When Financing Gets Tough: Alternative Financing Methods and their Effect on SMEs Growth in Sub-Sahara Africa

Abstract

This study aims to examine the relationship between Firm Growth and access to finance indicators from World Bank Enterprise Survey (WBES) dataset across 30 African countries from 2014 to 2024. Using panel data analysis, we employ several econometric techniques, including the Augmented Dickey-Fuller (ADF) test for stationarity, the Cross-Sectional Dependence (CD) test, the Generalized Method of Moments (GMM) estimation technique, the Kao Residual Co-integration Test, the Westerlund test for co-integration, and Granger causality analysis. The findings reveal that GDP per capita, working capital borrowed from non-bank financial institutions, and internal financing sources positively influence firm growth, suggesting that economic expansion and alternative financing play a crucial role in business development and SME growth. Conversely, financial constraints, including limited access to finance, inaccessibility of SMEs to bank loans, and informal financing, negatively impact firm growth. The co-integration tests confirm long-run relationships among the variables and causality analysis identifies bidirectional linkages between key financial indicators, highlighting their interdependence. These results emphasize the importance of financial accessibility and diversified funding sources in fostering firm growth across African economies