To estimate the efficiency of SMEs and
the effect of access to finance on the efficiency of SMEs the study adopted the
stochastic frontier estimation method of determining efficiency of firms. A
model of maximum performance (capacity) was estimated using 450 SMEs randomly
selected from the population of registered SMEs in the Western Area of Sierra
Leone from 2018 to 2020. The model of net business earnings was estimated using
the Maximum Likelihood procedure and the firm efficiencies were consequently estimated.
The mean inefficiencies are estimated by various categories, including SMEs
access to bank credit to determine firm characteristics that are associated
with higher mean efficiencies. The empirical results reveal that the potential
of firms is determined positively by capital productivity and labour
productivity and negatively by experience of firms, the latter results
suggesting that more experience (in terms of age) does not push their
production outwards but inwards. However, other factors are found significant
in efficiency differences among firms. These are: gender of the head of the
SME, educational level, professional training of the firm heads, sector of
operation and the area of operation.
JEL classification numbers: F14, F18, G14, G21.
Finance, Small and Medium Enterprises.