Journal of Applied Finance & Banking

Estimation of Efficiency and the Effect of Access to Finance on Efficiency of Small and Medium Enterprises (SMES) in the Western area of Sierra Leone

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  • Abstract

     

    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.

    Keywords: Efficiency, Finance, Small and Medium Enterprises.