ST.

MARY’S UNIVERSITY
SCHOOL OF GRADUATE STUDIES

PRACTICES AND CHALLENGES OF MICRO

AND SMALL SCALE ENTERPRISES IN THE
CASE OF SELECTED DISTRICTS IN AKAKI-
KALITY SUB-CITY

BY
MEKONNEN DERBIE

Advisor: Tilaye Kassahun (PhD)

JUNE, 2014
ADDIS ABABA, ETHIOPIA
 PRACTICES AND CHALLENGES OF MICRO AND
SMALL SCALE ENTERPRISES IN THE CASE OF
SELECTED DISTRICTS IN AKAKI-KALITY SUB-CITY

BY
MEKONNEN DERBIE

A THESIS SUBMITTED TO ST. MARY’S UNIVERSITY, SCHOOL OF

GRADUATE STUDIES IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE DEGREE OF MASTER OF GENERAL
BUSINESS ADMINISTRATION

Advisor: Tilaye Kassahun (PhD)

JUNE, 2014

ADDIS ABABA, ETHIOPIA

 ST. MARY’S UNIVERSITY
SCHOOL OF GRADUATE STUDIES
FACULITY OF BUSINESS

PRACTICES AND CHALLENGES OF MICRO AND SMALL

SCALE ENTERPRISES IN THE CASE OF SELECTED DISTRICTS
IN AKAKI-KALITY SUB-CITY

BY
MEKONNEN DERBIE

APPROVED BY BOARD OF EXAMINERS

________________________________ __________________
Dean, graduate studies Signature

________________________________ __________________
Advisor Signature

________________________________ __________________
External Examiner Signature

________________________________ __________________
Internal Examiner Signature
 TABLE OF CONTENTS

Table of Contents ……………………………………………………………………………….I

Acknowledgements ………………………………………………………………….………..IV
List of Abbreviations/Acronyms ………………………………………………………………V
List of Tables ……………………………………..…………………………………………..VI
List of Figures ……………………………………………………………………………....VII
Abstract ……………………………………………………….…………………………….VIII
CHAPTER ONE………………………………………………………………………………1
INTRODUCTION……………………………………………………………………………..1
1.1. Background of the Study…………………………………………………………………..1
1.2. Statement of the Problem…………………………………………………………………..2
1.3. Objectives of the Study…………………………………………………………………….4
1.3.1. General Objectives……………………………………………………………………….4
1.3.2. Specific Objectives………………………………………………………………………4
1.4. Significance of the Study…………………………………………………………………..4
1.5. Delimitation of the Study…………………………………………………………………..5
1.6. Definition of Terms………………………………………………………………………...5
1.7. Organization of the Study………………………………………………………………….6
CHAPTER TWO……………………………………………………………………………...7
REVIEW OF RELATED LITERATURE…………………………………………………..7
2.1. MSE’s at the Global and Ethiopian Context………………………………….....................7
2.1.1. MSE’s at the Global Context…………………………………………………………….8
2.1.2. MSE’s at the Ethiopian Context………………………………………………………...9
2.2. An Overview for the Development of MSE’s in Ethiopia……………………………….10
2.3. Micro and Small Enterprises Contribution……………………………………………….12
2.4. Rationale for Emphasizing MSE’s Development………………………………………...15
2.5. The Role of MSE’s Support Institutions………………………………………………….16
2.6. The Challenges on Micro and Small Enterprises………………………………………....17
2.6.1. Lack of Adequate Finance……………………………………………………………...18
2.6.2. Lack of Working Premises……………………………………………………………...19
2.6.3. Lack of Managerial and Technical Skills………………………………………………20
I
2.6.4. Lack of Adequate Market………………………………………………………………20
2.6.5. Inadequacy of Infrastructure Facilities……………………………………….………...21
2.6.6. Erratic Supply of Raw Materials………………………………………………………..22
2.6.7. Regulatory Constraints………………………………………………………………….22
2.7. National Strategies for the Development of MSE’s……………………………………...22
CHAPTERTHREE…………………………………………………………..........................25
THE RESEARCH DESIGN AND METHODOLOGY…………………............................25
3.1. The Research Procedures and Activities Undertaken…….................................................25
3.2. Research Design and Methodology………………………………………………………25
3.2.1. Sample and Sampling Techniques…………………………………………………... …25
3.2.2. Instruments of Data Gathering………………………………………………………. …27
3.2.3. Sources of Data……………………………………………………………………… …28
3.2.4. Method of Data Processing and Analysis...………………………………….................28
3.3. Reliability and Validity of Instruments……………….………..........................................29
3.3.1. Reliability…………………………………………………………………………….....29
3.3.2. Validity…………………………………………………………………………………29
3.4. Ethical Considerations……………………………………………………………………30
CHAPTER FOUR……………………………………………………………………………31
DATA PRESENTATION, ANALYSIS AND INTERPRETATION……………………..31
4.1. Introduction……………………………………………………………………………….31
4.2. Characteristics of the subjects…………………………………………………………….31
4.2.1. Sex of the Respondents…………………………………………………………………32
4.2.2. Age of the Respondents………………………………………………………………...33
4.2.3. The Educational Level of the Respondents……………….……………………............33
4.2.4. Respondents on Category of Sectors…………………………………………………...34
4.2.5. Experience of the Respondents…………………………………………………………35
4.3. Startup and Working Capital and its Contribution……………………………………...35
4.3.1. Responses on Employment Opportunity and Earnings…………………………… …36
4.3.2. Responses on Startup and Working Capital and Its Sources…………………………...37
4.4. Challenges Related to MSE’s Operations………………………………………………...38
4.5. Comparison of Major Challenges…………………………………...................................53

II
CHAPTER FIVE.....................................................................................................................55
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS…….. …55
5.1. Summary of Findings……………………………………………………………………..55
5.2. Conclusions……………………………………………………………………………….57
5.3. Limitations of the Study…………………………………………………………………..58
5.3. Recommendations………………………………………………………………………...60
REFERENCES
Appendices (A to D)

III
 ACKNOWLEDGEMENTS
It is the forgiveness, help and kindness of the almighty God that made me still alive and
achieve this success.

Despite many people who have supported me to achieve the completion of this study, it would
have not been possible without the unreserved guidance and support of my thesis advisor Dr.
Tilaye Kassahun. So, I would like to say thank you for his constructive comments, support and
the realization of this thesis.

Next, I cannot afford to leave out the precious support of Col. Muez Abreha who showed
much attention and support to the success of my study; and my staff members for their overall
positive comments, supports and cooperation while doing this study.

I would like to warmly thank all the study participants in general and Akaki Kality Sub-city,
and district one, four and seven MSE’s offices officials and experts who provide their valuable
time and effort in providing with relevant information and document in particular.

Last but not least, I would like to extend my thanks to my wife Yeshi Demere, my brother
Yitref Derbie, my sister Getie Belay, and my children Mihret Mekonnen and Kaleab
Mekonnen for their kind concern and encouragement to this study.

IV
 List of Abbreviations/Acronyms

AACA Addis Ababa City Administration

CLEP Commission for Legal Empowerment of the Poor

FRMSEDA Federal and Regional MSE’s Development Agency

FRMSES Federal and Regional Micro and Small Enterprise Strategy

GDP Gross Domestic Product

GFDRE Government of Federal Democratic Republic Ethiopia

Gov Government

GNP Gross National Product

GTP Growth and Transformation Plan

ILO International Labor Organization

ME Micro Enterprise

MN Mean

MSE Micro & Small Enterprise

MoFED Ministry of Finance and Economic Development

MSEDS Micro and Small Enterprises Development Strategy

MUDC Ministry of Urban Development & Construction

SD Standard Deviation

SPSS Statistical Packages for Social Sciences

UN United Nations

UNIDO United Nation International Development Organization

UNDP United Nations Development Program

V
 LIST OF TABLES

Table 2.1 Employment Created By Regions and City Administrations (2003-2005)………...14

Table2.2. Support to MSE’s provided by Akaki-Kality Sub-city (2004-2005)……………….17
Table3.1. Population and Sample Size......................................................................................27
Table4.2. Demographics of the Respondents…………………………………………………32
Table 4.3. Responses on Startup and working Capital Sources and its Contributions………..36
Table4.4.1. Challenges Related to the Role of Support Institutions…………………………..38
Table4.4.2. Challenges Related to Finance................................................................................41
Table4.4.3. Challenges Related to Working Premises………………………………………...43
Table4.4.4. Challenges Related to Marketing............................................................................44
Table4.4.5. Challenges Related to Managerial and Technical skills………………………….47
Table4.4.6. Challenges Related to Infrastructure Facilities…………………………………...49
Table4.4.7. Challenges Related to Raw Materials Supply……………………………………50
Table4.4.8. Challenges Related to Regulatory Issues................................................................51
Table4.5.Comparison of Major Challenges…………………………………………………...53

VI
 LIST OF FIGURES
Figure1. Sex of respondents………………………………………………………33
Figure2. Educational Level the of Respondents…………………………………..34
Figure3. Category of MSE’s by Sectors…………………………………………...35

VII
Abstract
Micro and Small enterprises are driving force for economic growth, job creation and poverty
reduction in developing countries. Ethiopia is one of the countries which have taken measures
to enhance the operation of micro and small scale enterprises (MSEs). However, there are
MSE’s in the country that have deteriorating performance and have been experiencing near to
cease with no significant graduation from one enterprise level to the next. This study was
conducted in some selected districts of Akaki-Kality Sub-city with the purpose of analyzing the
practices and challenges of MSE’s operations. For achieving the objectives of this study, 89
questionnaires were distributed and 81 of them were successfully completed and analyzed
using descriptive (percentages, mean and standard deviation) statistical analysis. The
participants were selected using stratified and simple random sampling methods. In addition,
face-to-face interview were conducted with 12 sub-city and district officials and experts; and 9
MSE’s owners through semi-structured interview questions and the questions were analyzed
using descriptive narrations through concurrent triangulation approach. The study identified
inadequate infrastructure facilities, inadequate finance, poor managerial and technical skills
and inadequate working premises as the major challenges of MSE’s followed by marketing
problems, low support from respective institutions, inadequate supply of raw materials, and
regulatory issues. Hence, the study concluded that MSE’s operation in the study area is
influenced by the above identified variables. In line with the findings obtained
recommendations to respective governmental bodies and MSE’s owners/managers are
forwarded. In addition, further investigation suggestions for other interested researchers have
been forwarded. The study helps to create awareness to MSE’s official and owners, and it will
give chance for others who are interested on micro and small scale enterprises practices and
challenges to make further studies and this may add something of value to the existing body of
knowledge related to the issue of MSE’s operation.

Key Words: Enterprise, Micro Enterprises, Small Enterprises

VIII
 CHAPTER ONE

INTRODUCTION

1.1. Background of the Study

It is generally recognized that Micro and Small Enterprises (MSE’s) have vital contribution to
the economic development and creation of wider employment opportunity in developing
countries with large number of unemployed people. According to Olabisi, Olagbemi and Atere
(2013), micro and small enterprises are driving force for economic growth, job creation and
poverty reduction in developing countries. In addition, Habtamu, Aregawi and Nigusu (2013)
revealed that MSE’s is a means in bringing economic transition by using the skill and the
talent of people without requiring high-level training, much capital and sophisticated
technology. These make the sector more preferable to business entry, unemployment
reduction, income generation and poverty alleviation.

Ethiopia is one of the developing countries which have taken measures to enhance the
operation of micro and small scale enterprises (MSEs) by considering its contribution to the
overall development, employment and poverty alleviation. In this regard, the licensing and
supervision of micro financing institution proclamation No. 40/1996 aiming at to provide
opportunity and security for the sector through enhancing legality and formalization, the
Federal and Regional Micro and Small Enterprises Strategy (FRMSES) were formulated in
1997. Furthermore, the Federal and Regional Micro and Small Enterprises Development
Agencies (FRMSEDA) were established by regulation No.33/1998 to utilize the local raw
materials, creation of production, job opportunity and the enhancement of the development of
MSE’s are some of the efforts done by the government (MUDC (2013). Besides, UNDP
(2012) indicated that the development of MSE’s is the key component of Ethiopia’s industrial
policy direction that will contribute to the industrial development and economic
transformation, and the growth and transformation plan (GTP) emphasizes the need to provide
to micro and small-scale enterprises so as to utilize their potential to create wealth and jobs
and to reduce poverty.

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Based on these efforts the government has tried to promote the development of the sector
through workable laws and regulations, facilitation of startup and working capitals, managerial
and technical assistance, working premises and infrastructure, market- enterprises linkages. As
studies revealed in the sector, many micro and small scale business enterprises that have been
engaged by individuals, groups and associations; and have played their roles to employment
creation, poverty alleviation, creation of entrepreneurship and country economic development
(MoFED, (2010).

Akaki-kality Sub-city is one of the ten sub-cities in Addis Ababa which has nine districts.
According to the Sub-city MSEs five year strategic plan (2005) its area is 6,149.4 hectares
with a total population of about 200,000 people. Geographically, the sub-city is delineated
from Bole Sub-city, Oromiya regional state, and Nefas-Silk Lafto Sub-city in Northern south,
southern east, and Northern West Respectively. Among the population more than 10,400 are
unemployed. Majority (60%) of the industries located in Addis Ababa is established in this
sub-city; and it is the major industrial zone in the country. The main business activities
engaged by the people are industrial and agricultural; and majority of the peoples have earned
low income from such sectors. Currently, the sub-city and nine district level MSE’s offices are
structurally established to support MSE’s development with strategic policies, Rules and
regulations, and five years strategic plan 2006 to 2010, (Ibid).

Therefore, the purpose of this research is to analyze the practices and challenges of
government initiated and organized Micro and Small Enterprises in Akaki Kality Sub-city of
purposively selected districts.

1.2. Statement of the Problem

Micro and Small scale enterprises are privately owned and managed by owners. As MUDC
(2013) and Habtamu et al. (2013) found out these enterprises significantly contribute to the
country’s economic growth through employment creation, income generation and poverty
alleviation. The facilitation and adjustment of the startup and working capital sources, working
premises, raw material supply, managerial and technical skill training, market-enterprise
linkage creation and management support for government initiated and organized enterprises

2
are shouldered on government officials. Thus, the responsibility requires tremendous efforts
and integration between enterprise owners and government officials’ at all hierarchical levels.

However, there are inherent problems which affect long term survival and business
performance. Akabueze (2002) found out that MSE’s failure in developing countries could be
because of lack of financial resources, lack of management experience, poor location, laws
and regulations, poor infrastructure, low demand for products or services, corruption and
shortage of raw materials.

According to Hanna (2010) and MUDC (2013) though their extent varied across regions and
cities, in Ethiopia irregular supply of raw materials, lack of working premises, insufficient
startup and working capital, lack of access to market, lack of access to land especially in Addis
and limited technical and managerial skills in efficiently managing MSEs are the major
obstacles of the enterprises. In addition, owners of the enterprises and MSE’s coordinators and
experts in Addis Ababa raise critical problems facing in their day-to-day operations related to
working premises, raw materials, management and financial adjustments.
Anecdotal evidences, quarterly and annual reports, and public meetings on MSE found in the
sub-city also showed that there are MSE’s that have deteriorating performance and have been
experiencing near to cease with no significant graduation from one enterprise level to the next.
Therefore, the purpose of the study is to analyze the practices and the challenges of MSE’s
based on the following basic research questions indicated here under.
• What are the major challenges of Micro and small scale enterprises operation in Akaki-
Kality Sub City?
• Which have the greatest influencing factor in MSE operation in the sub-city?
• To what extent does the MSE’s obtain useful support from the MSE support or
developmental organizations towards the growth of the sector in the sub-city?

3
1.3. Objectives of the Study

The study encompasses two objectives, i.e. general and specific objectives.

1.3.1. General Objectives

The overall objective of the study was to analyze the challenges of micro and small-scale
enterprises which enable to forward possible measures that can bring successful and sustained
MSE’s in Akaki-Kality sub-city.

1.3.2. Specific Objectives

• To determine the major challenges and the greatest obstacles which influencing the
proper operation of MSE’s in the sub-city?
• To examine the contributions by MSE’s support or development organizations towards
Micro and small scale enterprises growth.
• To recommend appropriate solutions that can help improving the identified challenges
of MSE’s operation.

1.4. Significance of the Study

The results of this research may have the contributions mentioned hereunder.

It enables to develop awareness for the city administration, sub-city, and district level
government officials, owners and other concerned individuals about challenges of micro and
small scale enterprises in Akaki-kality sub-city.

As far as the researcher’s knowledge is concerned, there are no research works done in the
sub-city focusing on micro and small scale enterprises. Therefore, this may give chance for
others who are interested on micro and small scale enterprises practices and challenges to
make further studies on the subject and this may add something of value to the existing body
of knowledge related to the issue of MSE’s management.

It suggests possible measures that help to alleviate the problems that inhibit the proper
operation of MSE’s in the sub-city.

4
1.5. Delimitation of the Study

This study is delimited in Akaki- kality sub-city which is one of the ten sub-cities in Addis
Ababa. The sub-city has nine districts which has a total of 254 MSE’s which constitute 1,730
owners. Among these the study is delimited within three districts namely district one, four and
seven which contain 115 MSE’s and 734 owners. The study employed descriptive survey
method and questionnaires and interview methods were utilized to gather the research data.
Among the population 30 MSE’s which includes 89 owners/ managers were samples. In
addition, 12 sub-city and districts coordinators and experts, and 9 MSE’s owners have
provided their responses based on interview methods. The reason for such delimitation is to
tackle the problems facing the researcher related to shortage of time, finance and lack of
research experience. The study variables are delimited to the role of support institutions,
financial, working premises, marketing, managerial and technical skills, infrastructural
facilities, raw materials supply, and regulatory issues.
1.6. Definition of Terms
It is important to provide operational definitions of terms or concepts used as in this research
to create better understanding about the usage of these terms and phrases. The definitions of
enterprise, micro enterprise and small enterprise are taken from AACA (2011), and the survey
report on MUDC (2013) as follows.
An enterprise: is an undertaking engaged in production and/or distribution of goods &
services for commercial benefits, beyond subsistence (household) consumption at the
household level. An enterprise might be owned and operated by a single household, or by
several households jointly on a partnership basis or by any institutional body MUDC (2013).
Micro Enterprise (MEs): is an enterprise which contains the numbers of employees
(including the owner or family) are not greater than 5 and with a total asset of less than
100,000 ETB for industrial sector and less than 50,000 ETB for service sector; and excluding
high tech consultancy firms and other high tech establishments.
Small Enterprise (SE): is an enterprise which contains the numbers of employees (including
the owner or family) between 6 and 30 and with a total asset from 100,001 to 1,500,000ETB
for industrial sector and from 50,001 to 500,000 ETB for service sector; and excluding high
tech consultancy firms and other high tech establishments.

5
1.7. Organization of the Study
Some writers may organize the final research report somehow differently. As Saunders et al.
(2009) most writers agreed that the structure of the final research report includes abstract,
introduction, literature review, methods, results, discussion, conclusions, references and
appendices. Chapter one is the introductory part which contains background of the study,
statement of the problem, basic research questions, objectives (general and specific objectives)
of the study, significance of the study, delimitation and limitation of the study, and definition
of terms. Chapter two focuses on review of related literature to set the study with in its wider
context and to show the readers how the study supplements the work that has already been
done on the topic, (Saunders et al. (2009). The research design, sample and sampling
techniques, types and sources of data, data gathering instruments, the procedures of data
collection and method of data analysis included in chapter three, whiles data analysis
presented in chapter four. Finally, findings, conclusions and recommendations looked in
chapter five.

6
 CHAPTER TWO

REVIEW OF RELATED LITERATURE

In doing any research activity it is important to review what has been conducted on the area of
the topic to have more theoretical knowledge and understanding related to the problem. To
this effect, major issues related to micro and small enterprises raised by different researchers
will be reviewed. Thus, this chapter deals with definition of micro and small enterprises,
overview on the development of MSE’s, MSE’s contribution and rationale for emphasizing
MSE’s. Then, the challenges and national strategies for the development of MSE are
addressed.

2.1. MSE’s at the Global and Ethiopian Context

There is no universally accepted definition of MSE’s due to its base of the subjective
judgment. As it is indicated on the MSE’s development strategy of the Government of Federal
Democratic Republic of Ethiopia (GFDRE, 2011), the policies and strategies designed to
speed up MSE development should be based on national definition of enterprises as it helps to
provide sustainable support and effectiveness of the sector. The definitions and objectives of
MSE are mainly formulated based on:
• to have a framework that will be able to support MSE independently
• to have institution, that support MSE development, uniform baseline
• to have uniform baseline about MSE information
• to evaluate the impacts, to setup and implement reform frameworks and
• to harmonize the national definition of MSE with international definition (Ibid).

As it is described by Stephen and Wasiu (2013), found out that in defining Micro and small
scale enterprises references are made to qualitative and quantitative measures based on the
number of people employed in the enterprises, investment out lay, annual sales turnover or a
combination of these measures. In light of this, the definition of Micro and small scale
enterprises in the global and Ethiopian context are discussed as follows.

7
2.1.1. MSE’s at the Global Context

In a study carried out by ILO (2005) over 50 definitions were identified in 75 different
countries. However, the references is usually made to some quantifiable measures such as
number of people employed by the enterprises, investment outlay, the annual turnover (sales)
and the asset value of the enterprises. According to GFDRE (2011) the international
definition of MSE is in line with full timer employed manpower, total asset, net asset, paid up
capital, and annual turnover; and their usage can be seen independently or in combination.

In this regard, Osotimehin, Jegede, Akinlabi and Olajide (2012) identified that in countries
such as the United States of America, Britain and Canada defined micro and small businesses
in terms of annual turnover and number of paid employees. In Britain, for instance, a small
business is defined as that business with an annual turnover of €2 million or less with fewer
than 200 paid employees. The Netherlands also defined micro and small enterprises based on
number of employees and the manager among the owners performs all the functions of
management without actually taking part in the production.

As Stanley and Morse (1965), stated that Japan defines small enterprises as one either having
capital not exceeding Y50m or having not more than 300 employees in manufacturing
industry and either having capital not greater than Y10m or having not more than 50
employees in commerce and service sectors. They further reported an Indonesia Agency as
defining small enterprises to mean all enterprises, household or cottage, employing less than
10 full time workers and not using machinery. In addition, the Indian official defines small
scale industry as comprising manufacturing enterprises with investment in plant and
machinery not exceeding 750,000 Rupees (Ibid).

In a similar manner, the definitions of MSE are given by majority of African countries utilized
similar criteria as discussed above. The Nigerian Government has used various definitions
and criteria in identifying micro and small sized enterprises. At certain point in time, it used
investment in machinery and equipment and working capital. At another time, the capital cost
and turnover were used. Concerning this, Olabisi, et al. (2013) defined Small scale enterprises
as an industry whose total project cost excluding cost of land and including working capital
does not exceed N5m (i.e. US$500,000). Furthermore, the National Council on Industry of

8
Nigeria (1996) at its 9th meeting adopted the report of its Sub-Committee on Classification of
Industrial Enterprises in Nigeria and approved a new set of classifications and definitions of
the cottage/micro and small scale enterprises. According to the Council, small scale
enterprises is an industry whose total cost, including working capital but excluding cost of
land, is over N1 million but mot more than N40 million and a labor size of between 11 and 35
workers (Ibid).

As Daniel (2012) indicated that Micro and small enterprise is defined in Ghana by applying
both the “fixed asset and number of employees” criteria. It defines a small-scale enterprise as a
firm with not more than 9 workers, and has plant and machinery (excluding land, buildings
and vehicles) and micro with employee less than five. However, due to the continuous
depreciation of the local currency as against major trading currencies often makes such
definitions outdated and new definitions were adopted based on an employment cut-off point
of 30 employees and MSE’s classified in to micro, very small, and small employing six, six to
nine, and ten to twenty nine employees respectively (Ibid).

Furthermore, micro and small enterprises defined in Tanzania in terms of number of

employees, license registration and business premises. It defines micro enterprise as a firm
employing four or fewer people, local authority registered and mostly home-based whereas,
small enterprise employing between 5 and 10 that are licensed and have business premises.

From these discussions someone can realize that countries whether developed or developing
have common understanding and criteria on the definitions of MSE’s though they classified
based on their economic levels and intentions.

2.1.2. MSE’s at the Ethiopian Context

The Ethiopian Government has used two definitions in identifying micro and small sized
enterprises since 1997. These definitions are based on the criteria with reference to the number of
employees, paid up capital, total asset and the level of technology involved in the MSE’s. As MoTI
(1997), micro enterprises are those enterprises with a paid-up capital of not exceeding
Ethiopian Birr (ETB) 20,000, and excluding high tech consultancy firms and other high tech
establishments. While small enterprises are those business enterprises with a paid-up capital of
not exceeding ETB 500,000, and excluding high tech consultancy firms and other high tech
9
establishments. However, this definition is revised due to the devaluation of Birr (national
currency) and inflationary trend in the economy (GFDRE, 2011).

According to the new (Micro and Small Enterprises Development Strategy of Ethiopia
[MSEDSE], 2011) the working definition of MSEs is that “Micro Enterprise” which consist
the numbers of its employees (including the owner or family) is not greater than 5 & total
asset is less than 100,000 ETB for industrial sector and less 50,000 ETB for service sector.

In a similar manner, Small Scale Enterprise is an enterprise which has 6-30 employees &
total asset 100,001—1,500,000 ETB for industrial sector and 50, 0001—500,000 ETB for
service sector.

To sum up, all definitions given by different countries whether developed or developing uses
nearly similar criteria though their differences are related with the number of employees,
assets, amount of paid up capital and annual turnover due to the economic levels and the social
conditions of each country.

2.2. An Overview for the Development of MSE’s in Ethiopia

In most developing countries, MSEs by advantages of their size, location, capital investment
and their capacity to generate greater employment have proved their powerful influencing
effect for rapid economic growth. Besides, (Commission for Legal Empowerment of the Poor
[CLEP], 2006) found that the sector is known as an instrument in bringing about economic
transition by effectively using the skill and talent of the people without requesting high level
training, much capital and sophisticated technology though the sector requires tremendous
efforts and commitment from the government, the owners and other institutional involvement
to support MSE’s development.

In relation to this, MUDC (2013) revealed that there was a government policy to lay the
foundation of basic administrative and institutional infrastructure of the state during the 1940’s
and 1950’s in order to consolidate the gains of reforms to accelerate the process of
industrialization. Thus, several reforms related to the development of MSE’s such as the
Business Enterprise Registration Proclamation No.184/1961 required business enterprises to
register under the Ministry of Commerce and Industry, the Industrial Regulation Legal Notice

10
No.292/1971 manufacturing enterprises were required to acquire a temporary license of six
month validity and a permanent license, the Investment Proclamation No. 242/1966 provided
MSE’s tax relief, access to land and buildings, public utilities and other facilitations of
advisory and administrative nature were made during this period.

Although these attempts were made to support MSE’s development in the country, the
socialist regime which followed a centrally planned economic system since 1974 came to
power and introduced socialist proclamations, excessive government interventions,
Burdensome rules and regulations, bureaucratic red-tape as well as excessive and costly
administrative and legal requirements to obtain trading license such as the Proclamation
No.26/1975 ended up owning and controlling the means of production, and the Proclamation
No.76/1975, acquisition of private businesses was restricted to a single license and capital
ceiling set at 300,000 birr for wholesale trade, 200,000 for retail trade and 500,000 for
industrial establishments.

In addition, the regime also nationalized the private property and these actions makes the
previously existing private sector almost came to an end and crippled the private sector
development in the country. In the late 1977, the Handicrafts and Small Scale Industries
Development Agency (HASIDA) was established by Proclamation No. 124/1977 with the
objective to give further improvement to the development of the public economy by
encouraging cooperative development in the small scale sector by issued licenses to
cooperatives, regulated their activities, and assisted in the provision of inputs and training
(Ibid). However, the achievement was very little and few cooperatives were formed due to
lack of imported inputs and the private investment in the sector nearly ceased.

According to Teshome (1994) in MUDC (2013), the Dergue declared a new program of mixed
economy development with two declarations in succession: the Small Scale Industry
Development Special Decree No.9/1989 and Special Decree on Investment No.17/1990.
Decree No.9/1989 allowed establishment of small-scale enterprises by business organizations,
cooperatives and individual entrepreneurs and this replaced the restrictive Proclamation
No.76/1975. This proclamation allowed participation by the Diaspora and raised the capital
ceiling for small scale enterprises from birr 500,000 to between two and four million birr
(MoTI, 1997). Decree No.17/1990 lifted the restriction of private sector participation to single
11
license and allowed individuals to undertake investment in unlimited number of enterprises
though the journey into mixed economy development was short lived because the Dergue was
overthrown in 1991.

After the downfall of the Dergue, the Ethiopian People Revolutionary Democratic Front
(EPRDF), introduced public sector reform and private and market economy development. The
Proclamation No.41/1993: Definition of Powers and Duties of the Central and Regional
Executive Organs of the Transitional Government of Ethiopia is provided for the
establishments of Industry and Handicrafts Bureaus in the Regional Governments to enhance
MSE’s development in the country (Ibid, 1997).

Furthermore, Agricultural Development Led Industrialization (ADLI) and private sector

development strategy in 1995, the licensing and supervision of micro financing institutions
proclamation in 1996 and the Federal and Regional MSE’s Strategy in 1997 were adopted to
enhance the operation of MSE’s. Besides, Federal and Regional MSE’s Development
Agencies were established with the main objectives of utilizing local raw material, creation of
job opportunities, adoption of new and appropriate technologies, and enhancement of the
development of MSE’s (MUDC, 2013).

Currently, the Growth and Transformation Plan of Ethiopia (2010 -2015) has also given a
priority to MSE’s development and has put the MSE’s development as one of the seven
identified growth pillars of the country (MoFED, 2011).

2.3. Micro and Small Enterprises Contribution

Economic development is a process of economic transition involving the structural

transformation of an economy through industrialization, rising GDP, GNP and income per
head; while economic growth contributes to the success of the economy by increasing
investment, increase in labor force, efficient use of inputs to expand output (Ackah and Vuvor,
2011). In order to bring about the expected outcomes; micro and small scale enterprises has an
important role and it is one of the priority areas of action among the Programs addressing
African development (UN, 2008).

12
Furthermore, as it has been revealed Stephen and Wasiu (2013), MSE can be a means of
achieving smooth transition from tradition to modern industrial sector; and has a huge
contribution to the growth and development of the country in terms of employment generation.
In addition, more than half of the industrial labor in developing countries engages in MSE and
create more employment opportunity at a relative low capital cost since micro and small scale
industries are fairly labor intensive, they are better coping with problem of unemployment and
poverty (Ibid).

In light of this, GFDRE has recognized and paid due attention to the promotion and
development of MSE’s for they are important vehicles to address the challenges of
unemployment, economic growth and equity in the country and MSE development strategy
was formulated and has been implemented since 1997 (MSEDS, 2011). Based on the first
MSE’s development strategy (1997 to 2002) more than 1.5million people were employed
(Ibid). According to the Federal Micro and Small Enterprise Agency yearly statistical bulletin
(2005), in the second MSE’s development strategy (2003 to 2005); 2,681,367 people were
employed in the sector which is more than 48% from the expected plan of the GTP
(1,800,000).

13
 Table 2.1 Employment Created By Regions and City Administrations (2003-2005)

2003 2004 2005 Total

No. Region Male Female total Male Female Total Male Female Total Male Female Total

1 Addis Ababa 47,271 25,429 72,700 82,989 39,054 122,043 116,481 102,583 219,064 246,741 167,066 413,807

2 Dire Dawa 6,751 4,759 11,510 6,215 4,319 10,534 6,579 4,259 10,838 19,545 13,337 32,882

3 Oromia 147,578 170,293 317,871 166,391 115,628 282,019 357,621 238,414 596,035 671,590 524,335 1,195,925

4 Amhara 71,602 45,533 117,135 82,016 42,251 124,267 96,487 56,226 152,713 250,105 144,010 394,115

5 SNNP 32,914 25,706 58,620 100,937 54,351 155,288 52,004 41,200 93,204 185,855 121,257 307,112

6 Tigray 37,027 28,170 65,197 61,614 39,393 101,007 82,181 50,516 132,697 180,822 118,079 298,901

7 Harari 1,266 457 1,723 2,510 1,673 4,183 2,200 1,528 3,728 5,976 3,658 9,634
Benishangul
8 Gumz 1,021 293 1,314 654 580 1,234 2,350 1,450 3,800 4,025 2,323 6,348

9 Gambella - 873 839 1,712 1,046 926 1,972 1,919 1,765 3,684

10 Afar 671 418 1,089 - 603 315 918 1,274 733 2,007

11 Somali 1,382 2,825 4,207 2,058 1,977 4,035 4,419 4,291 8,710 7,859 9,093 16,952

Total 347,483 303,883 651,366 506,257 300,065 806,322 721,971 501,708 1,223,679 1,575,711 1,105,656 2,681,367

Source: Federal Micro and Small Enterprises Agency Bulletin, 2005

14
As it is indicated in the table above even though the employment opportunities created in
Addis Ababa, Amhara, Tigray and Gambella have an increasing trend, the other six regions
and one city administration didn’t show a consistent trend. With regard to sex, males have
more employment opportunity than females in all regions and city administrations. Therefore,
this has to be the focus area to maintain consistent employment opportunities in all regions
and cities, and relatively to create equal employment opportunities for both sex.

Besides employment creation opportunity, the strategic direction of the GTP of Ethiopia has
taken MSE’s as a key of industrial development and envisaged structural transformation of the
economy (MoFED, 2010). The annual Report of the Federal Micro and Small Enterprises
Agency (2OO5) has shown that the years between 2003 to 2005 many or 1775 small
enterprises were promoted to medium level; and the sector also contributes more than the
expected plan of the sector i.e. 14 Billion and 864 million Birr from the local and foreign
market respectively contributes to the development of the country economy.

2.4. Rationale for Emphasizing MSE’s Development

Ethiopia is one of the least developed countries which have a population growth rate 0f 2.79%,
the labor force (the employed and unemployed) has continued to grow faster than what the
economy can gainfully and productively employ. The working age population stood at 54% of
the population in 2004/05, and is growing by about 1.2 million people per year, and out of the
33,088,792 economically active populations 1,653,686 (5%) are unemployed (CLEP, 2006).

Hence this requires serious attention and the Ethiopian government have introduced MSE’s
development strategy in order to reduce unemployment. currently MSE’s are the second
largest employment generating sector by employing more than 1.3 million people all over the
country (Habtamu et al. 2013; CSA, 2007). Therefore one of the major rationales focusing on
MSE’s is that they are large employers of the labor force and this makes them vital in handling
with the problems of unemployment and poverty.

The second rationale focused on MSEs is that it helps to decentralize industries, to accelerate
rural development, and to restrict urban immigration and the consequent problems of
overcrowding in the cities. In line with this the Ethiopian government has developed and
implementing Agriculture led Industrialization policy focusing mainly on MSE’s as an
14
implementing strategy (MoFED, 2010). Therefore, micro and small enterprises play an
intermediate role in the development of large scale enterprises and they enable to reduce
regional disparities through the creation of employment opportunities in the rural areas and
mobilize local resources more readily than large-scale industries (Osotimehin, et al. 2012).

The other rationale focusing on micro and small enterprises is that it has contribution to add
value in the manufacturing sector and to the Gross Domestic Product (GDP) of the economy.
In addition, Micro and small enterprises (MSEs) have been found to have locational
flexibility. The study conducted by Uzor (2004) identified that MSE’s could be more eagerly
used to achieve industrial dispersal and regional balance in economic development,
diversification of the industrial structure and the transformation of the rural economy.

2.5. The Role of MSE’s Support Institutions

Support institutions play key roles in creating the conditions for MSE’S development. As the
(United Nations Development Program [UNDP], 2006) most of the responsibility to MSE’s support
relies on government organizations, associations and agencies which are found at all
hierarchical levels and their commitment and degree of cooperation with the MSE’s
determines the success or failures of the enterprises.

Accordingly, the GFDRE (2011; 1997) has made institutional arrangement such as Ministry of
Trade and Industry, Regional Bureau, Federal MSE Development Agency, Regional MSE
Development Agencies, or other similar designated organs at the local levels, and Business
Associations for MSE sector support programs and strict controls in the use of funds. These
institutions have vital role for MSE’s development.

The Ministry of Trade and Industry has roles for the formulation of the country's industrial and
trade policies and strategies, defining the size of micro and small scale enterprises in order to
identify the right target groups for the right type of promotional support, the provision of
assistance to micro and small enterprises. The Regional Bureau also has the roles to develop
and promote the MSE sector, set criteria for prioritization of MSEs for support, to create
proper networking within business associations, regional chambers, and other stakeholders to
strengthen the flow of information.

16
Besides, Micro and Small Enterprises Development Agency with its respective hierarchies
has roles to provide human resource training and development, information and consultancy,
facilitation, technical, marketing and promotional support services to MSE’s owners/managers
to equip their managerial, technical and business management skills. In order to solve the
problems related to finance; government organized micro- finance institutions have roles in
funding and providing technical financial support services (Ibid).

In this regard, the data obtained from the sub-city MSE’s office five years strategic plan (2006
to 2010) shows that support institutions such as the sub-city MSE’s, microfinance, land
management, and technical and vocational education offices has tried to provide technical,
managerial, financial, and working premises adjustment supports based on their respective
roles indicated as follows.

Table2.2. Support to MSE’s provided by Akaki-Kality Sub-city (2004-2005)

Type of Support Unit Amount
Financial accessibility/loan/ Br 107,632,687
Market linkages created with others Br 158,527,164
Managerial training for MSE’s managers Trainees 1, 831
Technical and vocational training for owners Trainees 5,963
Working premises/place preparation and distribution Sheds 327

Source: Akaki- Kality sub-city MSE’s office five years (2006-2010) strategic plan

Even though these efforts have been made based on their respective roles by designated
institutions, performing their respective mandates with maximum effort and commitment is
questionable. In relation to this, bureaucratic and inflexible work Procedures, lack of
commitment and responsiveness, and unsuitable regulatory issues are some of the
shortcomings associated with support institutions (Mulugeta, 2011).

2.6. The Challenges on Micro and Small Enterprises

Even though micro and small enterprises have important roles in economic development,
poverty alleviation, employment opportunity; the enterprises are critically challenged by
certain impeding factors to sustain with in the sector. The research conducted by Bowen,
17
Morara and Mureithi (2009) identified that in Kenya three out of five micro and small
businesses failed within the first few months of operation due to competition, managerial
inefficiency, insecurity, debt collection, lack of working capital and power interruptions,
political uncertainty, cost of materials, sellers, low demand and restrictive by-laws.

The problem confronting MSE’s appears to be similar in least developed or developing

countries. However, the extent of the problems varies from country to country and industry to
industry; and it depends on firms’ characteristics (Aremu and Adeyemi, 2011). Currently in
Ethiopia, there are many internal and external challenges such as lack of finance, lack of
working premise, lack of access to land, etc. face MSE’s in their operations and hinder their
growth (MUDC, 2013). These factors are reviewed as follows.

2.6.1. Lack of Adequate Finance

Finance is one of the most important elements in every economic activity; and access to finance will
provide start-up capital for the business as well as funds to meet operational costs and accelerated
economic growth. Even though its importance, the financial constraints such as lack of adequate
investment capital, lack of sufficient loan, inefficient financial market in terms of facilitating financial
resources to the enterprises are the major obstacles in doing business, and most micro and small
enterprises are highly risky ventures involving excessive administrative costs and lack the experience
in dealing with financial institutions (CLEP, 2006).

In relation to this, many surveys revealed that access to finance has been identified as the most
important factor which determines the growth and development of entrepreneurship, micro
and small business in developing countries (Kula, O. et al., 2005).

According to Sacerdoti (2005) in Habtamu et al. (2013), financial institutions such as

microfinance and the banking systems in Africa are not in a position in providing enough
financial support to the expansion of micro and small businesses. MUDC (2013) also
identified that Financing has become a principal challenge to micro and small scale enterprises
in Ethiopia. Furthermore, Sacerdoti (2005) in Habtamu et al. (2013) found out those micro and
small scale enterprises in developing world face challenges in securing finance due to the
following major reasons.

18
One of the reasons is that there are problems of information asymmetry between financial
institutions and MSE’s. This has made it difficult for institutions to determine the real values
of micro and small businesses. Thus, the involvement of financial institutions in promotion of
micro and small enterprise through the provision of information, knowledge and skills play
key roles in accessing finance to the enterprises, (Osinde, Iravo, Munene and Omayio, 2013).

The second reason is that entrepreneurs in developing countries have limited access to capital
markets locally and internationally, partly due to the perception of high risk and high cost of
intermediation for firms. Consequently, entrepreneurs often cannot obtain long-term finance in
the form of debt and equity.

This leads micro and small businesses has resulted in relying on high costs of credit, relatively
high bank charges and fees and high collateral requirements. According to MUDC (2013)
except City administrations and regional microfinance institutions, their savings and family
supports, banks in Ethiopia do not provide finance in the form of loan to micro and small
business due to collateral obligations and other requirement. Therefore, the development and
success of MSE’s require finding the right means of accessing adequate finance from reliable
financial institutions.

2.6.2. Lack of Working Premises

The development of MSE’s requires intensive efforts on the parts of government institutions.
In this regard, working premises are needed to be addressed to facilitate the development of
MSE’s. While national policies play an important role in the development of MSEs, targeted
interventions are much more effective to bring about a rapid change in the growth of MSE’s
support services at the firm level. According to the MSE’s development strategies of Ethiopia
MSE is one of the growth oriented sectors which requires maximum support from the
government, and among these Working premises with least leasing price adjustment is the first
requirement and taken as mandatory to the government (GFDRE, 1997 and 2011).

Accordingly, the three years performance report of FMSEA (2005) shows that the government
has supplied 23,263,938 square kilometers land to buildings, sheds and displaying places to
the existing MSE’s. Although the efforts have taken by the government, working premise is

19
one of the factors which impede the full scale implementation and growth of micro and small
scale enterprises (Habtamu, et al., 2013).

Furthermore, the survey conducted by MUDC (2013) found out that lack of access to land is
the second ranked challenges of regional towns and the major ones in Addis Ababa. Thus, the
problem requires attention to gain MSE’s expected benefit; and the government and other
stakeholders should act on this factor to enhance the operation and growth of the MSE’s at the
national level in general and in Addis Ababa in particular.

2.6.3. Lack of Managerial and Technical Skills

It is clear that micro and small scale enterprises are privately owned and managed by owners.
The owners fail to realize the importance of managerial skills for the success of the enterprises
may lead to failures of the enterprises. The problems of MSE’s management arises from the
limited knowledge and ability of the owner or shortage of competent staff to advice the owner
on management policies (Stephen and Wasiu, 2013).

Decision-making skills, sound management and accounting practices are very low in
developing countries MSE’s operators (Aremu, and Adeyemi, 2011). In addition, the CLEP
(2006) revealed that lack of managerial skills leads to problems in production due to lack of
coordination of production process, and inability to troubleshoot failures on machinery and/or
equipment’s is a critical problem that MSEs are facing since they cannot afford to employ
specialists in the fields of planning, finance and administration. Most MSE’s owners/managers
have limited education, and faced critical problems related to the practice of modern
management techniques in their enterprises.

2.6.4. Lack of Adequate Market

Marketing knowledge is important for the promotion, growth and development of Micro and
small enterprises. MSE’s operators require marketing knowledge such as accessing and
acquiring information on business opportunities, advertising based on different media, and
ways of creating marketing linkage with other enterprises. To this end, the sector needs
attention and commitment of individual owners, government officials and experts, chambers
and business associations.
20
In this regard, the Ethiopian government has formulated MSE’s strategies to ease marketing
challenges by creating inter-linkage mechanisms with other institutions, providing training on
marketing, developing export support programs and marketing information center (MoTI,
1997).

However, market constraints and the inability to sell the products and services; lack of
adequate marketing channels, and lack of marketing skills are the problems to the starting of
business and further growth of the sector (MUDC, 2013; MoFED, 2011). Thus, factors related
to marketing development and implementation may have negative effect on the success and
growth of micro and small enterprises in the sub-city.

2.6.5. Inadequacy of Infrastructure Facilities

Infrastructure facilities are mainly related to the provision of access roads, adequate water and
sewerage, power, and telecommunications which helps to enhance and develop the full scale
operation of MSE’s. On the other hand, lacking such facilities leads to malfunction of MSE’s
operation. In this regard, a research conducted by Daniel (2012) stated that unfavorable roads,
power interruption, shortage of water, and inaccessible telecommunications are the major
challenges and without which primary, secondary and tertiary production cannot function.
Therefore, Infrastructure facilities can be seen as both a final good providing services directly
to consumers, and intermediate input that enter into the production function of other sectors
and raises the productivity of the factors employed.

Furthermore, (Habtamu, et al. 2013), indicated that MSE’s operating with available
infrastructure facilities has higher probability of long live existence and growth as compared
to those MSE’s that are operating without adequate infrastructures. The researchers also added
that electric power interruption and inadequate water supply in Ethiopia was highly affected
the growth of the business.

The availability of infrastructure facilities is not only significant to the operation of existing
firms but it also represents another constraint on both the choice of MSE’s opportunities and
the full scale operation of each respective enterprise. The production as well as distribution of
MSE’s products depends vitally on the availability as well as reliability of physical
infrastructure (Awura, 2006). Therefore, emphasis should be given since the success or
21
failures of MSE’s business growth and development depend on the availability and efficiency
of infrastructure utilization.

2.6.6. Erratic Supply of Raw Materials

Supply problems of MSE’s are issues related to unreasonable access to raw materials and
quality services at affordable prices. Linking MSE’s to input suppliers, improving suppliers’
capacity and regular supply of quality information on input supply sources have positive
effects on the success of MSE’s (Siva, 2012). As MUDC (2013) one of the major issue and
problems constraining to MSE’s development was erratic supply of raw materials to the
sector. Therefore, this requires attention to alleviate the problems related to raw materials
availability and supply to the sector.

2.6.7. Regulatory Constraints

Regulatory issues such as registration and licensing, and unreasonable government official
involvement and accessibility of rules and regulations have impacts on the success or failure
of MSE’s. According to Dlitso, K., and Peter Q., (2000), high start-up costs for licensing and
registration requirements, cost of settling legal claims and excessive delays in court
proceedings can impose excessive and unnecessary burdens on MSE’s operations.

Even though registration and licensing helps MSE’s to have legality rights, and to reduce the
prevalence of informality in the economy, more than 12% of MSE’s in Addis Ababa haven’t
registration license (MUDC, 2013). Therefore, regulatory issues require continuous follow up
and monitoring activities to provide immediate solutions to regulatory constraints which affect
the operations of MSE’s in the study area.

2.7. National Strategies for the Development of MSE’s

Most micro and small scale enterprises in developing countries face critical constraints both at
the operation and start up level due lack of adequate government intervention and support by
setting appropriate strategies (UN, 2008). Therefore, government support in business
development services is critical for the success of MSE’s operation. By recognizing this and
the contribution of MSE, the current Ethiopian government paid due attention to the

22
promotion and development of MSE’s for they are important vehicles to address the
challenges of unemployment, economic growth and equity in the country. To realize this, the
government has formulated a National MSE Development and Promotion Strategy in 1997
which guides a systematic approach to tackle the problems and promote the growth of MSEs
(CLEP, 2006).

According to MoTI (1997), the primary objective of this national MSE development strategy
has been to create enabling environment for MSE’s. In addition to the primary objectives, the
strategy also has the specific objectives which include:
• Facilitate economic growth and bring equitable development,
• Create long term jobs;
• Strengthen cooperation between MSEs;
• Provide the basis for medium and large scale enterprises;
• Promote export and
• Balance preferential between MSEs and bigger enterprises.

Although the national MSE’s strategy was developed in 1997, the degree of recognition to the
sector with regards to job creation and the alleviation of poverty were not sufficient, and there
were no regional MSE’s development agencies until 2005, and this impedes to make the
strategy practical specially in delivering business development service for MSE operators
(Konjit, 2011). By considering such problems faced by MSE’s operators since 2004/2005 the
government of Ethiopia established MSE’s development agencies in all regions, and sub
branch offices at sub city, zone/district levels. The MSE development strategy implemented all
over the country until 2010 and the system helps to support a lot of MSE’s and thereby to
create job opportunity for the unemployed (Ibid).

The second and latest micro and small enterprises development strategy has developed in
2011in line with the Growth and Transformation Plan (GTP) of the country. The Strategy
included fresh group of target groups i.e. the university graduates to form cooperatives and
create their own jobs, to bring about the technological transfer and new corporate management
skills to the nation (GFDRE, 2011).

23
According to MUDC (2013) the newly developed strategy also identified the three stages of
growth of micro and small enterprises, i.e., the start-up stage, the growth stage and the
maturity stage. Besides, the strategy helps these enterprises to receive directional support
services from government officials, professionals and other stakeholders. It also enables MSE
operators and actors to analyze the kinds of problems MSE’s Face in these three different
growth stages in order to recommend solutions.

To conclude the review, MSE’s in different countries categorized and defined based on similar
criteria’s with a slight differences related to the numbers of employees, the amount of
investment and the financial turn over in the accounting year due to their level of economic
environment. The sector has priority attention due to its role in employing large employers of the
labor force to address the challenges of unemployment, economic growth and equity in the
country with a mobility of some amount of investment, low skill manpower and minimum
level technology requirements.

Although the MSE’s has these opportunities, it has challenges related with financing during
the initial and operation level, lack of working premises, infrastructure facilities, supply of raw
materials, market , managerial and technical skills which affects the growth and the full scale
operation of the sector.

Thus, the sector requires thorough attention and commitment by government officials and
professionals, owners of the MSE’s and other support institutions to play their respective roles
and responsibilities with commitment and responsiveness in ensuring sustainable growth and
development of the business.

24
 CHAPTER THREE

THE RESEARCH DESIGN AND METHODOLOGY

In order to analyze the practices and challenges of MSE’s this research had designed an
appropriate research methodology. This chapter discusses procedures and activities under
taken, the study’s research design, sampling strategy, questionnaire development and data
collection, data processing and analysis and instrument development.

3.1. The Research Procedures and Activities Undertaken

The assessment and identification of challenges of MSEs from the three districts of Akaki -
Kality Sub-city encompasses many activities such as proposal development, literature review,
research design, questionnaire development, data collection, sampling procedures, visiting of
relevant offices and MSE’s enterprises, selection of participants, and test of validity and
reliability of instruments, data collection and data analysis.

3.2. Research Design and Methodology

The research design enables the researcher to answer the basic research questions. According
to Saunders, Lewis and Thornhill (2009) showed that the Choice of the research design
depend on the objectives of the study, the available data sources, the cost of obtaining the data
and the availability of time. The purpose of this research is making assessment on the
challenges of MSE’s to show the situation and to have a clear picture on phenomena by using
quantitative and qualitative data. Therefore, the researcher has employed descriptive survey
method because it fits to the purpose of the study, allows the collection of a large amount of
data by using questionnaires in an economical way, and it is comparatively easy to explain and
understand (Saunders et al, (2009). In addition, it facilitates the collection of a considerable
amount of data quickly, efficiently and accurately (Oso and Onen, (2005).

3.2.1. Sample and Sampling Techniques

Akaki- Kality sub-city was purposively selected among the ten sub- cities of Addis Ababa as
the study area for this research. The reason is that the researcher has lived in the sub-city since
1987 E.C and has a good exposure to the problems recurring in the sub-city; and its proximity
25
creates convenience to the researcher to get adequate information and to collect data within a
short period of time.

The primary function of sampling strategy is to identify the target population of the study
which enables to determine the sample size. The target population of this study was
government initiated owners of MSE’s operating within Akaki- Kality sub- city which are
registered by the government. In addition, the local officials and experts working in MSE
departments were considered as the target population. This population is large, their
distributions across sectors have been diverse and their lists are not well organized. Thus, it
was not easy for the researcher to involve all the target population in the study due to
problems related to time, finance and management of the research.

As Zikmund, Babin, Carr and Girrifin; (2010) noted the researcher need not take the whole
population because the results of a good and representative samples have the same
characteristics as the population as a whole. Hence, the researcher has decided to conduct the
research within three purposively selected districts namely District one, four and seven which
have many MSE’s compared with other districts found in the sub-city.

These districts have 115 MSE’s which constitutes a population of 734 owners/managers in the
construction (423), manufacturing (171) and service sectors (140). The researcher employed
stratified and simple random sampling technique to determine the sample size of the study
since this sampling technique helps the researcher to minimize sampling bias and creates
relatively homogeneous samples when dealing with the population. Therefore, samples were
taken from 30 MSE’s of which 17 construction, 7 manufacturing and 6 service sectors. The
samples were computed by using the sample formula of Nasiurma (2000) in Nyabwanga, R.,
and Ojera, P., (2012); n=NC/(c^2+ (N-1) e^2) Where, n= the sample size, N = the population,
c=the coefficient Variation (0.5), and e = level of precision (0.05). Thus, n=734* 0.5/ (0.5^2+
(734-1) 0.05^2 which has a total of 89 sample respondents of managers/owners of MSE’s.
This sample was proportionally distributed to each stratum owners i.e. construction (51),
manufacturing (21) and service (17) owners. These issues are summarized in tables as follows.

26
 Table3.1. Population and Sample Size
Population Samples

No. Sector No. of MSE’s Male Female Total Male Female Total

1 Construction 59 330 93 423 38 13 51

2 Manufacturing 35 135 36 171 17 4 21

3 Service 21 78 62 140 9 8 17

Sum 115 543 191 734 64 25 89

Furthermore, interviews were administered on the sample of 9 MSE’s owners/managers and

12 sub-city and districts MSE’s officials and experts.

3.2.2. Instruments of Data Gathering

The issues discussed in the review of literature and the research questions were used as a
guideline for the development of in the questionnaire. In addition, some questions in the
questionnaire were taken from other sources (Admasu, 2012).

The questionnaire that were designed, administered and used in the questionnaire are some
open and more close ended (multiple choice and Likert scale type) questions. The type of
scales used to measure the items on the questionnaire is continuous five scales ranging
strongly agree to strongly disagree. This helps the researcher to gather quantitative data from
owners/managers of MSE’s.

The questionnaire were designed both in English and Amharic languages to MSE’s owners/
managers. This helps to create proper rapport and to gain better responses from the
respondents of those who cannot clearly understand the English language. In addition, to
enhance the willingness of the respondents to provide the information requested a pilot study
was conducted to refine and make clear the questionnaire before administering. Besides, to
make the study reliable and dependable semi- structured interview questions were designed
only in English to MSE’s owners/ managers, and local officials and experts. The discussion on
the interview questions with purposefully selected owners/managers, and fully involved local
officials and experts were administered in Amharic.

27
3.2.3. Sources of Data

Use of two or more independent sources of data or data collection methods helps to
substantiate the findings in the study (Saunders et al., (2009). Therefore the study employed
both primary and secondary sources of data collection.

I. Primary Sources

In order to answer the basic research questions and to realize the intended objectives; the
researcher gathered primary data from MSE’s operators through questionnaire. Furthermore,
face-to-face interviews with selected MSE’s Operators, and fully involved local MSE’s
officials and experts were undertaken. The interview method of data collection provides an
opportunity of getting reliable data from the respondent. It also provides a chance to the
interviewer and interviewees in order to have better interaction, clarification of issues and
getting details on the questions and answers.

II. Secondary Sources

The study employed secondary data from the Federal MSE’s Agency and sub- city offices
quarterly and yearly reports, rules and regulations, office manuals and MSE’s strategies.
Besides, books, journals, published and/or unpublished research papers, government plan
documents were reviewed to make the research reliable and dependable.

3.2.4. Method of Data Processing and Analysis

The study employed manual and computerized data processing techniques. The data
processing activities such as editing, coding, classification and tabulation of the collected data
were used. This helps to clean up and detect errors, omissions in responses and the questions
are answered accurately and uniformly. Finally, the raw data were ready for further data
analysis.

Data analysis is the application of reasoning to understand the data that have been gathered
from respondents; and the appropriate analytical technique of the analysis mainly determined
by the characteristics of the research design and the nature of the data gathered, (Saunders et
al. (2009). In line with this, the data collected from primary sources were tallied,
28
systematically organized, tabulated and summarized in items based on tables, graphs or charts.
The study also employed SPSS and Excel in analyzing the collected data. Descriptive statistics
such as percentage, mean and standard deviation were the tools used to summarize and
analyze the data gathered from the respondents based.

3.3. Reliability and Validity of Instruments

Reducing the possibility of getting the answer wrong is possible by evaluating the reliability
and validity of data gathering instruments employed in the study.

3.3.1. Reliability

Reliability is the extent to which data collection techniques or analysis procedures will yield
consistent findings (Sunders, et.al, 2009). Ensuring the reliability of the instrument is possible
through testing; and the reliability of a standardized test is expressed as coefficients which
vary between -1 and +1 with the former reveal perfect negative reliability and the latter reveals
perfect positive reliability. The Cronbach’s alpha value of 0.67 and above is acceptable and
taken as a good indication of reliability. In this research the likert scale questionnaires
responded by MSE’s owners/managers were tested with a sample of 30 MSE’s operators and
the Cronbach's alpha coefficient is 0.94. Hence, the instrument can be taken as highly reliable
to achieve its purposes.

3.3.2. Validity

According to Sunders, et al., (2009), validity is the soundness or rationality; whether the
findings are really about what they appear to be or the degree to which results obtained from
the analysis of the data actually represents the phenomena under study. The validity of data
gathering instrument is confirmed by the ability and willingness of the respondents to provide
the information requested. In order to make the questionnaires valid, relevant and objective to
the problem; it was properly commented by the advisor, and it also tested on available
respondents, and based on the issues which were not properly clear by the respondents were
corrected and refined.

29
Lastly, the improved questionnaires were printed, duplicated and dispatched. The designed
questionnaires can help to identify the main challenges that affect the operation of MSE’s. It
also enables to address how these issues affect the operation of MSE’s in the study area.
Furthermore, the interviewed respondents can also confirm the validity of the questionnaires.

3.4. Ethical Considerations

All the research participants included in the study were duly informed about the purpose of the
study and their willingness and agreement was secured before the beginning of filling the
questionnaire and conducting interview. Regarding the right to privacy of the respondents, the
study maintained the confidentiality of the identity of each participant. In all cases, names are
kept confidential and collective names such as ‘the respondents,’ the participants, the
interviewees etc., were used in the study.

30
 CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTERPRETATION

4.1. Introduction
This section discusses the results of the study based on the research tools presented in
preceding sections of the report. The purpose of this study is to assess the practices and
challenges of MSE’s in Akaki Kality sub-city. Data were collected from the three districts
namely district one, four and seven MSE’s owners/managers based on questionnaires and
interview. In addition, the sub- city and the districts MSE’s officials and experts had provided
their views through semi-structured interview and this has helped the researcher to discuss the
issues concurrently.

For MSE’s owners/managers eighty nine questionnaires were distributed across three districts;
of which 85 were returned. After editing 81(91%) responses were successfully completed,
tallied and analyzed. Besides, interviews were conducted with twelve sub-city and district
officials and nine MSE’s owners/ managers. The study has employed SPSS and Excel in
analyzing the collected data. Percentages; mean and standard deviations have been used to
analyze the raw data. In order to make the analysis visible by the reader and others tables and
pie charts are included.

For Likert Scale Questionnaire the Numbers from 1 to 5 are Rated As:

1 = Strongly Disagree 4 = Agree

2 = Disagree 5 = Strongly Agree

3 = Not Sure

4.2. Characteristics of the Subjects

Characteristics of the respondents mainly focus on the demographics of the respondents such
as sex, age, education, business sector and experiences indicated as follows.

31
 Table4.2. Demographics of the Respondents

Cumulative
No. Item Choices Counted % %
1 Sex Male 59 72.8 72.8
Female 22 27.2 100
Total 81 100

2 Age 25 years and below 12 14.8 14.8

26 to 30years 21 25.9 40.7
31 to 35 years 31 38.3 79.0
Above 35 years 17 21.0
100
Total 81 100
3 Education Grades 8 and below 8 9.9 9.9
Grade 9 to 12 23 28.4 38.3
Tech and vocational, and Diploma 44 54.3 92.6
First Degree and Above 6 7.4 100
Total 81 100
4 Respondents based on sector Construction 47 58.0 58.0
Manufacturing 19 23.5 81.5
Service 15 18.5 100
Total 81 100
5 Experience 2 years and below 17 21.0 21.0
3 to 5 years 22 27.1 48.1
Above 5 years 42 51.9 100
Total 81 100

Source: Survey Questionnaire

4.2.1. Sex of the Respondents
As it is observed in the above table item 1, among 81 respondents, 59 (72.8%) were male and
22 (27.2%) represent female. This reveals that in the sub city most of MSE’s activities are
carried out by men compared with its counterparts. This can also confirm by the 2005 E.C
Federal Micro and small Enterprises Agency of Ethiopia three years bulletin report which
indicates that 58.2% of MSE’s operators in Addis Ababa and all other regions are male and
the 41. 2% were female. Thus, balancing this gap and improving the participation of women in
MSE’s operation requires serious attention since they have indispensable roles in bringing the
overall political, social and economic development of the society. The difference between
male and female participants may be created by the cultural and social influence of the society.

32
 Figure 1: Sex of the Respondents (Source: Survey Questionnaire)

4.2.2. Age of the Respondents

The same table above item 2 shows that 64 (79%) of the respondents fall within the ages of 35
years and below. This reveals that most youths have better participation within MSE’s
activities and this can gives bright future for the development of the sectors and can reduce the
rate of youth unemployment if all the necessary support are given by respective support
institutions; Whiles the remaining 17 (21%) of the respondents falls within the age category of
above 35years of age. The study indicates that the enterprises found in the study area have
diversified age group people; from this it is believed that micro and small enterprises and its
owners in the study area has a good future and will help to reduce unemployment and poverty
among the people in general and the youth in particular.

4.2.3. Educational Level of the Respondents

Education is one of the factors that impact positively on growth of MSE’s and business men
with larger stocks of human capital, in terms of education and (or) vocational training, are
better placed to adapt their enterprises to constantly changing business environments (King
and McGrath, 2002). The analyses of educational background of the respondents are shown in
items 3 above indicates that 9.9% and 28.4% have obtained grades eight and below, and nine
to twelve respectively. The rest 54.3% and 7.4% of respondents has also technical and
vocational and diploma, and first degree and above educational levels respectively.

Therefore, this helps MSE’s owners to deal with plans that can lead to business growth like
keeping proper books of records, prepares business plan, taking advocacy issues to support
their businesses and to look for more training programs to improve their businesses. In
33
addition, 28.4% of the respondents those who have secondary education can manage their
business and able to keep some level of records as well as making contact with other
stakeholders by acquiring some financial and technical training. Therefore, their level of
education may not be a factor of MSE’s failure.

Figure 2: Educational Level of the Respondents (Source: Survey Questionnaire)

4.2.4. Respondents on Category of Sectors

As it is revealed in items 4 above, the sample firms were operating in three sectors. Most of
them 47 (58%) are engaged in construction followed by manufacturing 19 (23.5%) and service
15 (18.5%). This division of MSEs by sector type was believed to be helpful to study the type
of business ventures practiced in the study area and it also helps to have balanced information
to study the challenges faced MSE’s by creating homogeneity among sample respondents
since firms in different sectors face different challenges.

34
 Figure3: Category of MSE’s by Sectors (Source: Survey Questionnaire)

4.2.5. Experience of the Respondents

Experiences related with funding finance and management, marketing, and management
positivelycontributes to the succes of the overall MSE’s operation, (Daniel, 2012). In this
regard, the above table in item 5 shows that majority (51.9%) of the respondents have an
experience of above five years. The rest 27.1% and 21% of the respondents have also an
experience of 3 to 5 years, and 2 years and below respectively. From this data, someone can
conclude that majority of MSE’s owners have better expereince and this contributes for future
sustainability, performance and expansion of the enterprises. In addition, those enterprises
which have below five years experience requires obtainnig experiences from those who have
acquired better experiences.

4.3. Startup and Working Capital and Its Contribution

MSE’s obtain startup and working capital from different sources; and the capital also has
contributions to MSE’s owners and other employees in creating employment opportunity and
poverty alleviation.

35
Table 4.3. Responses on Startup and Working Capital Sources and its Contributions

Cumulative
No. Item Choice Counted % %
1 Have you had job before this Business? Yes 26 32.1 32.1
No 55 67.9 100
Total 81 100
2 Amount of Startup and working Capital Less than 5000 Birr 22 27.2 27.2
Between 5000 to10,000Birr 16 19.8 47.0
Above 10,000Birr 43 53.0 100
Total 81 100

3 Source of startup and working Personal saving 13 16.1 16.1

capital Family 10 12.3 27.0
Banks 4 4.9 31.9
Microfinance 54 66.7 100
Total 81 100
4 Average monthly income of owners Less than 1000Birr 21 25.9 25.9
1000 to 2000Birr 22 27.2 53.1
2001 to 3000Birr 24 29.6 82.7
Above 3000Birr 14 17.3 100
Total 81 100
5 Adequacy of the income to their life Yes 41 50.6 50.6
No 40 49.4 100
Total 81 100
6 Advantages to owners earned from Able to learn 8 9.9
this business Able to help family Able 30 37.1 9.9
to Save Able to cover 4 4.9 47.0
costs 39 48.1 51.9
Total 81 100 100
7 Number of owners and employees 659 owners and
employed in sample sectors 229 employees

8 Employees average monthly salary Less than 1000 Birr1000 34 42.1 42.1
to 2000 Birr 18 22.2 64.3
2001 to 3000 27 33.3 97.6
Above 3000 Birr 2 2.4 100
Total 81 100

Source: Survey Questionnaire

4.3.1. Responses on Employment Opportunity and Earnings
Micro and small enterprises have a huge contribution to the growth and development of
developing countries in terms of employment opportunity generation at a relatively low capital
cost (Stephen and Wasiu, 2013). The above table (4.3) item1 indicates that most (69.7%) of
the respondents didn’t have job before the involvement of this business due to different
reasons such as absence of job, active in schools, etc. and this study confirms 659 MSE’s
sample owners and 229 employees have had an employment opportunity within this business.

36
Among this employment opportunity as observed in the same table in items 4, 25.9%, 56.8%
and 17.3% MSE’s owners have earned an average monthly salary of Birr below 1000, 1000 to
3000, and above 3000 respectively. Regarding the employees monthly income, the table
reveals that 42.1%, 55.5% and 2.4% of employees’ employed in the sector have earned an
average monthly salary of Birr below 1000, 1000 to 3000, and above 3000 respectively.
In addition, the sub-city MSE’s Office strategic plan document (2006 to 2010) confirms that
the years from 2001 to 2005 the sector has created 45,491 (27,839 permanent and 17,652
temporary) employment opportunities.

As it is indicated in the same table items 5, 50.6% of the respondents’ income is adequate to
satisfy their needs. In the same table above, 48.1% of the subjects were able to cover their
expenses, and 37.1% able to help their families respectively. A small amount, 9.9% and 4.9%
of the respondents also can learn and save respectively.

The study reveals that MSE’s in the study area have a green light and good contribution in
employment opportunity creation and poverty alleviation. This means, if many people have
accessed employment opportunity, leads to increase the income of participants, the per capita
income of the citizens, and the GDP development of the country. Therefore, owners, support
institutions and the society at large should provide serious attention based on the policy
directives.

4.3.2. Responses on Startup and Working Capital and Its Sources

As it is obtained in the table above items 2, 53% of MSE’s in the study area has started their
business above Birr10, 000. The rest 27.2% and 19.8% of MSE’s have also started their
business below Birr 5000, and 5,000 to 10,000 respectively. Starting and doing own business
requires startup and working capital which obtained from different sources. In this regard,
majority (66.7%) of owners shows that the source of startup capital is obtained from
government sponsored microfinance institution. The rest, 16.6%, 12.3% and 4.9% were
financed from personal saving, family and banks respectively.

Besides, the result of interview also shows that MSE’s in the study area uses informal sources
such as Iqub and Idir due to the inability to satisfy the credit needs of MSE’s by formal
financial institutions, and if it is possible, most of the interviewees prefer informal sources due

37
to its relatively rare requirement of collateral since such sources take place among parties with
intimate knowledge and trust of each other.
The study shows that MSE’s opportunity in accessing startup finance is mainly dependent on a
single source, i.e., microfinance institutions. As a result, the sector has shortage of finance to
satisfy the credit needs which helps the expansion and growth of MSE’s, engaging substantial
number of employees and/or generating more financial resources. Therefore, accessing startup
and working finance to MSE’s requires serious attention in order to obtain significant
contribution from the sector.
4.4. Challenges Related to MSE’s Operations
Respondents were asked different questions based on questionnaires and interview in line with
the challenges that influence MSE’s operation of MSEs are analyzed here under.
Table4.4.1. Challenges Related to the Role of Support Institutions

Agreement Level
No. Item Sum MN SD
5 4 3 2 1
1 Support institutions provide adequate
assistance to MSE’s with their respective 6 24 9 31 11 81 2.79 1.22
roles
% 7.4 29.6 11.1 38.3 13.6 100
2 Gov. officials have consistent monitoring
schedules to MSE’s 6 19 1 36 19 81 2.46 1.28
% 7.4 23.5 1.2 44.4 23.5 100
3 Officials and experts search market for
MSE’s and they create market linkages 6 30 6 34 5 81 2.97 1.16
% 7.4 37.0 7.4 42.0 6.2 100
4 MSE‘s have got equal treatment of using
incentives given by the Gov. 7 20 4 29 21 81 2.54 1.34
% 8.7 24.7 4.9 35.8 25.9 100
5 Microfinance institution have provided
finance related technical/managerial support 3 16 5 48 9 81 2.45 1.04
% 3.7 19.8 6.2 59.3 11.0 100
6 Support institutions have adjusted continuous
training and dev. Programs to MSE’s 13 31 5 23 9 81 3.19 1.31
% 16 38.3 6.2 28.4 11.1 100
7 Experience sharing program is scheduled
among MSE’s. 4 14 3 36 24 81 2.23 1.19
% 4.9 17.3 3.7 44.4 29.6 100

Total 2.66 1.22

Source: Survey Questionnaire

Key: MN = Mean SD = Standard Deviation

38
According to MoTI, (1997), the government of FDRE with its respective support institutions
has roles in promoting MSE’s by facilitating infrastructure, marketing, financing, establishing
monitoring and feedback systems, providing training etc. to realize the contribution of the
sector. In relation to this in Table 4.4.1 item1, 51.9% (13.6% strongly disagree and 38.3%
disagree) of the respondents shows that support institutions don’t provide adequate assistance
to MSE’s based on their respective roles. On the other hand, 37% (7.4 strongly agree and 29. 6
% agree) positively acknowledged the support of the institutions, and the rest 11.1% neither
agree nor disagree on the role played by support institutions. The 2.79 and 1.22 MN and SD
respectively also reveal that the assistance given to MSE’s is below the expected central
average and coefficient variation of the distribution.

The interviews obtained from the sub-city and district officials and experts also strengthened
the questionnaire responses that MSE’s don’t acquire adequate support due to shortage of
skilled and professional experts at both the sub-city and district levels.

As the responses analyzed in the same table item2, majority 67.9% (23.5% strongly disagree
and 44.4% disagree) of the respondents indicate that government officials don’t have continuous
monitoring schedules to MSE’s. On the other hand, 30.9% of the respondents are positively
acknowledged the existence of schedules set by government officials. The MN 2.46 and SD
1.28 also confirm that officials don’t have consistent monitoring schedules to MSE’s which
helps to address immediate problems.

With regard to market search and linkage creation indicated in item 3, 48.2% (6.2 strongly
disagree and 42% disagree) of the respondents reveals that Officials and experts couldn’t search
market and establish adequate market linkage with others. On the contrary, 44.4% (7.4 strongly
agree and 37% agree) positively recognized effort in searching market and establishing
linkages; and the rest 7.4% of the respondents neither agreed nor disagreed. Even though the
2.97 MN and 1.16 SD shows average efforts exerted by officials and experts in searching
market and establishing market linkages, there is a deviation in satisfying the needs of MSE’s.

Concerning incentives given by the government indicated in the above table item 4, 61.7%
(25.9 strongly disagree and 35.8 disagree) of the responses show that MSE‘s don’t get equal
treatment of using incentives given by the government. On the other hand, 33.4% (8.7 strongly

39
agree and 24.7% agree) of the respondents reply that MSE‘s have received fair treatment, and
only 4.9% provide their neutral response. The analysis of 2.54 and 1.34 MN and SD
respectively reveals that majority of MSE’s owners don’t agree by the fairness of the
incentives given by government officials. Hence, this requires attention in establishing fair
treatment mechanism which ensures the fairness and reasonableness of the treatment.

In relation to finance related technical/managerial support to MSE’s indicated in items 5, most

(70.3%) which is 59.3% strongly disagree and 11% of the participants’ response indicates that
microfinance institution couldn’t provide adequate support on finance related
technical/managerial matters. The rest 23.5% and 6.2 % of the respondents provide their
agreements and neutral responses respectively. The 2.45 MN and 1.04 SD also helps to
conclude that the effort given by microfinance institution on finance related
technical/managerial support to MSE’s couldn’t satisfy the expectation of MSE’s owners. As
a result, this could be one of the challenges which affect MSE’s success.

With regard to support on providing training to owners/managers the sub-city has provided
training for 5,963 owners during the years 2004 and 2005. As respondents confirmed that
54.3% (16% strongly agree and 38.3% agree) MSE’s are obtained adequate training from
support institutions. On the other hand, 39.5% (11.1% strongly disagree and 28.4% disagree)
shows that MSE’s didn’t acquire adequate training from respective institutions. Even though
the mean 3.19 shows the level of support above the central average and has a SD of 1.31, there
is a gap which needs further improvement.

As it is observed in item7, 74 % (29.6% strongly disagree and 44.4% disagree) shows that
support institutions don’t have scheduled experience sharing program among MSE’s. On the
contrary, 22.2% (4.9 strongly agree and 17.3% agree) of the respondents acknowledged the
existence of scheduled experience sharing program. The 2.23MN and 1.19 SD also show the
gaps between the effort of support institutions and the expectation of owners in relation to
experience sharing practices.

The above discussions related with support institutions reveal that the total 2.66 MN and 1.22
SD reveals that sample MSE’s don’t obtain adequate support from respective organizations.
Thus, lacking proper experience sharing activities, technical and managerial support related

40
with financial matters, inability to solve immediate problems based on continuous monitoring
activities and failure in providing fair treatment to MSE’s could be the challenges which
impedes the growth and expansion of MSE,s.
Table4.4.2. Challenges Related to Finance

Agreement Level
No Item 5 4 3 2 1 Sum MN SD
1 Start up and working capital is easily
accessible 7 12 2 41 19 81 2.34 1.23
% 8.6 14.8 2.5 50.6 23.5 100
2 The loan obtained from financial
institution is adequate for my business 4 11 2 46 18 81 2.22 1.09
operation
% 4.9 13.6 2.5 56.8 22.2 100
3 Borrowing money is possible without 5 4 1 37 34 81
collateral 1.87 1.08
% 6.2 4.9 1.2 45.7 42 100
4 The amount of interest rate paid to
lending institution is reasonable 10 14 5 37 15 81 2.59 1.31
% 12. 17.3 6.2 45.7 18.5 100
3
5 The repayment period of loan is suitable
to payback the debt 8 14 11 33 15 81 2.59 1.25
% 9.9 17.3 13.6 40.7 18.5 100
Total 2.32 1.19

Source: Survey Questionnaire

Although access to finance is crucial to carry out MSE’s business operation, expansion and
growth of any nation’s economy, problems related to finance dominate all other constraints
(Ackah and Vuvor, 2011). Lack of finance, shortage of access to credit, and high interest rates
of financial institutions lead to MSE’s retarding their expansion and growth (Ibid).

In this regard, the sub-city microfinance institution has provided a loan of Br. 107,632, 687 in
2004 and 2005 years. Even though this amount of loan has been supplied by microfinance
institution, majority (74.1%) of the respondents in table 4.4.2 in item 1 confirm the difficulty
of obtaining startup and working capital to MSE’s. Among the respondents, 23.4% (8.6%
strongly agree and 14.8% agree) shows that startup and working capital is easily accessible to
MSE’s, and only 2.5% of the respondents neither agree nor disagree.

41
In addition, 2.34 MN and 1.23 SD reveal that MSE’s have faced challenges to the
inaccessibility of finance. As it is indicated in the same table the main source of finance was
dependent on microfinance institution. Besides, the response of the questionnaire and
interviews conducted from sub-city and district officials and experts, and MSE’s owners
confirm that obtaining adequate finance is difficult to MSE’s in general and new entrants in
particular due to the prior 20% compulsory saving requirement of the total loan size.

It is presented in item 2, 79% (22.2% strongly disagree and 56.8% disagree) of the responses
indicate that the loan size given by microfinance is inadequate to run the business. Only 18.5%
of the respondents show their positive agreements on its adequacy to run their business. In
addition to the inadequacy of the loan, 87.7% of the respondents in items 3 which has 1.87 and
1.08 MN and SD respectively reveals loan is impossible without saving or asset collateral.

Regarding this issue, interviews were conducted from sub-city and district officials and
experts, and MSE’s owners; and their responses strengthened the challenges related with the
loan that new entrants in to the sector should fulfill a compulsory saving of 20 % based on the
total loan size, and this requirement hinders new entrants in general and the very poor people
in particular.

Concerning interest rates, the majority (64.2%) of the responses shows the existence of
unreasonable interest rate. On the other hand, 29.6 % (12.3% strongly agree and 17.3% agree)
shows its reasonableness. The rest 6.2% of the respondents neither agree nor disagree.
Furthermore, the interviews also shows that the current annual interest rate of loan taken from
microfinance institution is 10.5%; which is more than 1.5% and 2% in comparison with
commercial and development banks respectively.

In relation to the payback period of the debt, majority of the respondents which is 59.2 %
(18.5% strongly disagree and 40.7% disagree) reveals the inconvenience of the payback
period. On the contrary, some of (27.2%) and (13.6%) of the subjects provide their
agreements and neutrality respectively.

As the study shows there are finance related challenges which severely hinders sample MSE’s
operation. Based on the mean of observed variables; collateral requirements (1.87),

42
inadequacy of loan (2.22), and the difficulty of accessing finance (2.34) are the major ranked
challenges followed by inconvenience of loan repayment period and high interest rate.

Table4.4.3. Challenges Related to Working Premises

No Item Agreement Level

5 4 3 2 1 Sum MN SD
1 Working premises are adequate for
operation 8 27 4 32 11 81 2.83 1.26
% 8.6 33.3 4.9 39.5 13.6 100
2 Premises are adjusted based on
MSE’s growth level. 5 12 3 47 14 81 2.34 1.11
% 6.2 14.8 3.7 58.0 17.3 100
3 Leasing cost is reasonable and 14 33 4 24 6 81
affordable. 3.30 1.27
% 17.4 40.7 4.9 29.6 7.4 100
Total 2.82 1.21

Source: Survey Questionnaire

Working premise is one of the challenges which impede the full scale implementation and
growth of micro and small enterprises, and it is the second ranked problem in regional towns
and the major ones in Addis Ababa (MUDC, 2013). In relation to this study, the sub-city has
provided 327 sheds which has approximately ranging from of 36 to 120 sq. meters based on
the number of members and the nature of the enterprises. Although these sheds are available to
the sector, majority (53.1%) which is (13.6 strongly disagree and 39.5% disagree) of the
respondents and the mean and standard deviation of 2.83 and 1.26 respectively confirm that
working premises are inadequate for their business operation. On the other side, 41.9% (8.6
strongly agree and 33.3% agree) of samples show the adequacy of the premises.

In relation to premises adjustment based on MSE’s growth level, most (75.3%) of the
participants, and the 2.34MN and1.11SD indicated that premises aren’t adjusted based on their
growth levels. The interviews from MSE’s owners and officials also found out that MSE’s
graduation from one level to the other has practiced without considering their premises, and
this hinders the full scale operation and expansion of the enterprises. The interviewees added
that due to shortage of premises currently the sub-city doesn’t allow working premises for
those new entrant groups of having less than ten members.

43
The same table above in items 3, majority (58%) of the participants and the 3.30 MN indicates
the reasonableness of the leasing cost of the premises; and 37% and 4.9% expressed their
disagreements and neutral responses respectively. As it is confirmed by interviews from
owners and officials the maximum leasing cost which found in the study area is Birr 400 per
month.
Hence, the inability to adjust premises based on the growth levels of MSE’s and the
inadequacy of working premises may hinders operators in utilizing the maximum resources
and expansion of the existing businesses.
Table4.4.4. Challenges Related to Marketing

Agreement Level
No. Item 5 4 3 2 1 Sum MN SD
1 MSE’s had short and long term
marketing plan. 7 23 4 36 11 81 2.74 1.25
% 8.6 28.4 4.9 44.5 13.6 100
2 Market linkages are created between
MSE’s and other institutions. 7 30 2 26 16 81 2.82 1.34
% 8.6 37.0 2.5 32.1 19.8 100
3 MSEs have market clearly defined
market potential and customers. 4 17 5 40 15 81 2.44 1.16
% 4.9 21.0 6.2 49.4 18.5 100
4 MSE’s products are easily accessible to
customers. 9 21 6 36 9 81 2.81 1.25
% 11.1 25.9 7.5 44.4 11.1 100
5 There is no intense market competition
among MSE’s 20 32 18 9 2 81 3.72 1.03
% 24.7 39.5 22.2 11.1 2.5 100
6 Entry in the market is convenient to 7 30 2 26 16 81 2.40 1.14
MSE’s.
% 8.6 37.0 2.5 32.1 19.8 100
7 MSE’s vary their products to satisfy and
catch customers 6 10 6 51 8 81 2.44 1.07
% 7.4 12.3 7.4 63.0 9.9 100

Total 2.76 1.17

Source: Survey Questionnaire

As it is observed item 1 above, 13.6% strongly disagree and 44.5% of disagree which is 58.1%
of the disagreement and the 2.74 mean results obtained from the distribution shows that
MSE’s don’t have short and long term marketing plan. The other 37% (8.6 % strongly agree
and 28.4% agree) reveals the existence of marketing plan, and the rest 4.9% of the respondents

44
are not sure to provide their responses. In addition, this is also supported by MSE’s owner’s
interviews that most of the enterprises don’t have market plan due to lack of knowledge and
skills related with managerial functions.

Regarding the created market linkages between MSE’s and others, 51.9% the responses
indicates that market linkages among MES’s and others aren’t properly done The other 45.6%
(8.6% strongly and 37% agree) of participants expressed their agreements, and only, 2.5% of
the participants couldn’t provide their agreement’s or disagreement’s.

Even though majority of the questionnaire responses reveals the none existence of market
linkages, the interview responses and secondary source documents of officials reveals that
market linkages are created among MSE’s. According to the strategic plan of the sub-city
MSE’s office, in the years 2004 and 2005 MSE’s have got Birr 158,527,164 from the created
market linkage. Despite managers/owners also confirm that MSE’s related to construction
sectors has tried to create market linkages with Addis Ababa City Administration Housing
Development Agency, the diversification of the linkages, and attention to other sectors are
questionable.

In relation to market potential and customer identification, 67% of the disagreements which
encompasses 18.5% strongly disagree and 49.4% of disagree shows that MSE’s don’t have
clearly identified market potential and customers. As it is confirmed by the interview except
those the government has created the linkages, MSE’s face challenges due to the doubtful
attitudes of the community towards the quality of products. Some of the respondents (25.9%)
acknowledged the availability of market potential and customers. The rest 6.2% couldn’t
forward their responses either positively or negatively.

As observed in item4, 55.5% of the respondents replied that MSE’s products are inaccessible
to their customers. On the other hand, 37% of the respondents agreed on the possibility of
accessing the products to their customers, and only, 7.5% of the respondents provided their
neutral responses.

Concerning market competition, 64.2% of the responses show the none-existence of intense
market competition, and 22.2% of the respondents neither agree nor disagree. Only 13.6% of
the respondents accept the existence of intense market competition. Interviews from MSE’s
45
owners/ mangers also ensure that competition is not as such a challenge which hinders their
operation.

In the table above in item 6, 51.9% (19.8% strongly disagree and 32.1% disagree) of the
responses confirm that market entry is not convenient to MSE’s. On the other hand, 45.6 % of
the respondents reveal the convenience of market entry, and only 2.5% shows their neutral
responses. The interviews from MSE’s owners, and sub-city and district officials and experts
indicate that the difficulty to market entry is related with the negative attitude of the
community towards the quality of products, the inaccessibility of market near to the
production site and lack of product display areas or houses.

With regard to product differentiation, 73.9% of the answers show that the enterprises do not
produce various products to satisfy and catch customers. Only 19.7% of the respondent’s
response indicates the effort of MSE’s in producing differentiated products to satisfy and catch
their customers. The interviewed individuals answered that even though some manufacturing
enterprises those involved in metal and wood works have tried to apply differentiation, most
enterprises found in the construction sector are guided by the interest of the government and
hence differentiation were not the focus of such enterprises.

Marketing knowledge is important for the promotion, growth and development of Micro and
small enterprises. However, market constraints and the inability to sell the products and
services; lack of adequate marketing channels, lack of marketing skills and inability to create
market linkages are the problems to the starting of business and further growth of the sector
(MUDC, 2013; MoFED, 2011).

As the study discussed and the 2.76 MN and 1.17 SD confirm that most of micro and small
enterprises don’t have short and long term marketing plan, fully addressed market linkage’s,
clearly defined customers, means of product accessibility and differentiated products to make
loyal to their customers. There is also a challenge to market entry related with the negative
attitude of the community towards the quality of products. Therefore, such problems may have
an impact on the proper development and operation of sample MSE’s.

46
 Table4.4.5. Challenges Related to Managerial and Technical skills

Agreement Level
No. Item 5 4 3 2 1 Sum MN SD
1 MSE’s managers/owners have
managerial knowledge and skills. 7 18 3 43 10 81 2.61 1.21
% 8.6 22.2 3.7 53.1 12.3 100
2 Managers are designated based on
their managerial skills. 4 15 8 41 13 81 2.45 1.11
% 4.9 18.5 9.9 50.6 16 100
3 MSE’s have written work plan. 5 16 6 47 7 81 2.56 1.09
% 6.2 19.8 7.4 58 8.6 100
4 Monitoring and evaluation program
is clearly scheduled and practiced. 5 28 2 38 8 81 2.80 1.19
% 6.2 34.6 2.5 46.9 9.9 100
5 MSE’s managers/owners have
access to get better managerial 7 15 7 30 22 81 2.44 1.30
knowledge.
% 8.6 18.5 8.6 37.0 27.2 100
Total 2.57 1.18

Source: Survey Questionnaire

According to CLEP (2006), lack of managerial skills such as lack of coordination of the
production process, and inability to handle troubleshoot failures on machinery and/or
equipment’s is a critical problem that MSEs are facing since they cannot afford to employ
specialists in the fields of planning, finance and administration.

In relation to managerial knowledge and technical skills of MSE’s managers table4.4.5 in item
1, 65.4% (12.3% strongly disagree and 53.1% disagree) of the respondents express that
managers/owners don’t have adequate managerial knowledge and skills. This also confirmed
by the interviews that most of MSE’s failures and dropouts are related with the inability of
managing the groups, financial matters, raw materials and other resources. According to the
positive responses of 8.6 % strongly agree and 22.2% agree (30.8%), managers have
managerial and technical skills in order to lead their business. only 3.7 % of the respondents
were not sure to show their position.

As it is observed in the above table in item 2, 66.6% of the respondents show that managerial
position of MSE’s aren’t assigned based on their managerial knowledge and skills. Interview

47
responses from officials and experts, and MSE’s owners also confirm owners don’t provide
attention to their managers and other management members’ assignment; and even the owners
may not be well known each other. The other 23.4% (4.9% strongly agree and 18.5% agree) of
the respondents reply that their managers assignment is based on their managerial knowledge
and skills. Few (9.9%) of the respondents were not sure to provide their responses.

Concerning the existence of written work plan, 66.6% of the responses reveal that MSE’s
haven’t written work plan. Furthermore, during the time of the enterprises visiting the
researcher has tried to observe the offices of MSE’s and asked them to show their work plan
and other documents but except daily attendances of owners and employees no one of them
can have a written work plan which placed in their premises. Although majority of the
respondents and interviews confirm the none existence of written work plan, 35% of the
respondents show the existence of their work plan, and the other 7.4% of the respondents
provide their neutral responses.

With regard to monitoring and evaluation, 9.9% of strongly disagree and 46.9% disagree
which is a majority (56.8%) of subjects reveal that the target group don’t have clearly
scheduled and applicable monitoring and evaluation program. Among the respondents, 40.8%
(6.2% strongly agree and 34.6% of agree) indicates the existence of scheduled monitoring and
evaluation programs. A few, 2.5% of respondents were neutral in providing their responses.
Besides, the interview responses obtained from officials and experts, and MSE’s owners show
that managers don’t have scheduled consistent follow up and evaluation practices to alleviate
immediate observable problems.

As it is indicated in items 5, majority (64.2%) of the participants indicates that MSE’s

managers haven’t access to get better managerial knowledge. On the other hand, 27.1% of the
respondents confirm the existence of opportunities to obtain managerial knowledge and skills;
and the rest 8.6% shows their neutral responses. However, secondary source documents
confirm that support institutions which are found in the sub-city has provided managerial
training for 1,831 MSE’s owners to strengthen their managerial and technical skills.

Despite the efforts has made to improve the MSE’s managerial knowledge and skills,
Majority of the respondents percentages and the mean of each item, and the total mean of 2.57
shows that MSE’s have problems in acquiring better managerial knowledge and skills,
48
managerial designations, and preparing their own work plan. Hence, such problems may have
negative effect on the success and further expansion of MSE’s.
Table4.4.6. Challenges Related to Infrastructure Facilities

Agreement Level
No. Item 5 4 3 2 1 Sum MN SD
1 There is no continuous electric power
interruptions 4 3 1 37 36 81 1.79 1.00
% 4.9 3.7 1.2 45.7 44.5 100
2 Sufficient water supply is available in
your working premises 9 1 4 35 32 81 2.01 1.22
% 11.1 1.2 4.9 43.3 39.5 100
3 Sufficient and quick transportation is
available. 6 13 3 32 27 81 2.24 1.27
% 7.4 16.1 3.7 39.5 33.3 100
4 Appropriate dry waste and sewerage
system is available 3 4 2 30 42 81 1.71 1.00
% 3.7 4.9 2.5 37.0 51.9 100
Total 1.93 1.12

Source: Survey Questionnaire

The result presented in the above table shows that unavailability of dry waste and sewerage
system, power interruption, inadequate water supply, and inconvenience of working site for
transportation access are the major challenges that face MSE’s operation in the study area.
As it observed in item1, 90.2% (44.4% strongly disagree and 45.7% disagree) of the responses
confirm that existence of electric power interruptions. Only 8.6% (4.9% strongly agree and
3.7% agree) of the subjects confirm the none-existence of electric power interruptions, and the
rest 1.2% of the respondents provide neutral responses. In addition, the mean 1.79 and the
standard deviation 1.0 reveal that most respondents of MSE’s are influenced by electric power
interruption next to unavailability of dry waste and sewerage system.

Regarding the sufficiency of adequate water supply in item 2, majority (82.8%) of the
respondents shows that MSE’s don’t obtain adequate water supply. Among the respondents,
only 12.3% and 4.3% responses confirm the availability of adequate water supply and neutral
responses respectively. Besides, the mean 2.01 with the standard deviation of 1.22 reveals that
majority of the respondents are agreed on the insufficiency of water supply in the study area.

49
In relation to transportation indicated in item3, 72.8% (33.3% strongly disagree and 39.5%
disagree) of the participants reply that the working site is not convenient for accessing
adequate and quick transportation. Among the respondents, 23.5% (7.4% strongly agree and
16.1% agree) MSE’s indicates that the working site is convenient for transportation access,
and 3.7% neither agree nor disagree.

Concerning the issues relate with dry waste and sewerage system, 51.9% strongly disagree and
37% disagree which is 88.9% of the disagreements shows that unavailability of dry waste and
sewerage system is the first ranked challenge among the variables with infrastructure facilities.

In addition, the questionnaire responses are supported by the interviewees from MSE owners
and the sub-city and district officials that unavailability of appropriate dry waste and sewerage
system, power interruption, inadequate water supply, and poor transportation facility near the
working site are the major impeding factors for the full scale implementation of MSE’s.

From this discussion and the total mean 1.93 indicated in table above, poor infrastructure facility could
be one of the major challenges which inhibits the existence and further expansion of MSE’s.

Table4.4.7. Challenges Related to Raw Materials Supply

Agreement Level
Item 5 4 3 2 1 Sum MN SD
No.
1 Production raw materials are adequately
available 5 35 5 24 12 81 2.96 1.25
% 6.2 43.2 6.2 29.6 14.8 100
2 MSE’s and production input suppliers create
Linkages. 5 28 7 26 15 81 2.78 1.27
% 6.2 34.6 8.6 32.1 18.5 100
3 The raw materials Supply don’t have
bureaucratic influence. 5 9 3 38 26 81 2.12 1.16
% 6.2 11.1 3.7 46.9 32.1 100
Total 2.62 1.22

Source: Survey Questionnaire

In relation to production raw materials availability, 49.4 % (6.2 strongly agree and 43.2% agree)
agreements reveals that production raw materials is adequately available to MSE’s. On the other hand,
44.4% (14.8% strongly disagree and 29.6% disagree) of the responses shows the inadequacy of
production raw materials and the rest 6.2% haven’t sure response. The mean 2.96 confirms that the

50
availability and adequacy of production raw materials to MSE’s has deviation to the maximum value
of the likert scale.
In the same table above in item2, majority (50.6%) of the respondents indicate that MSE’s and
production input suppliers couldn’t make linkages. On the contrary, 40.8% indicates the existence of
linkages, and the rest 8.6 % neither agree nor disagree.

Even though the interviewees of sub-city and district officials witnessed that production input suppliers
and MSE’s have proper linkages, owners/managers couldn’t agree by the created linkages since the
linkage is mainly created between the construction sector and the Addis Ababa city Administration
Housing Development Agency in supplying cement. Owners/managers interviewees also show that
their construction production capacity is highly dependent on the effectiveness of the agency, i.e. if the
agency requires more production output, it supplies more cement to MSE’s and have more production
outputs; if not the result is vice versa. Besides, the interviewees added that MSE’s which produce
bricks couldn’t produce and sale their production without the above government agency.
As it is observed in items 3, 79% of the respondents confirm the existence of bureaucratic influence in
the area of supplying production inputs. Only 17.3% and 3.7% participants provide their positive and
neutral responses respectively. Furthermore, the interviews from officials and MSE’s owners show that
bureaucratic influence related with supplying cement, taking the final product from the production site
and payment adjustment can be taken as the challenges of MSE’s.
Although some efforts have been made to create linkages between MSE’s and production raw material
suppliers, inability to creating linkages and serving all sectors, and bureaucratic influence seem to be
the challenges which affects MSE’s operation.
Table4.4.8. Challenges Related to Regulatory Issues

Agreement Level
No. Item 5 4 3 2 1 Sum MN SD
1 The tax levied on my business is reasonable
13 30 6 22 10 81 3.17 1.33
% 16.0 37.1 7.4 27.2 12.3 100
2 Bureaucracy is not a bottleneck in registration
and licensing 18 40 2 14 7 81 3.59 1.25
% 22.2 49.4 2.5 17.3 8.6 100
3 There is no unreasonable government officials
involvement 15 40 6 13 7 81 3.53 1.21
% 18.5 49.5 7.4 16.0 8.6 100
4 Rules and regulations are easily accessible to 22 32 3 13 11 81 3.50 1.39
MSE’s.
% 27.2 39.5 3.7 16.0 13.6 100
Total 3.44 1.29
Source: Survey Questionnaire

51
Regarding regulatory issues identified in table above in items 1, 53.1% of the respondents
indicate that the reasonableness of the tax levied on MSE’s, and 7.4% also neither agree nor
disagree. On the other hand, 39.5 %( 12.3% strongly disagree and 27.2% disagree) shows that
unreasonable taxation could be a challenge to MSE’s operation.

In relation to acquiring registration and licensing, among the respondents 71.6% (22.2%
strongly agree and 49.4% agree) indicates bureaucracy is a challenge to register and acquire
license which helps to start new business and promote the existing ones. On the contrary,
some 25.9% (8.6% strongly disagree and 17.3% disagree) participants reply that bureaucracy
is not a bottle neck to acquire a license, and the rest 2.5% neither disagree nor agree.

The interview results from officials and MSE’s operators confirms that bureaucratic decisions
such as 20% of compulsory saving prior to obtaining loan and a requirement having ten and
above members to establish a group prior to registration and licensing is one of the main
challenges to MSE’s in general and new entrants in particular; and those who has less than ten
members couldn’t have the right to get premises.

Moreover, the interviewees agree that bureaucratic decision adversely impedes the policy
objectives; creating employment opportunity, poverty reduction, and overall economic growth.
In the same table items 3 indicated above, 68% (18.5% strongly agree and 49.5% agree) of the
participants show that government officials involvement couldn’t take as a challenge, and the
other 7.4% also provides their neutral responses i.e. neither disagree nor agree. On the other
hand, 24.6% (8.6 strongly disagree and 16% disagree) reveals the existence of unreasonable
government officials involvement on MSE’s operation.

The interview results obtained from government officials and experts, and MSE’s owners
indicate contradicting views on the involvement of government officials. MSE’s owners show
that government officials have unreasonable involvement on political and economic matters.
On the other hand, officials and experts reveal that the involvement is mainly focus on
strengthen MSE’s and to play their roles in the economic agenda of the sectors. Hence, in
order to confirm this contradicting ideas require further investigation and identification by
those who have interest on this matter.

52
Concerning rules and regulations accessibility to MSE’s, 66.7% of the respondents provide
their agreement responses, and 3.7% neither agreed nor disagreed. The other 29.6% of the
participants indicate inaccessibility of the materials and directives to respective MSE’s.
Even though the above discussion and analysis on legality issues show somehow positive
efforts have exhibited compared with the other issues discussed above, there are challenges
related to preconditions to have registration and licensing, and unreasonable government
official involvement which have impacts on the success of MSE’s.
4.5. Comparison of Major Challenges
Although all issues related to support institutions, financial, working premises, marketing,
managerial and technical skills, infrastructure facilities, supply of raw materials and regularity
have its own effect on the success or failure of MSE’s; this does not necessarily mean that all
issues have equal influence on MSE’s operation. Thus, the table below ranks the level of
influence of the major issues discussed before.
Table4.5.Comparison of Major Challenges

Agreement Level
No. Item 5 4 3 2 1 Sum MN SD Rank
1 Challenges related to support 81
institutions 21 28 11 19 2 3.58 1.18 6th
% 25.8 34.6 13.6 23.5 2.5 100
2 Challenges related to finance 29 32 4 11 5 81
% 35.8 39.5 4.9 13.6 6.2 100 3.85 1.22 2nd
3 Challenges related to working premises
23 36 9 9 4 81 3.80 1.12 4th
% 28.4 44.4 11.1 11.1 4.9 100
4 Challenges related to market 15 42 8 12 4 81
% 18.5 51.9 9.9 14.8 4.9 100 3.64 1.09 5th
5 Challenges related to managerial and
technical skills 33 21 6 20 1 81 3.80 1.25 3th
% 40.7 25.9 7.4 24.7 1.2 100
6 Challenges related to infrastructure
facilities 48 12 5 10 6 81 4.06 1.35 1st
% 59.3 14.8 6.2 12.3 7.4 100
7 Challenges related to supply of raw
materials 11 29 13 25 3 81 3.24 1.14 7th
% 13.6 35.8 16.0 30.9 3.7 100
8 Challenges related to regularity 12 21 20 19 9 81
3.10 1.24 8rd
% 14.8 25.9 24.7 23.5 11.1 100

Source: Survey Questionnaire

53
As it can be observed in the table above, the issues related to infrastructure facilities, financial,
and managerial and technical skills have greatest influence on sample MSE’s operation;
followed by working premises, marketing, support institutions, supply of raw materials and
regularity issues. This means problems related to infrastructure facilities, financial, and
managerial and technical skills are ranked the three most challenges that affect MSE’s
operation. This finding is supported by MUDC (2013) and Habtamu et al. (2013) whose
studies identified that inadequate finance, infrastructure facilities and working premises
leveled as the main constraints of most MSE’s.

Hence, infrastructure facilities, finance, managerial and technical skills and working premises
may impede MSE’s operation in the study area.

54
 CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSIONS AND

RECOMMENDATIONS
In this chapter summary of the findings, conclusions and recommendations are presented.
Based on the purpose of the study and findings conclusions and recommendations are made.
The recommendations are mainly related with support institutions or government bodies, and
MSE’s owners.

5.1. Summary of the Findings

The main objective of the study was to analyze the challenges of micro and small-scale
enterprises. In line with this, the study has identified the following findings.
Majority (72.8%) of MSE’s owners and the activities in the sub city are carried out by men;
and 79% of the study samples fall within the age’s category of 35 years and below.

About 61.7% of the participants have an educational level of above technical and vocational,
and 58% of MSE’s owners have been engaged in the construction sector, and 51.9% of owners
have above five years.experience.

Most (69.7%) of the MSE’s owners didn’t have job before of this business, and among the
owners 56.8% have earned an average monthly salary of Birr 1000 to 3000.

Majority (53%) of MSE’s are started their business above Birr10, 000; and 66.7% of owners
obtained the startup capital from government sponsored microfinance institution.

As each item and the total 2.66 mean of the issues related with support institutions show that
majority of MSE’s lack obtaining proper experience sharing activities, technical and
managerial support related with financial matters, ability to solve immediate problems based
on continuous monitoring activities and equal treatment of using incentives given by the
government.

As the individual, and total mean (2.32) reveals most MSE’s faced by the major ranked
finance related challenges such as collateral requirements (1.87MN), inadequacy of loan

55
(2.22MN), and the difficulty of accessing finance (2.34MN) followed by inconvenience of
loan repayment period and high interest rate which severely hinders MSE’s operation.

Most (75.3%) of MSE’s owners reveal that MSE’s graduation from one level to the other has
implanted without considering their premises, and this hinders the full scale operation and
expansion of the enterprises; working premises doesn’t allow for those new entrant groups of
having less than ten members.

Majority MSE’s don’t have short and long term marketing plan, fully addressed market
linkage’s, clearly defined customers, means of product accessibility and differentiated
products to make loyal to their customers; and has entry challenges related with the negative
attitude of the community towards the quality of products.

Majority of the respondents’ percentages and the mean of each item, and the total mean of
2.57 shows that MSE’s have faced challenges in acquiring better managerial knowledge and
skills, managerial designations, and preparing their own work plan.

Almost all of the respondents show that unavailability of appropriate dry waste and sewerage
system, power interruption, inadequate water supply, and poor transportation facility near the
working site are the critical influencing factors for the full scale implementation of MSE’s.

Majority (79%) of the respondents indicates existence of bureaucratic influence in supplying

production inputs, and (50.6%) of the respondents indicate that MSE’s and production input
suppliers couldn’t create linkages.

Majority of the respondents reveals that new entrants have faced challenges related with
preconditions to have registration and licensing, and unreasonable government official
involvement which influences on the success of MSE’s.

As it is compared infrastructure facilities, financial, and managerial and technical skills are
ranked the three most challenges that affect MSE’s operation; followed by working premises,
marketing, support institutions, supply of raw materials and regularity issues.

56
5.2. Conclusions

This study was carried in Akaki-Kality sub-city with the purpose of assessing the practices and
challenges faced MSE’s operators engaged in different activities. The study has tried to see the
demographics of the study participants such as the sex composition, age category, level of
education and experiences. Specifically, MSE’s startup and working capital and its sources,
contributions to owners and employees, and the challenges faced to MSE’s operation.

As the samples revealed that the involvement of males in MSE’s activities is more than
females; and balancing this gap and improving the participation of women would have
indispensable roles in benefiting women, bringing political, social and economic development
of the society. Majority of the study participants were youths which give bright future for the
development of the sectors and reduce youth unemployment. Most of the study group have
technical and vocational, diploma, and first degree and above educational levels which enables
MSE’s in keeping proper books of records, prepares business plan, taking advocacy issues and
to look for more training programs. MSE’s in the study area provides employment opportunity
to owners and employees, and helps them to increase their per capita income and able to help
their families.

The main sources of startup capital for most sample MSE’s happened to be microfinance
institution followed by a few amount of personal savings and family. This single formal
financial institution couldn’t satisfy the credit needs of MSE’s. Even though the sector has
huge contributions to the community, finance related factors such as difficulty of accessing
finance, high collateral requirements and inadequacy of loan are the major ranked challenges
followed by inconvenience of loan payback period and high interest rate severely hinders most
sample MSE’s operation.

Despite governmental support institutions organized to provide adequate support to MSEs, the
extent of support obtained from samples was found to be low compared with their respective
roles. The institutions couldn’t provide proper experience sharing activities, technical and
managerial support related with financial matters, solve MSE’s immediate problems based on
continuous monitoring activities, and couldn’t provide equal treatment of using incentives given
by the government based on their respective roles due to lack of commitment, shortage of

57
skilled and professional experts at the sub-city and district levels. Inability to prepare and
distribute working premises based on MSE’s graduation from one level to the other, and
failure to provide premise to new entrant groups of having less than ten members are the major
problems related to working premises which hinders the full scale operation and expansion of
Sample MSE’s in the study area.

Marketing factors such as absence of short and long term marketing plan, fully addressed
market linkages, clearly defined customers, inability to produce differentiated products, and
the negative attitude of the community in line with products quality are the identified
problems. The other main problems identified related to managerial and technical skills
include lack of opportunity in acquiring better managerial knowledge and skills, providing
poor attention for managerial designations, and failure to prepare their own work plan.

Among the deterring factors; Poor infrastructure facilities include unavailability of appropriate
dry waste and sewerage system, continuous power interruption, inadequate water supply, and
poor transportation facility near the working site are the major and first ranked impeding
problems for the full scale implementation of sample MSE’s in the study area. Besides,
inability to create linkages between MSE’s and production raw material suppliers and
bureaucratic influence on production input supply are the problems observed in the sample
area. Regulatory issues such as preconditions to have registration and licensing and
unreasonable government officials’ involvement also affects the success of sample MSE’s.

Finally, the study has identified the extent of the influence of variables which highly
influenced sample MSE’s operation. Challenges related to infrastructure facilities, financial,
managerial and technical skills and working premises were found to be largely pressing.
Specifically, problems related to infrastructure facilities, financial, and managerial and
technical skills, and working premises were ranked as the four most impeding factors that
affect sample MSE’s operation compared to other challenges.

5.3. Limitations of the Study

This research has encountered certain limitations during the course of conducting the study.
One of the difficulties encountered was the data inconsistency between what is reported by the
MSE’s owners and officials. The other difficulties faced, some respondents were reluctant to

58
spare their time to fill the necessary data, and due to disclosing information may lead to
negative effect on their business. This limitation was, however, resolved in dealing with and
developing friendly relationship with and gaining trust from MSE’s owners.

It must be noted that the research only has covered the three selected districts namely district
one, four and seven. Hence, care should be taken to generalize the findings of this study to
MSE’s operating in other districts and elsewhere.

59
5.4. Recommendations

Taking measures to alleviate the challenges faced MSE’s operation is crucial. Thus, in line
with the findings and conclusions of the study obtained from the samples, the
recommendations are forwarded as follows.

1. The involvement of women in MSE’s operation is low compared to men. So, emphasis
should be given for women to have equal access in obtaining their own income and to
contribute their roles to the economy at large.

2. As the study reveals government organized support institutions have indispensible

roles to promote MSE’s operation. Therefore, all support institutions should create
integration by rules and regulations based on common board to provide uniform, fair
and immediate managerial and technical support on financial, managerial, training and
development and marketing matters. The common board also enables to oversee and
provide immediate adjustment on the existing regulatory issues which tap MSE’s
operations. In addition, proper experience sharing activities should be set by the sub-
city MSE’s support institutions with the integration of MSE’s operators; and this helps
vulnerable MSE’s to acquire better knowledge and experiences from the bench-
marked MSE’s.

3. In the current situation, accessing finance to MSE’s by broadening formal financial

sources requires the full scale attention of the top government officials. Thus, the
Ababa city administration should communicate and integrate with the federal
government to create linkages between the commercial banks and MSE’s by setting
reasonable collateral, interest rate and payback periods.

4. Infrastructure facilities are the critical and first ranked challenges which influence
MSE’s operation. Hence, the preparation and distribution of premises should be done
with its appropriate waste and sewerage system, adequate water supply and better
transportation facility. This should be done with strong commitment and accountability
by the Addis Ababa city administration and their lower level political officials in
collaboration with the city and sub-city water and sewerage, road transport and electric
power offices.

60
5. Premises should be adequately prepared and considered before MSE’s graduation from
one level to the other and if necessary deliver it immediately. This should be done with
prior planning, commitment and coordination of the sub-city and district land
development management and MSE’s offices.
6. MSE’s managers’ failure in acquiring better managerial knowledge and skills, and
preparing their own work plan can be solved by MSE’s themselves by creating
collaboration with technical and vocational and other training provider institutions.
MSE’s owners should responsible and take strong actions to designate their managers.
All these should have continuous follow up and monitoring by MSE’s offices and
political officials.
7. Absence of short and long term marketing plan, limited market linkages, inefficient
customer identification, and negative attitudes of the community towards MSE’s
products are the identified marketing related challenges. These should be resolved by
the effort of the MSE’s offices and owners by:
Identifying the products customers and creating fully addressed linkages the MSEs
with other government and private organizations within or around the study area
helps MSE’s operators to access adequate market opportunity.
Setting integrated awareness creation programs on the attitude of the community
can be changed and those individuals could be loyal to MSE’s products. This could
be done through MSE’s owners and MSE’s officials and experts.

8. The sub-city MSE’s offices and support institutions have to work with commitment in
collaboration with MSE’s owners to strengthen and broaden the linkages between the
production input suppliers and MSE’s this should be done based on continuous follow
up and adjustments.
9. Making intensive research work based on the whole area coverage is crucial to obtain
the right information and identify the challenges which influence MSE’s operation, and
which enables to provide broaden recommendations. The focus area for this study was
on some selected districts of the sub-city. Hence, it is the researcher’s view that future
research work could focus on the other districts helps to come up with specific findings
which will contribute a lot in MSE’s overall development in general and alleviating
immediate problems in particular.
61
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 APPENDIX-A

St. Mary’s University School of Graduate Studies

Questionnaires to be filled by MSE’s owners/ Managers

Dear respected Respondent,

I am a graduate student at St. Mary’s University. Currently I am conducting a research

entitled ‘The Practices and Challenges of MSE’s in Akaki Kality Sub-City’. The study aims to
analyze practices and challenges faced by MSE’s. To this end, your kind and objective
response will significantly contribute to find practical and possible solution to the problem.
Therefore, your honest responsiveness is strongly required to make the research valuable and
reliable. This is purely academic exercise, so any information given would not be disclosed to
the 3rd party.

Thank you in advance for your kind cooperation and dedicating your time.

Mekonnen Derbie (Email:[email protected])

Instructions

No need of writing your name

For Likert scale type statements and multiple choice questions indicate your answers
with a tick mark (√) in the appropriate block.

For blank spaces please write the correct Information

I. Background Information

1. Sex: Male Female

2. Age: below 25 years 26-30years’ 31-35 years above35 years

3. Education: grade 1-8 grade 9-12 TVT or Diploma 1st degree and above

4. Main Sector:

Construction (building and carpentry work, bricks production, electric installation, Coble)

Manufacturing (metal work, wood work, garment)

Service (Restaurant, Beauty salon, Photocopy))

5. Experience in this business: 2 years and below 3 to 5 years above 5 Years.

II. Questions Related to MSE’ Contribution

1. Have you had job before this business? Yes No

2. The startup capital for your business in birr was: <5000 between 5000- 10000
>10000

3. What was the source of startup capital?

Personal saving family banks microfinance

4. . Size of members: ____________________

5. The owners average monthly income from this business in birr is:

<1000 1000- 2000 2001-3000 >3000

6. Is this income enough to your livelihood? Yes No

7. What advantages did you get engaging in this business?

able to learn able to help my family able to save able to cover my expenses

8. How many employees are employed in this business? ________________

9. These employees earn the average monthly salary of birr:

<1000 between 1000-2000 between 2001- 3000 > 3000

III. Questions Related to Challenges to MSE’s Operations and Success

The major challenges which influence the operation of MES’s are listed below. Therefore,
read thoroughly each of the influencing factors and evaluate them in relation to your business
and then put tick mark (√) under the choices below.
Where, 5 = strongly agree, 4 = agree, 3 = undecided, 2 = disagree, 1 = strongly disagree.
No. Item Agreement Level
5 4 3 2 1
1 Issues Related to the Role of Support Institutions
1.1 Support institutions provide adequate assistance to MSE’s with
their respective roles
1.2 Gov. officials have consistent monitoring schedules to MSE’s
which helps to solve immediate problems
1.3 Officials and experts search market for MSE’s and they create
market linkages with others
1.4 MSE’s have got equal treatment of using incentives given by the
government.
1.5 Microfinance institution have provided finance related
technical/managerial support to MSE’s

1.6 Support institutions have adjusted continuous training and dev.

Programs to MSE’s owners
1.7 Experience sharing program is scheduled among MSE’s.
2 Issues Related to Access to Finance 5 4 3 2 1
2.1 Access to finance to MSE’s start up and working capital is easily
accessible
2.2 The loan obtained from financial institution is adequate for my
business operation
2.3 Borrowing money is possible without collateral
2.4 The amount of interest rate paid to lending institution is
reasonable
2.5 The repayment period of loan is suitable to payback the debt
3 Issues Related to Working Premises 5 4 3 2 1
3.1. Working premises are adequate for operation
3.2 Premises are adjusted based on MSE’s growth level.

3.3 Leasing cost is reasonable and affordable.

4 Issues related to Marketing 5 4 3 2 1

4.1 MSE’s had short and long term marketing plan.

4.2 Market linkages are created between MSE’s and other

institutions.
4.3 MSEs have market clearly defined market potential and
customers.
4.5 MSE’s products are easily accessible to customers.

4.6 There is no intense market competition among MSE’s.

4.7 Entry in the market is convenient to MSE’s.

4.8 MSE’s vary their products to satisfy and catch customers

5 Issues Related to Managerial and Technical Skills 5 4 3 2 1

5.1 MSE’s managers/owners have managerial knowledge and skills.

5.2 Managers are designated based on their managerial skills.

5.3 MSE’s have written work plan.

5.4 Monitoring and evaluation program is clearly scheduled and

practiced.
5.5 MSE’s managers/owners have access to get better managerial
knowledge.
6 Issues related to Infrastructure Facilities 5 4 3 2 1

6.1 There is no electric power interruptions

6.2 Sufficient and adequate water supply is available

6.3 Appropriate dry waste and sewerage system is available

6.4 Sufficient and quick transportation is available.

7 Issues Related to Raw Materials Supply 5 4 3 2 1

7.1 Production raw materials are adequately available

7.2 MSE’s and production input suppliers create Linkages.

7.3 The raw materials Supply don’t have bureaucratic influence.

8 Issues Related to Regulatory 5 4 3 2 1

8.1 The tax levied on my business is reasonable

8.2 Bureaucracy is not a bottleneck in registration and licensing

8.3 There is no unreasonable government officials involvement

8.4 Rules and regulations are easily accessible

IV. Please indicate the degree to which you agree with the following general challenge
that have a direct influence on the performance of your business.

No General Factors 5 4 3 2 1

1 Challenges Related to Support Institutions

2 Challenges Related to Finance

3 Challenges Related to Working Premises

4 Challenges Related to Managerial and Technical skills

5 Challenges Related to Market

6 Challenges Related to Infrastructure Facilities

7 Challenges Related to Supply of Raw Materials

8 Challenges Related to Regulatory Issues

 APPENDIX-B

   

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 APPENDIX-C

Interview questions to MSE owners/managers

1. What opportunities or advantages have you had after engaging in this business?

2. What problems did you face while running MSEs in relation to:

Support institutions ( micro finance, local MSE’s officials and experts, other
government institutions) and the like]

Working Premises (leasing cost, accessibility, fairness, etc.)

Infrastructure (power, transportation, water supply and like)

Marketing factors (relationship with customers, market linkages, product

differentiation, and others)

Financial factors (interest rates, collateral requirements, debt payback period, etc.)

Supply of Raw Materials

Managerial and technical skills

3. Indicate the extent of its influence in your business experience starting from most
sever to the least.

4. Please indicate the amount or size of support that your organization had received from
the Sub-City or any other agency in the past against each support dimension indicated
below:

• Financial support: ______________________

• Training/capacity building support: ______________________

• Working premises support: ________________________________

• Market support: _________________________________

• Managerial and technical support: ___________________

• Raw materials support: ___________________________________

5. What possible solutions would you recommend to solve the challenges?

 APPENDIX-D

Interview Questions to Sub-City and District MSE’s Officials and Experts

1. What problems did you observe in your locality? Please give your responses related
to:

The role of support institutions ( micro finance, local MSE’s officials and experts,
other government institutions)

Working Premises (leasing cost, accessibility, fairness, etc.)

Infrastructure (power, transportation, water supply and like)

Marketing factors (related to customers, market linkages, product differentiation)

Financial factors (interest rates, collateral requirements, debt payback period, etc.)

Supply of Raw Materials

Managerial and technical skills

Regulatory issues

2. Based on your judgment, please indicate the level of influence of the above variables
in MSE’s operation in your locality starting from most sever to the least.

3. Please evaluate and indicate the amount or size of support that your organization had
provided to MSE’s in the past against each support dimension indicated below:

• Financial support: ______________________

• Training/capacity building support: ______________________

• Working premises support: ________________________________

• Market support: _________________________________

• Managerial and technical support: ___________________

• Raw materials support: __________________________________

4. Please indicate the level of your organization support based on its respective roles?

5. What possible solutions would you recommend to solve the challenges?

 DECLARATION

I, the undersigned, declare that this thesis is my original work, prepared under the guidance of
and support of the research advisor. All sources of materials used for the thesis have been duly
acknowledged. I further confirm that the thesis has not been submitted either in part or full to
any other higher learning institution for the purpose of earning any degree.

________________________ ____________________

Name Signature

St. Mary’s University, Addis Ababa June, 2014

 ENDORSEMENT

This thesis has been submitted to St. Mary’s University, School of Graduate Studies for
examination with my approval as a university advisor.

________________________ ____________________

Advisor Signature

St. Mary’s University, Addis Ababa June, 2014