position will

affect firm performance( Wincent&Westerberg, 2005).Entrepreneur trait has been, extensively

studied in the literature with mixed results (Wincent&Westerberg, 2005; Cools

15
& van den Broeck, 2007). Some studies convincingly asserted that that some traits have positive

and significant relationship with firm performance (Hmieleski& Carr, 2008) while other studies

find insignificant relationships.

The results indicated that internal locus of control positively related to firm performance, and

entrepreneurial orientation did not play a mediating role in this relationship. In contrast,

generalized self-efficacy had no direct effects on firm performance; however, it influenced firm

performance positively through its effect on entrepreneurial orientation. Finally, self-attributed

achievement motive was not significantly related to entrepreneurial orientation or firm

performance (Poon, Ainuddin and Junit , 2006)

Based on the above, discussions it is clear that the field of entrepreneurship have some

interesting and relevant theories, which supported by empirical research evidence. This

development holds a rather brighter future for the study, research, and practice of

entrepreneurship.

2.6. Empirical Study on challenges of Small and Micro Enterprise

Based on the reviewed of past studies conducted on micro and small enterprise the internal

(Personal entrepreneurial characteristics) and external business environments affect performance

of MSEs. Accordingly, some of empirical studies discussed as follows;

Adegbite (2006) evaluated the impact of entrepreneurial characteristics on the performance

16
of small-scale manufacturing industries in Nigeria using descriptive and inferential statistics to

examine 10 Personal Entrepreneurial Characteristics (PECs). The study concluded majority (7)

of the 10 Personal Entrepreneurial Characteristics (PECs) such as: persistence, commitment to

work Contact, opportunity seeking and initiative, risk taking, goal setting, networking and

persuasion and independence and self-confidence of the respondents made negative contribution

on the sales revenue. The other PECs demand for efficiency and product quality, information

seeking; and systematic planning and monitoring had positive impact.

Ajay (2008) have revealed many facts concerning the socioeconomic and motivational factors

affecting street entrepreneurship. It found that among many socio-economic and motivational

factors, size of initial investment, number of workers, family business and promising demand of

product/ services were some of the major determinants of street entrepreneurial success.

.2.7. Conceptual Framework

The conceptual framework shows relationships between independent and dependent variables.

Since business performance is influenced by both internal and external factors, operators need to

understand what influences businesses to reach expected performance. The external factors

include political, legal, finance, marketing, work premise, technology, and infrastructure factors.

The internal factors included personal characteristics of entrepreneurial

17

such as opportunity seeking, persistence, commitment to the work, demand for efficiency and

quality, risk taking, goal setting, systematic planning and monitoring, information seeking,

persuasion and networking, and self-confidence.(Ajay , 2008).

18

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Research design

 The study was undertaken on challenges of Small and Micro Enterprise
in Addis Ababa city administration Kirkos sub city. To conduct the study, the
researcher was used descriptive study design. Small and Micro Enterprise of
the town faced various challenges. Therefore, the researcher gave more
emphasis to the relevant challenging factors of Small and Micro Enterprise
of the sub city.

3.2 .Primary and Secondary data source

Primary source of data.

Questionnaire is the dominant primary data collection tool that the researcher is use for

the study. For these purpose self- administrated types of questionnaire has used to collect data

from employees of the organization. This method is chosen because it is expected that the

respondents are educated to fill the designed questionnaire properly as it is intended by the

researcher. Interview is the other primary data collection tool that the researcher is use to collect

data from management bodies. This method is chosen because it provides greater flexibility and

the opportunity to restructure questions and misinterpretation of the answer for question is also

easily avoided.

19

Secondary source of data

Secondary data is important instrument for the study. For this purpose a number of books are

used to understand how the system works, it is necessary to look through written documents

(materials) and records available from the organization.

Documentary review is necessary to understand the system so that to judge the organization

application of the system. For the study the documents are expected to be taken from printed

materials, journals and online published materials from internet.

3.3. Sampling technique

The researcher selected the sample respondents by using stratified sampling

technique, because this technique divides the population in to homogenous
sub groups.

3.4. Target population

The target populations of this study were micro and small enterprise of manufacturing,
construction and service sector that is found in Kirkos sub city. The total number of population is
describing as follows:-

Table 1

Business sector Total population Sample from each strata

Manufacturing 460 42
Construction 244 22
Service 130 12
Total 730 76

20

3.5. Method of data collection

The researcher was collect the data by using questionnaires and interview from different people

participating in micro and small enterprise. These people include youth, adults and old age

groups.
To get data from primary sources both open ended and close ended questions have prepared in

the form of questionnaire and distributed to sample respondents to reply their ideas and

experiences about the question for open ended questions. The closed ended questions had

selected for the reason that it provides uniform responses and also easy to process and relevant to

the most of respondents.On the other hand, unstructured interview had prepared and asked to the

concerning bodies related to the topic of the study.

3.6. Sample size

From the total number of target population of micro and small enterprise of the manufacturing,

construction and service sector the researcher is taking by calculate by using formula. Assume: e

=10%

n=N/1+N (e) 2 =325/1+3251(0.1)2 =76.87

Where N=Target Population

n=Sample size

e = sampling error

21

3.7. Method of data analysis

The researcher was used descriptive data analysis technique to analyze qualitative and

quantitative data by using table, pie chart, bar graph and percentages.
CHAPTERFOUR: DATA ANALYSIS, RESULT AND
DISSION

This chapter deals with the result, discussion or data presentation analysis
and interpretation of data collected. This analysis tries to assess the challenges
of Micro and Small Enterprise in Kirkos sub city. The researcher has conducted
questionnaires and unstructured interview in the enterprises.
The researcher had taken sample size of 76 owners and managers from total
population of 730 of the enterprises. The questionnaires were distributed to 76
respondents but only 65 questionnaire or 90% of the questionnaires were
returned the rests 11(10%) of questionnaire were not returned because of
respondents different factors like unwillingness, time shortage and other
factors.

4.1 General employees’ background

Under this portion the analysis and interpretation mainly consist of Sex, age, education level,
marital status, and work experiences.

4.2 Demographic Characteristics of respondents

Fig 4.1 sex of respondents

31
%
Female
69.
% Male

The proceeding fig 4.1 depicts that 69% of the sample for the study were males
and the rests (31%) were females

The researcher understood that there were unequal distribution of male and
females and the participation of females in Micro and Small on Enterprise was
low when compared with male.

Table 4.1 Age distribution of owner manager

Respondents
Age category Frequency %
15-30 35 64
31-45 20 33
46-60 10 3
Above 60 0 -
Total 65 100
Source: own survey 2019

The result of data analysis in table 4.1 revealed that the age of 64% of the
respondents lied within 15-30 years and 33% of the respondents are 31-45 3%
respondents were 40-60 years.

From this the researcher understood that the majority of the respondents lie
between 15-30 years and this implies they are productive labor force which
takes the best advantage of new technologies and changing market
opportunities

Table 4.2 Educational status of respondents

Respondents
Respondents items Frequency %
1-6 0 -
7-8 11 13
9-12 20 47
12 complete 14 16
Vocational 13 14
BA degree 7 10
Total 65 100
Source: own survey 2019

The above table shows that the educational status of 47% of micro and small
business owners surveyed were from 9-12 grades, 13% of respondents were
from 7-8, 16% of respondents were 12 completed, 14% of respondents were
from vocational and 10% of respondents were BA degree. Generally as
researcher observed from the table there was modularity life rate human even
though, there was less graduated of BA degree. This implies that they have
medium level of opportunities to growth their productivity and to engaged in
new market and they lack some professional or more educated people.

Fig 4.2 Year of establishment

2040
27 24
2030 22
21
19
2020
16
12
2010 9

2000

1990

1980
1 2 3 4 5 6 7 8
1997 1998 1999 2000 2001 2002 2003 2004
Years
Source: own survey 2019

From the graph the researcher understood that most of the Micro and Small
Enterprise were established in 2002 year. Generally it implies that there were
many Small and Micro business established in Kirkos sub city. at different years
and they have been a lion share contribution to the sustainable development of
countries economy and have been improved standard of the society of the town
by increasing their per capital income.

As indicated in the above graph about 6% of Micro and Small Enterprise were
established in 1997,8% of in 1998, 10.7% of in 1998, 12.67% of in 2000, 14%
of in 2001, 18% of in 2002, 14.67% of in 2003, 16% of in 2004 were
established.

Fig 4.3 Beginning capital of Micro and Small Enterprise

 below 20,000,53%

20,000-10,000,32%

above 10,000,15%

Amount of
capital

Source: own survey 2019

The above fig shows that 53% of the respondents responded that their capital
was blow 20,000.32% of them ranged between birr 20.000 and 10,000 and the
rests 15% of respondents that their capital was above birr 10,000. This
indicated that most of the respondents have weak finical position.

Generally this weak financial position by itself would bring about other related
problems which are supposed to be raised in this regard are marketing
problem and raw material problem from this one can understand that even
though, the nation’s economic developments requires enough capital in
different sectors, but at Micro and small Enterprise sectors the capital was still
low in Kirkos sub city.

Table 4.3 managers Micro and small Enterprise

Managers of the enterprise Frequency

Number %
The owner him/her self 20 21
Relative of owners 35 52.34
Employed person 15 26.66
Total 70 100
Source: own survey 2019

From the above table it indicated that 52% of the managers of the enterprises
is the owner himself. 21.33% relative of the owner and 26.66% of the
enterprises is employed person. This indicated that more than half of managers
of the enterprises were the owner themselves and it might face lack of
professional managers with the required knowledge that can handle the affairs
of the business and its management in business and not all owners were
adequately qualified and managed their business.

Table 4.4 Managerial problem of small enterprise

Descriptive Items Respondent

Number %
Is there managerial problem? Yes 44 57.66
No 29 42.34
Total 70 100
Source: own survey 2019
From the above table 57.66% of the respondents responded that there was a
managerial problem in Micro and Small Enterprise and the rest of 42.34 of
respondents responded that there was no managerial problem in their micro
and small enterprise.

The researcher understood that even though, there was good management in
some enterprises most of the enterprise faced poor management poor
managerial activities like lack of proper planning, lack of manage their
materials and human resources or labor force to manage their enterprise this
would lead to be difficult to be success to their objective of the enterprises.

Table 4.5 Governmental action on small enterprise

Existence of government impact on enterprise

Descriptive Respondents Respondents

Is there governmental action? item Number %
Yes 56 57.33
No 24 42.67
Total 70 100
Source: own survey 2019

The result on the above table indicated that 57.33% of respondents responded
that there was an impact of government action on small micro enterprise
through charging high tax and less support for them and the rest 42.67% of
respondents responded that there was no government action on small
enterprises

Table 4.6 Impact of government action on small enterprises

Respondents item Respondents

Number %
High taxation 22 39.33
Less support 21 38
Rule and regulation 27 22.66
Total 70 100
Source:own survey 2019

As the table indicated 39.33% of the respondents responded that government

affect them through collecting of high tax. 38% responded about government
action that there were no enough participation or support of government and
the rests 22.66% of respondents responded that rule and regulation of
government (license and control the enterprise). This showed that high taxation
was one of the major impacts of the government action on Small and Micro
Enterprise that leads the enterprises to increase their expenditures and
decrease productivity.

In general high taxation, less support or less attention for the rule and
regulation on small and micro business would make them to fail to run the
business.

Table 4.7 Illegal Business

Descriptive Respondent’s item Respondent

Number %
Is there illegal business? Yes 50 82
No 15 18
Total 65 100
Source: own survey 2019

As the table indicated that the availability of illegal business like fail to pay tax
was18% of respondents responded that there was illegal business. The rest
82% of respondents responded that there was no illegal business.
Table 4.8 impact of illegal business

Descriptive Respondent’s item Respondent

Number %
Is there impact of Increase price of input 6 4
illegal business? Decrease price of out put 12 8
Reducing of customer 7 5.33
Non 40 82.67
Total 65 100
Source: own survey 2019

The above table showed that 6%, 8%, 5.33%, 82.67% of respondents indicated
that increase price of input, decreases the price of the output, reduce the
number of customer, and none (no impact) respectively. This means most of
the Micro and Small Enterprise were legal.

Table 4.9 Marketing problem in Micro and Small Enterprise

Descriptive Respondent’s item Respondent

Number %
Is there marketing Yes 39 80.67
problem? No 26 19.33
Total 65 100
Source: own survey 2019

As the researcher understood from the table 80.67% of respondents responded

that there was marketing problem and the rest 19.33% responded that there
was no existence of marketing problem. This means there were marketing
problems of Micro and Small Enterprise regarding the product price and other
marketing area of the enterprise.

Table 4.10 Impact of marketing problem on small business

Respondents item Respondents
Number %
Shortage of raw materials supply 13 20
Increase in price of raw materials 16 24
Lack of quality of in put 12 19.66
All of the above 18 26
None of the above 6 10.34
Total 65 100
Source: own survey 2019

Based on the above table, Shortage of raw material supply was responded by
20% increase in price of raw material was responded by 24% of respondents,
Lack of quality of input responded by19.66%, All problems were responded by
26% of respondents and the rests none was responded by 10.34% of
respondents.

From the above table the researcher understood that even though there were
no market problems in a few ways there were several problems in regarding the
market so that it may lead to hinder the development of Micro and Small
Enterprise.

Table 4.11 Working capital of Small Enterprise

Descriptive Respondents item Respondents

Is there enough capital to Number %
continue the operation? Yes 20 34.67
No 45 65.33
Total 65 100
Source: own survey 2019.

The above table indicated that 34.67% of respondents responded that there
was enough capital that would help to continue the operation in Micro and
Small Enterprise and the rest 65.33 of respondents responded that there was
no enough capital to continue the activities Micro and Small Enterprise.

Table 4.12 How to continue if there is no enough capital

Respondents item Respondents

Number %
Borrowing from bank 13 18.6
Borrowing from government 22 34.9
Borrowing from other enterprise 20 32.5
More 10 14
Total 65 100
Source: own survey 2019

The above table shows that most Micro and Small Enterprise were borrowed
from government which was 34% of the total respondents,32.5% from other
enterprise,18.6% from bank ,and 14% of the respondents respondent that
there had been had enough capital to continue their business.

From the data the researcher understood that most of the enterprises had not
enough capital and most of them borrowed from government. It indicated that
governments would play major role to process of Micro and small Enterprise
specially by borrowing the capital.
Chapter 5: Conclusion and Recommendation

5.1. Conclusion

In the analysis section, detailed interpretation and discussion were made. The
researcher has concluded the study based on the analysis made in the
previous chapter.

Many of the owner and managers in the Micro and Small Enterprise were
males and this indicated that there was no equal distribution among females
and males and females have less participations.
Most of the respondents on this sample were young people who were very
powerful for the production increases and generally to achieve the primary
goals of that business.

As the data indicated most of respondents were from grade 9-12 and others
were not more educated. This implies that they faced lack of knowledge and
they would need some training or to be learned more in order to have very
skilled and professional person who can run the business effectively.

Almost Micro and Small Enterprise came in to existence during the last few
years. This shows that they had no long time experience of how the business
should be profit able.

The majority of Small Enterprise was beginning with capital of less than
20,000. They had weaker financial positions due to that they were labor
intensive. The researcher concluded that they were in the process of low
operating capital.

The manager of Micro and Small Enterprise were the owner him/herself which
refers to no need of another person to employ to run their business.

Most the respondents responded that Small Enterprise hade managerial

problem and only few of them responded that they had no managerial
problems.

It shows that many enterprises had no good management that would help them
to solve their problems. Others of the enterprises that had managerial problem
were related in experience due to the established in last few years.

Government action was one of the most problems that had impact on Micro
and Small Enterprise. This impact was mainly through paid thigh tax on small
enterprises. This means that the expenditures of Small Enterprise will be high
and it affected the whole growth of the enterprise
-On the existence of illegal business, the majority of the respondents responded
that there was no illegal business. Some other few respondents said that there
was illegal business and its major impact on their Micro and Small Enterprise
decrease the price of the products by competently with them.

- Small business had also marketing problem. This problem was related to the
increase in the price of row materials or in put that used in operation. Even
though, there were shortage of raw materials supply and lack of quality of
input, increase the price of raw materials was the most problem. It indicated
that the cost of Micro and Small Enterprise for purchasing raw materials was
high and it decrease profitability and productively.

-In fact, the capital is one of the important resources that help the enterprise
for the whole operations of their business, but majority of respondents said
that there was no enough capital to continue the business.

The respondents responded that they had borrowed from the government and
only few enterprises borrowed from bank. From this the researcher concludes
the government was one of the major sources for their capital through lending
to theme.
5.2 Recommendation

Based on the research findings, the researcher has forwarded the following
recommendations:

Females’ participation can increase if the government support and initiate

them through education and visualizing the importance of Micro and small
Enterprise by planning different strategies like training and by applying
affirmative action.

Education of the managers and owners of the enterprise is better to perform

their activities efficiently and to improve their knowledge about business and
others. Idea sharing program with other city Micro and Small Enterprise is
better to increase experience.

To have sufficient operation capital, they should increase from finical

institution such as bank and the like.
Managers and Owners of the enterprise should improve their ability though
education and training formally and informally to be successes in business
activity and to be effective.

By considering the importance of Micro and Small Enterprise for the

development of the country, the government income such as tax should be
based on their profitability from the products or services they have. Otherwise
the enterprises may be stop due to high taxation.

Any illegal business like unpaid tax should not be available because it leads to
go down the development of the country. So government should follow-up them
and punish if there is illegal business.

wise use of the available resources, making best relationship with the supplies
and using substitute goods until the materials needed available at reasonable
price may be the solution for marketing problem they faced. If they don’t spend
their capital by purchasing large machinery and equipment they can have
enough working capital and it is good to increase contribution of the owners
from time to time.
 22

REFERENCE

1. Burn (1996) Entrepreneurship and small business, 2nd edition.

2..Burn and Hurrt (1996). Small business and entrepreneurship.

3.Chittithaworn(2011) Technical Efficiency of Small-and Medium- Scale Enterprises. .

4. David Young (2013). Business research of practical guide for post gradates.

5.Dinl, (2003) Micro and Small Scale Enterprises and their influences in alleviating Urban

Poverty in Nekemte City, Oromiya Regional State.…

6.Efil (2001) Marketing Strategies for Micro and Small Enterprises in Ethiopia: Ethiopian

Business Development Services Network (EBDSN), Addis Ababa.

7.Fisseha(2006Small Scale Enterprises in Lesotho: Summary of a Country-wideSurvey’.

Gemini Technical Report No.14, Washington D.C. Development Alternatives Inc

8.Fjose, Greenfield ,and Green (2010) Entrepreneurship in Large Firms and SMEs: A

Comparative Study,International Small Business Journal, 12: 11-23.

9. Gibson (1990) ). Perceived Causes of Small Business Failures: A Research Note, American

Journal of Small Business, 8:15-19..

10.Haily (2007). Socioeconomic Status, Poor Health in Childhood, and Human Capital

Development, Journal of Economic Literature.

23

11. Ilo (2010) Large Sums of Capital or Sophisticated Technology.

12.Lee and Tsang (2001), The Growth of the Company's Assets, and Profit Growth.

13.Mulu (2009).Factors affecting the performance of Women Entrepreneurs in Micro and

small enterprises (the case of Dessie Town).

14.MuluGebreeyesus (2009) Innovation and Microenterprises Growth in Ethiopia.

15.Nicholarc (1994). Business research method, 5th edition.

16. Sanchez and Marin (2005) measured the performance of small and medium enterprises.

17.Swerczek(2003).Entrepreneurshipandsmallbusinessmanagement.

18. Tvedten, Wende, Hansen, and Jeppesen, (2014) Many of the countries in Sub-Saharan Africa

reported to have high number of MSEs in the economy.

19.Zeleke (2009) ).Factors that Affect the Long-term Survival of Micro, Small, and Medium

Enterprises in Ethiopia.South African Journal of Economics.

20.Zeleke(2009) and Admasu (2012) ,Technical Efficiency of Small-and MicroEnterprises.

24