Determinants of demand for and supply of credit to small-scale enterprises and performance of micro-credit markets in Sudan

Abstract

This study focused on three central themes of formal microcredit markets performance in Sudan. The first theme analysed determinants of participation and level of participation of small-scale enterprises owners in formal microcredit. The second theme analysed factors that determine institutional decision of approval and level of approval of formal microcredit to small-scale enterprises. The third theme addressed the perceived gap between supply and demand of formal microcredit to small-scale enterprises and the size of that gap. Analyses of factors determining demand for and supply of microcredit help identify and examine the perceived microcredit gap in Sudan. Thus, a data set including household, business and lender-related factors which was collected from 690 Micro and Small Enterprises (MSEs) in Khartoum State in Sudan, was used. This study focussed on the Murabaha Islamic Contract of credit, which is the most commonly used mode of finance by all commercial banks in Sudan and constitutes 97% of banks total lending size. This contract is kind of a sale in which the seller tells the buyer about the cost of a commodity and the profit he will get on the sale of that commodity before the transaction takes place. Repayment may be in lump sum, in installments or a combination of both. The study employed descriptive statistics as well as Heckman s two-step selection model. Two approaches were employed to address the above themes. First, Heckman s sample selection model was employed to analyse participation and intensity of participation of MSEs in formal microcredit markets. The same model was employed to analyse approval and level of approval of formal microcredit to MSEs in the state. Second, simple descriptive statistics were used to analyse the perceived gap between supply of and demand for formal microcredit to MSEs in the state. Results of the participation (demand side) analyses suggest the need for policy measures and strategies to strengthen business skills of MSEs managed by women, lower income owners, and relatively disadvantaged migrants, through increased awareness of the existence of formal microcredit services, training on business and other complementary mechanisms to increase their participation and demand for microcredit. Innovative measures to ease constraining lender-related factors such as collateral requirements and loan processing time need to consider lending to beneficiary groups (e.g. cooperatives) to reduce risks of repayment defaults. The study recommended reform of the Murabaha mode of finance and provision of alternative lower risk options as well as balancing the current unequal distribution of bank branches to improve access and reduce costs to potential clients in currently lacking areas. Results of the approval of microcredit loans (supply-side) indicate certain biases of the current microcredit supply system towards larger size, more skilled, higher asset endowed and higher income status MSEs which seem to strongly correlate with and reflect better collateral and repayment abilities. Appropriate innovative institutional and policy measures are recommended to balance such biases and improve access to and provision of microcredit to relatively smaller, less asset, income and skill endowed MSE operators and those migrating from relatively remote geographic regions with lower social networks and connections in Khartoum state. Results of the perceived gap between demand for and supply of microcredit indicate that the problem is a low participation problem rather than a gap in the supply of microcredit. This problem is caused by key factors such as those revealed by findings of the participation analyses. These results seem to point to the fact that the main issue with outreach of microcredit in Sudan is to focus on critically examining and understanding factors behind such low participation rates (demand constraints). Availability of information and awareness about microcredit and providers efforts to reach out could be key elements, among other factors, to be considered by policy makers. Policy makers are recommended to increase awareness of microcredit services as well as the Islamic modes of finance, particularly the Murabaha mode, among potential users of microcredit.