1 Introduction

In the West, the manufacturing sector is declining, replaced by knowledge-based industries (Raspe & Oort, 2006; Thelen, 2019). However, in Africa, manufacturing remains the backbone of most of the continent’s economies (World Bank Group, 2015). Some scholarly research has focused on small business and entrepreneurial financing, acknowledging that the availability of financial resources is essential for business because it gives many small and medium-sized enterprises (SMEs) vital support (Binks & Ennew, 1996; Levine et al., 2000; Moro & Fink, 2013; Wellalage & Locke, 2017; N’Guessan & Hartarska, 2021) for their development, growth and survival (Carbo-Valverde et al., 2016; Erdogan, 2019). Regardless of the gender of the owners of SMEs in advanced economies, their businesses are reported to have access to a wide range of financial and information support services in situ (see Cowling et al., 2012; Gama & Duarte, 2015; Howorth & Moro, 2012). In advanced economies, support for businesses is often provided through multiple channels, including established economic stakeholders and agents from banks, private investors (e.g. venture capitalists, business angels, serial entrepreneurs, investment syndicates and crowdfunding platforms) and government institutions (Mol-Gómez-Vázquez et al., 2019; Palazuelos et al., 2018).

Africa’s financial markets are characterised by vast institutional voids, uncoordinated domestic policies and widespread application of derivative accounting practices. Studies suggest that in these markets, the survival and growth prospects of many SMEs are seriously compromised (Beck et al., 2011; Issahaku, 2019; Santos et al., 2021). Hence, for manufacturing SMEs, the availability of financial resources can be dangerously low (Bigsten et al., 2003; Calabresse et al., 2021; Wellalage & Locke, 2016).

An important question arising from this discussion is: How do businesses, especially manufacturing SMEs, which are known to sustain many African economies, confront such problems when seeking bank credit (cf. Kautonen et al., 2020)? Several constraints associated with credit access for small businesses in the developing world have been identified in the literature. Examples include distortions of financial institutions and sectors (Ferreria & de Oliveira, 2019), lack of know-how on the part of banks (Beck et al., 2007), information asymmetry (Beck et al., 2009), the high risk of lending to small businesses due to collateral security reasons (Duarte et al., 2017) and differences in gender profiles (Berguiga & Adair, 2021; Muravyev et al., 2009; Wellalage & Thrikawala, 2021). These factors have been widely debated in the literature. Such obstacles discourage SMEs from applying for credit because of their inflexible use by financial lenders when determining creditworthiness (Xiang et al., 2015). In a way, many SMEs are exposed to what Wasiuzzaman and Nurdin (2019) describe as “involuntary financial exclusion”. This exclusion leaves SMEs unable to access and use financial services and has far-reaching implications for the role of SMEs as economic agents.

This research draws on the stakeholder-agency theory of debt financing (Diamond, 1984; Sharpe, 1990) to develop an understanding of the factors that restrict manufacturing SMEs’ access and use of financial services in African financial markets. The stakeholder-agency theory of debt financing posits that the availability, terms and structure of credit are constrained by agency problems derived from biases about borrowers and their businesses, as well as conflicts of interest between borrowers and lenders (Kautonen et al., 2020). Elsewhere, scholarly research suggests that the agency problem in banks is exacerbated when evaluating the creditworthiness of SME owners because of their limited liability, which has some bearing on their ability to finance their debts (Beck et al., 2009). Thus, transaction lending based on credit ratings or the value of firms’ assets (Van Caneghem & Van Campenhout, 2012) has limited application to SMEs (Kautonen et al., 2020) in African markets. However, because transaction lending is universally applied, there is an urgent need to consider how it reduces or enhances credit access for businesses in Africa’s productive sectors, including manufacturing. Consistent with this call, the following question guides the present research:

  • Which factors do owners of manufacturing SMEs in Africa consider vital for credit access, and how do they affect their perceptions of applying for and obtaining credit?

Existing scholarly research on the factors that affect credit access for African SMEs has mainly focused on the agriculture or farming sector in rural communities (Sarfo et al., 2019; Simtowe et al., 2008; Weber & Musshoff, 2012). Although this approach has provided meaningful insights into the obstacles that smallholder farmers face in relation to credit access (Foltz, 2004; Samuel et al., 2017; Stringfellow et al., 1997) and poverty (Biekpe, 2004; Biggs & Shah, 2002), knowledge about the factors that determine SMEs’ access to finance and outcomes, particularly in manufacturing in Africa, remains limited. This scarce knowledge is scattered and fragmented (Bigsten et al., 2003; Wellalage & Locke, 2016), even though the sector is classed by the World Bank Group as the cornerstone for development in Africa.

Therefore, to develop novel contextual insights into the issues associated with manufacturing SMEs’ credit access in Africa, hypotheses are formulated to study the impact of collateral security, collateral security value and gender. These hypotheses are empirically tested using data on 13,783 manufacturing SMEs across 41 African countries provided by the World Bank Enterprise Surveys (WBES, 2016). Given its rigorous approach and consequent reliability, the WBES data set is used extensively for research on developing economics (e.g. Harrison et al., 2014; Mitton, 2016) and studies of formal credit (Tajeddin & Carney, 2019). Thus, this data set provided valuable information on SMEs in Africa to account for firm ownership, the owner/manager’s gender, credit access, various types of obstacles in operating the business and control variables. The data enabled distinction between credit access perception, credit application and the use of credit or loans in manufacturing SMEs. Given that the dependent variables were not continuous, logit techniques were favoured as opposed to standard efficient ordinary least squares (OLS), which would have yielded biased estimates. Using logit models helped produce efficient estimates based on the response probabilities for both continuous and discrete explanatory variables (Wooldridge, 2010). Equation modelling was then employed to produce reliable estimates. The outcomes of this research contribute to entrepreneurial financing, entrepreneurship and SME research in several ways.

The empirical findings of this research explain how using collateral security, collateral security value and the gender of SME owners to assess creditworthiness leads to involuntary financial exclusion. These findings extend the stakeholder-agency theory of debt financing by accounting for the business and social configurations describing how SMEs in the manufacturing business and financial lenders interact and relate to each other in Africa’s financial markets. Such insights improve the understanding of the cross-fertilisation between entrepreneurial financing, entrepreneurship and SME research, with a focus on Africa.

This approach is important because African contexts are distinct enough to produce novel insights. Theoretically, the scholarly arguments extended through this empirical study are aligned with the calls of Filatotchev et al. (2022) and Welter (2011) for contextualising theory building in entrepreneurship and management research. Moreover, the entrepreneurial financing analysis presented in this paper adds an indigenous understanding that is sensitive to African financial markets. The overall research outcomes are arguably transformative in entrepreneurial financing and SME research because they call into question the existing financing provisions for manufacturing SMEs in Africa.

2 Theoretical background

What theoretical grounds support the expectation that collateral security, collateral security value and gender are the main factors that limit credit access for manufacturing SMEs in Africa? In this section, it is argued that theories originating in the fields of small business and entrepreneurship finance, business and finance and applied economics provide the theoretical basis to explore the availability of financial provisions in Africa. Specifically, this study draws on the stakeholder-agency theory because of its implicit assumptions concerning institutional and firm interactions. Adopting theoretical arguments developed in other research domains to explain an entrepreneurial phenomenon (credit access and credit provisions in Africa) not only enriches entrepreneurship research but also advances new contextual perspectives (cf. Filatotchev et al. 2022; Zahra, 2007) by providing an indigenous understanding based on the distinctiveness of local contexts (Bruton et al., 2022). This approach thus fosters scholarly engagement that generates complementary spaces to understand contextually embedded assumptions (Hamann et al. 2020).

2.1 Credit access and the stakeholder-agency relationship

Credit access can be viewed as a business financing concept that depends on lender and borrower negotiations. From this view, the stakeholder-agency theory of Hill and Jones (1992) can be used to analyse the level and extent of the interplay between credit access and its associated factors in Africa. In any context, lenders (i.e. lending institutions) are important in the financial markets because they hold essential financial resources and dispense financial provisions that can affect (both positively and negatively) survival rates, growth and expansion (Egger & Keuschnigg, 2017) of SMEs by either lowering or increasing the availability of credit lines (Bigsten et al., 2003).

With stakeholder theory, such a scenario plays out in the power relationship of the social context of shareholders and the form of business ownership (Aggarwal & Goodell, 2014; Freeman, 1984). In Africa, this issue is more pronounced than elsewhere (Ibrahim & Alagidede, 2018).

Research on the developing world has shown that women are overlooked or considered incapable in business, which limits their access to financial services (Ogundana et al., 2021; Ojong et al., 2021; Wellalage & Locke, 2017). Gender-related barriers seriously impede the economic potential of women as business owners. This situation has a negative impact on their enterprises, productivity and competitiveness. It also reduces the growth potential of underdeveloped regions (Halkias et al., 2011). Although recent scholarly research (e.g. Naegels et al., 2018; Simba & Nziku, 2022) has called for gender equality in terms of access to resources, the ability of women to secure financial resources for their firms through regulated money lenders remains limited because of social biases surrounding gender (Koubâa, 2014). Even with the constant attention on gender issues (Dabić et al., 2022), women entrepreneurs still face business investment challenges (Leitch et al., 2018).

Irrespective of the subtleties of gender-based discrimination, business owners must engage in some form of lender-borrower relationship to secure a line of credit (Chakraborty & Hu, 2006). They must also sign contractual credit agreements (Besanko & Thakor, 1987) to support and promote the development of their businesses. As with agency theory (Jensen & Meckling, 1976; Ross, 1973), the principals are credit access facilitators who offer financial provisions (i.e. lenders). They can limit credit access through stringent parameters that deter potential beneficiaries (cf. N’Guessan & Hartarska, 2021). Such situations have profound theoretical and practical implications for businesses in general but particularly for SMEs in less-developed regions such as Africa (Brixiová et al., 2020). Thus, using the stakeholder-agency theory of Hill and Jones (1992) helps discern the complexities that African manufacturing SMEs face in the process of seeking essential financial resources.

2.2 Credit access and lines of credit

Credit access as a component of business financing is often associated with business development or failure (Beck et al., 2007; Beck et al., 2011; Mach & Wolken, 2012; OECD, 2006). In the absence of financial provisions to support business development (Allen, 2016; Alvarez et al., 2016; Burns, 2016), the probability that the process of starting, lunching and running a business (Marioti & Glackin, 2016; Scarborough & Cornwall, 2016) will be constrained multiplies (Wehinger, 2014). Access to credit offers businesses a lifeline by allowing them to pursue growth strategies (Inoue & Hamori, 2016; OECD, 2006). Likewise, the importance of a firm’s access to external funds is emphasised in the literature (Brixiová et al., 2020). Such emphasis highlights the key role of external funding as a catalyst not only for market development but also for firm growth (Egger & Keuschnigg, 2017). Arguably, ease of access to finance has a direct correlation with firm size (in terms of both physical and financial assets), meaning that smaller companies find it more difficult to tap into external financing options (OECD, 2019). Research suggests that any institutional “restrictions on the amount of credit a business can obtain have a far–reaching effect” (Penrose, 1965, p. 219) on its survival, development strategies and ability to implement the business plan. Therefore, less surprisingly, SMEs in general constantly engage in several credit-seeking attempts (Kim, 2006). Accordingly, a line of credit is an important provision for businesses. Indeed, as a key enabler of credit access, a line of credit can unlock financial resources for many businesses, both large and small. As a financing provision offered by banks to businesses, it can give them access to scarce financial resources that are essential for their activities (Kuntchev et al., 2013). Firms that use short-term bank loans often arrange for a line of credit (Chakraborty & Hu, 2006).

To ensure that a line of credit is used for short-term purposes, lenders often request that borrowers pay the line down to zero and hold the balance there for some period during the year. The literature identifies two main forms of lines of credit: long-term and short-term (Ayub, 2016). Difficulties in proving creditworthiness, inadequate credit history, high-risk premiums, underdeveloped bank-borrower relationships and high transaction costs make securing long-term lines of credit more difficult for small firms than large organisations (IFC, 2010). Such a situation leaves short-term provisions (lines of credit) as their primary route for accessing credit. Short-term lines of credit can be grouped into two main categories: committed and non-committed (Ayub et al., 2016). Committed lines of credit are mainly based on the current assets of a business (Acharya et al., 2020; Lins et al., 2010). In contrast, non-committed lines of credit take the form of informal arrangements that allow firms to use credit facilities made available to them in line with a previously specified limit without going through the normal paperwork (Ayub et al., 2016). These non-committed arrangements do not require the borrower to provide collateral (Acharya et al., 2020; Mishkin & Eakins, 2005).

In light of this discussion of credit access and lines of credit, the picture in Africa seems somewhat fragmented, hence the unbalanced representation in the literature of credit access issues for African manufacturing SMEs. According to WBES data, only 22% of African enterprises have a loan or a line of credit (Triki & Faye, 2013). On average, half of the enterprises in Africa do not have access to formal credit or lack the appropriate financial products to grow and innovate (Beck & Cull, 2013; Demirguc–Kunt & Klapper, 2012a, b). This situation implies that only a small proportion of SMEs (around 29%) in the whole of Africa have a line of credit (Triki & Faye, 2013; Stein et al., 2010). As previously argued, without the necessary financial resources or lines of credit, SMEs, especially in the manufacturing sector, will be unable to grow and continue to contribute positively to employment and economic growth in their countries (Beck et al., 2011). WBES data reveal that, on average, only 15% of firms in fragile African states report having a loan or a line of credit from a financial institution (WBES, 2011). Thus, generating empirical evidence to understand the underlying factors that influence access to financial resources in Africa can inspire a more structured policy development agenda for small business and entrepreneurial financing.

3 Hypothesis development

Access to finance and the market has been described as a predominant challenge for SMEs (Msomi & Olarewaju, 2021). International institutions including the OECD, UN and World Bank have made considerable efforts to highlight the urgency of providing financial resources to support SMEs in developing countries (see OECD, 2021; UN, 2021; World Bank, 2022). Nevertheless, gaps still remain in the understanding of how lending institutions in Africa’s financial markets interact with SMEs, especially in the continent’s manufacturing sector. The limited knowledge of financial markets in Africa is scattered and fragmented. It also provides varying accounts of how SMEs access these markets (Beck, 2015). This fragmentation is partly due to the drastic changes that have occurred in Africa’s financial systems in the past two decades, causing high market instability and imperfections (Beck & Cull, 2014). Therefore, to develop a deeper understanding of the factors that influence SMEs in Africa’s productive sectors such as manufacturing, this research is grounded in hypotheses of credit access based on associated constructs such as collateral security, collateral value and gender. These issues are considered inextricably linked to the African small business context. As argued, the African context is distinct enough to offer novel theorisations of entrepreneurial financing.

3.1 Collateral, collateral security and credit access

Collateral denotes the assets to which borrowers commit to a lender as security for a debt payment (Gitman, 2003). Collateral serves two purposes.

It provides a route to finance, whilst it can be used as an effective deterrent for borrowers not to engage in risky behaviours, including asset substitution and ex post moral hazard given the fear that the pledged collateral will be seized and liquidated (Mathur & Marcelin, 2014). Its use has developed into a common feature of credit contracts and negotiations between firms and lending institutions (Steijvers & Voordeckers, 2009). However, limited access to external financial resources and a lack of tangible assets as collateral have proved major obstacles to many firms (Egger & Keuschnigg, 2017; Hanedar et al., 2014).

The literature on small business and entrepreneurial financing highlights several problems related to credit access. These problems include lack of collateral, an inability to comply with bureaucratic procedures and (financial) illiteracy (see also Dinh et al., 2012; Fowowe, 2017; Meenakshi et al., 2011). The literature offers two noteworthy views on why collateral may affect a firm’s access to credit (Bopaiah, 1998). First, collateral is seen as an instrument for lenders to gauge the safety of their investments (Besanko & Thakor, 1987). Second, it is used as an insurance policy, which banks need to give them some recourse in case of default of risky borrowers (Bopaiah, 1998; Brei et al., 2020). From that perspective, collateral has undoubtedly been applied as a mechanism for reducing the risk of adverse selection and moral hazard (Abdallah, 2016; Matthews & Thompson, 2008; Williams, 2017).

In the absence of information sharing (Beck et al., 2011; Biekpe, 2004; Duarte et al., 2017), which is known to be prevalent in Africa (WBES, 2011), collateral can reduce what Williams (2017) refers to as moral hazard. As part of a borrowing firm’s commitment to meeting its debt obligations, banks require that the firm pledges an amount equivalent to the value of the loan that it can forfeit in the event of default (Love et al., 2016). In underdeveloped financial markets, collateral security is seen as a binding constraint on business financing (Liberti & Mian, 2010). Menkhoff et al. (2012) studied collateral security and its substitutes in emerging market lending, confirming that, due to opaque information and weak enforcement in emerging loan markets, the need for collateral security is high but that borrowers often lack adequate assets to pledge as collateral.

Furthermore, in a multivariate study of how collateral registers can work as a bridge to access bank financing, Love et al., (2016) found that firms perceived insufficient, unacceptable or unsuitable collateral as the main reason they could not access financing. Despite the arguments from these studies, decisions regarding what level of collateral is required or whether to take collateral are unclear and unscientific (Hanley, 2002).

Because of the indivisible nature of collateral, lenders may struggle to match the level of collateral to the level of borrowing (Hanley, 2002). Therefore, following this logic, collateral may be undervalued or overvalued. In the case of manufacturing SMEs in regions such as Africa, which is known to have information asymmetries (Duarte et al., 2017; WBES, 2011) and less developed or dysfunctional credit systems (Issahaku, 2019; Sacerdoti, 2005), access to finance can be a major challenge that requires policy-driven solutions. Thus, differences in institutional arrangements and financial markets between developed and developing countries mean that more research on credit access issues is required. This need is particularly acute in the context of Africa (Abor & Biekpe, 2009), where SMEs are the key economic agents. Based on this discussion, the following hypothesis is formulated:

  • H1: In Africa, owners of manufacturing SMEs that possess collateral security perceive access to credit as less difficult. Consequently, they are more inclined to apply for credit, which they then use to develop their businesses.

3.2 The value of collateral and credit access

Prior research suggests that pledging collateral is an effective mechanism that banks, and lending institutions use to assure themselves of a certain value in the future (Rahman et al., 2017; Voordeckers & Steijvers, 2006). A company may not retain its value in the long term, but collateral will most likely retain its value (Duarte et al., 2017; Mann, 1997; Santos et al., 2021). Arguably, the value of collateral is a decreasing function of time to maturity (Stulz & Johnson, 1985). Often, the initial value of collateral will have a significant positive influence on the recovered value of collateral, whatever the type of security pledged on borrowings (Amoako–Adu & Eshun, 2018; Blazy & Laurent Weill, 2013).

The theoretical paper by Mathur and Marcelin (2014) focused on the association between collateral coverage, country-level governance and various institutional proxies. The conclusion was that, despite great strides in reforming collateral laws in recent years, collateral-to-loan value appears to be the single biggest barrier to finance. Indeed, because of the possibility that borrowers suffer fluctuations in their credit availability, the values of their securable assets may vary, particularly for loans secured by accounts receivable or inventory (Berger et al., 2010). Studying the determinants of collateral, Jimenez et al. (2006) explained the notion of collateral value more fully. They stressed that the amount of collateral in each loan is an increasing function of the real risk less the interest rate (to limit the increase in the cost of the loan and to cope with the moral hazard associated with high interest rates). Likewise, it may also be a decreasing function of the dissipative cost of the collateral—at that point, the collateral is worth more to the bank, and less collateral will be needed to break even, and of the size of the loan, larger projects increase the pay-off to the borrower in good states (Jimenez et al., 2006).

These theoretical views on collateral depict an established measure of the value of collateral (see also Chakraborty & Hu, 2006; Jimenez et al., 2006; Ono & Iichiro, 2009; Ortiz & Penas, 2008). Despite this extensive literature permeating the bulk of studies of business financing, there is a shortage of research on the interplay between credit access and factors determining credit access in Africa, particularly in the context of manufacturing SMEs. Moreover, research has yet to provide insights into how the owners of manufacturing SMEs perceive the value of collateral security as a factor in obtaining credit. Accordingly, the following hypothesis is formulated:

  • H2: Owners of African manufacturing SMEs perceive high-valued collateral as an obstacle constraining their access to credit. However, they work hard to increase the value of their assets (physical and financial) to use them when applying for credit, even if their success rates vary because of the subjectivity of collateral value in Africa.

3.3 Gender and credit access

Research on the developing world acknowledges that women-owned businesses face barriers to accessing formal lending services. Moreover, the obstacles they encounter are much more pronounced than those facing their male counterparts (Chaudhuri et al., 2020). Similar to the situation faced by businesswomen in Asia (see Wellalage & Locke, 2017), businesswomen in Africa are far behind men in terms of basic human rights and are much less on an equal footing with men in economic activities (Asiedu et al., 2013; Seema et al., 2021). In addition, the fact that research in Africa is still trying to break the glass ceiling by advocating for equal access to financial resources for male- and female-owned businesses suggests that women are still marginalised in the context of financial services, particularly credit access (cf. Asongu et al., 2020). The literature on business and finance indicates that, in the developing world, women-owned businesses encounter more systemic barriers to access to financial services, with finance being the most difficult resource for them to access (Wellalage et al., 2013; Richardson et al., 2004). Arguably, these findings offer further evidence that gender bias in Africa still exists and that it is heavily skewed against women.

They also suggest that, in financial services, it severely restricts the availability of financial service provisions for women to draw on for business support (Asiedu et al., 2013; Meniago & Asongu, 2018). Thus, in the context of Africa, gender plays a central role in whether women can access credit (Seema et al., 2021).

This discussion implies that gender discrimination in credit access is pronounced, especially in Africa. Research has shown that, in general, SMEs with female ownership are overly assessed for suitability (Le & Stefańczyk, 2018). Elsewhere, from a demand perspective, research suggests that women are evaluated in relation to their propensity to take business risks. Their risk-averse attitude is cited as a drawback that often prevents them from securing credit (Karimu et al., 2021; Stefani & Vacca, 2015). Also, compared to men, women in Africa are often judged for their suitability as borrowers on the basis of their formal qualifications (Aterido et al., 2013). Because most of them lack formal qualifications, their chances of securing credit are severely constrained. From that perspective, based on this discussion, the following hypothesis is presented:

  • H3: Gender biases in Africa influence women’s access to credit facilities. Women owners of African manufacturing SMEs often perceive access to credit as difficult and are largely dissuaded from applying for credit. Hence, they are less likely to obtain it.

3.4 Validated model

The credit access model for SMEs in Africa (Fig. 1) illustrates that collateral security, the value of collateral security and gender constitute the core variables that determine credit access in the manufacturing sector in Africa. Although collateral security and the value of collateral security are considered standard parameters for accessing financial service provisions in industrialised economies (Zhang, 2021), in Africa, their use is subject to the lender. It consequently constrains SMEs (Yartey, 2011). This constraint is exacerbated by information asymmetry, poor record keeping and underdeveloped financial systems (Yülek & Yeda, 2018). Regarding the gender of SME owners, several factors are at play. The assumptions behind Fig. 1 are that social biases and cultural norms embedded in most African countries restrict the ability of businesswomen who own manufacturing SMEs to access financial resources (cf. Seema et al., 2021). Such prejudices have a negative impact on their ability to establish essential lines of credit for their manufacturing businesses (Karimu et al., 2021).

Fig. 1
figure 1

Validated model for African SMEs

Full size image

To explore the interplay between credit access (dependent variables), collateral security, collateral security value and gender (independent variables), these variables were statistically tested using regression and logit techniques. The results are presented later. However, to determine whether such a pattern is widespread across all of Africa’s business sectors, further empirical inquiry is required.

4 The empirical method

4.1 Data

The hypotheses were tested using data provided by the World Bank Enterprise Surveys (WBES, 2016). In total, 13,783 manufacturing SMEs from 41 countries in Africa were included in the study. The WBES data set is administered by the World Bank to gauge the investment climate in many economies worldwide to improve people’s understanding and firms’ behaviour. The data set comprises a wide array of data from 174,000 firms in 151 countries. For this study, the most recent data (collected in 2016) were used. The WBES are administered by local staff based on one-on-one interviews with firm representatives, who are usually top managers or functional managers who are knowledgeable about the firm’s overall operations. The use of local staff as survey administrators suggests that the interviewers are familiar with the local language and culture. Given its rigorous approach and resulting reliability, the WBES data set has been used widely in economics and strategic management studies (e.g. Harrison et al., 2014; Mitton, 2016, Tajeddin & Carney, 2019).

4.2 Variables

4.2.1 Dependent variable

Following Hansen and Rand (2014a, b), three separate variables from the data set were used to represent credit access (see Table 1). First, SME owners’ perceptions of credit access were considered. The WBES ask managers to evaluate the difficulty of access to finance, including availability and cost, interest rates, fees and collateral requirements (K30, from Africa WBES, 2016). This variable is measured on a five-point Likert scale, ranging from 0 (no obstacle) to 4 (very severe obstacle). The question is a subjective indicator from an SME owner’s perspective.

Table 1 Construct measurement
Full size table

To measure the manager’s practice of getting credit, two additional, more objective dependent variables were used. Whilst subjective variables provide information about what the owner of an SME perceives, objective variables reflect their experiences (Aterido et al., 2011; Bertrand & Mullainathan, 2001; Bouton & Tiongson, 2010). Self-reported data on the owner’s use of credit were gathered, as was credit application information to provide a broader picture of the process of obtaining credit by sub-Saharan SMEs. In the case of an SME’s use of credit, information about an SME’s use of a line of credit was taken as a measure of financial access. Regarding credit application information, a binary variable was used, taking the value 1 if an SME had applied for a loan, and 0 otherwise. The WBES specifically ask, “Did this establishment apply for any loans or lines of credit?” (K16, WBES, 2016). To measure the outcome of the application for credit, a binary variable from the WBES data set was used. This variable took the value 1 when a firm had access to credit (i.e. had received a line of credit), and 0 otherwise. The specific question is “Does this establishment have a line of credit or a loan from a financial institution?” (K8, WBES 2016).

4.2.2 Independent variables

The independent variables were owner’s gender, collateral security and the value of collateral security. For the main explanatory variable, collateral security was measured by the percentage of fixed assets owned by the firm and the value of these assets (Q K5a, WBES 2016). SMEs that own more of the assets in the business are more likely to access external finance (Beck et al., 2004). Financial constraints are further reduced when the assets used for collateral are of greater value (Chaney et al., 2012). The value of requested collateral was measured as a factor altering the constraints to credit access by asking managers the following question: “Referring only to this most recent line of credit or loan, what was the approximate value of the collateral required?” (K15a, WBES 2016). Finally, the owner’s gender was a binary indicator that took the value 1 when the business owner was a woman, and 0 otherwise (Qb3b, WBES, 2016). Studies elsewhere have shown that women-owned businesses are constrained in terms of access to credit, whereas others suggest that these results depend on the size of the business and the choice of credit constraint measure (Asiedu et al., 2013; Hansen & Rand, 2014a, 2014b).

4.2.3 Control variables

The control variables were experience, firm age, education, exports, institutions and accreditation. Experience was operationalised as the natural log of the number of years the owners had been in the business. The more years accrued by the owner, the more knowledge they were likely to have. This accumulated knowledge can positively influence the outcome of business activity and hence make the business more creditworthy (Kim, 2006). The firm’s age variable was the natural log of the number of years the SME had been operating in the business environment. SMEs that have been in existence for long usually form long-term relationships, which, in financial environments, denote that they are safe to provide with credit, all else being equal (Rahman et al., 2017). Education was also controlled for and was measured by asking whether the SMEs had formal training programmes for their permanent full-time employees. SMEs’ attention to education implies a better understanding of how the business environment works. Exports were included to capture the way in which international business by SMEs altered their credit constraints. Similarly, business accreditation was used in reference to their access to finance. Finally, the analysis controlled for institutions using a corruption variable. This variable was deduced from questions on whether corruption posed an obstacle for an SME’s access to finance (Beck & Demirguc–Kunt, 2006).

4.3 Data analysis

To examine the effects of these three key factors on perceptions of credit access, credit applications and credit use, a logit model was used for estimation. This choice of model was because the dependent variables were not continuous. Hence, the use of standard efficient ordinary least squares (OLS) would have yielded biased estimates. Thus, using a logit model helped produce efficient estimates based on the response probabilities for both continuous and discrete explanatory variables (Wooldridge, 2010). The indicator for credit access was proxied by variables measuring credit constraints (Hansen & Rand, 2014a, b; Wellalage & Locke, 2016). The models are described in the following equations, where 𝛼 is a constant, 𝛽 is the coefficient vector and 𝜀 is the error term. Finally, the model equation also included a set of country fixed effects.

  • (1a) Credit Access Perception = α + β Collateral Security + β Collateral Security Value + β Female Ownership + β Control Variables + Ɛ

  • (1b) Credit Access Perception = α + β Collateral Security + β Collateral Security Value + β Female Ownership + β Control Variables + fixed effects + Ɛ

  • (2a) Credit Application = α + β Collateral Security + β Collateral Security Value + β Female Ownership + β Control Variables + Ɛ

  • (2b) Credit Application = α + β Collateral Security + β Collateral Security Value + β Female Ownership + β Control Variables + fixed effects + Ɛ

  • (3a) Credit Utilise = α + β Collateral Security + β Collateral Security Value + β Female Ownership + β Control Variables + Ɛ

  • (3b) (2b) Credit Utilise = α + β Collateral Security + β Collateral Security Value + β Female Ownership + β Control Variables + fixed effects + Ɛ

5 Results

Descriptive statistics appear in Table 1 to illustrate the variables used in the baseline regression. The SMEs in the data set perceived credit access as a moderate obstacle, indicating that most had difficulties accessing credit. This conclusion is supported by the low number (about 31%) of SMEs that applied for credit of any type. However, SMEs who were successful in accessing credit or were deemed creditworthy by lending institutions made good use of the credit that was made available to them. In the data set, approximately 80% of these SMEs used some form of credit facility. Also, the analysis considered attributes (e.g. high education qualifications) that were deemed important for SMEs because they were considered essential by lending institutions. Such attributes significantly increased SMEs’ chances of securing credit from lending institutions in Africa.

In the case of gender variance, only 15% of these SMEs had female owners. On average, individuals who managed SMEs in the manufacturing sector in Africa had 15 years of experience. Regarding education, 14% of SMEs provided formal training for their employees. Similarly, firm characteristics were important determinants of credit access (Wellalage & Locke, 2017). Notably, 14% of the SMEs in the data set had a quality certification for their products. Such a certification was considered reliable assurance for lending institutions. The quality certification provided SMEs with a soft guarantee of their business activities across 41 African economies. However, the volume of products exported to other markets by these SMEs was small. The average age of the SMEs in the data set was 13 years. Half (50%) of them had assets that they could use as collateral, but less than 50% had a very high collateral value. Moreover, a large proportion (70%) of SMEs expressed corruption as a major concern.

To establish the extent of the relationship between the variables in the model, correlation analysis was used. Table 2 illustrates the results. Each correlation between variables is supported by a level of significance to confirm the statistical significance of the relationship between variables. Most of the correlation coefficients presented in the table are significant. In addition, the size of the coefficients is moderate in most cases. Accordingly, there are no likely issues of multicollinearity amongst the variables. Multicollinearity can affect the outcome of the estimation and its corresponding interpretation. Also, issues of endogeneity are less severe when there is no multicollinearity (Hoffman, 2010; Mela & Kopalle, 2002). There is a positive relationship between the three indicators of credit access (perception, application and use). Also, there is a positive relationship between the indicators of credit access and collateral security and between credit access and collateral security value.

Table 2 Descriptive analysis
Full size table

  • H1: In Africa, owners of manufacturing SMEs that possess collateral security perceive access to credit as less difficult. Consequently, they are more inclined to apply for credit, which they then use to develop their businesses. The results of the logit model are presented in Table 3. The probability of an SME being creditworthy was estimated using explanatory variables identified through comprehensive analysis of the literature as determinants of credit constraints. The first column of Table 3 illustrates that SMEs with higher collateral security have fewer credit constraints (β = − 0.001, p < 0.01, Model 1a). Accordingly, these SMEs with higher collateral security tend to apply for credit (β = 0.004, p < 0.01, Model 2a).

Table 3 Determinants of credit access, application and use
Full size table

As expected, financial institutions only offer credit in cases where they can secure the loan against an asset that they can repossess to redeem their losses in case of default. This credit constraint is amplified in the case of developing countries, where financial institutions suffer from a lack of information in the form of information asymmetry (Duarte et al., 2017). It is also compounded by the business environment, which is typically dominated by dysfunctional financial systems, poor governance and a lack of legal institutions (Menkhoff et al., 2012). Thus, there is little trust of recovering a loss if a loan default must be settled in court. Despite having more collateral security, these SMEs do not use credit or any type of loan (β = 0.000, p > 0.1).

This result suggests that these SMEs can rely on their assets and have less need for loans and credit. Thus, the first hypothesis is supported for credit perception and credit application, but not for credit use.

  • H2: Owners of African manufacturing SMEs perceive high-valued collateral as an obstacle constraining their access to credit. However, they work hard to increase the value of their assets (physical and financial) to use them when applying for credit, even if their success rates vary because of the subjectivity of collateral value in Africa. In testing H2, the analysis shows that collateral security value explains credit application (β = 0.317, p < 0.01, Model 2a) and credit use (β = 0.434, p < 0.01, Model 3a), but not credit perception. Despite more credit constraints when the required collateral security is high, there is no significant impact (β = 0.038, p > 0.1, Model 1a). Therefore, H2 is almost fully supported.

  • H3: Gender biases in Africa influence women’s access to credit facilities. Women owners of African manufacturing SMEs often perceive accessing credit as difficult and are largely dissuaded from applying for credit. Hence, they are less likely to obtain it. To test H3, the first set of equations (a) in Models 1a, 1b, and 1c were used (Table 3). The results show that female owners of SMEs perceive financial institutions in relation to credit access as an obstacle (β = 0.125, p < 0.01, Model 1a) and do not benefit from credit or loans accordingly (β = -0.391, p < 0.01, Model 3a). This finding raises concerns about the impact of gender inequality, especially in the developing world, where women are overlooked or considered incapable, limiting their access to financial facilities (Wellalage & Locke, 2017).

The relationship between female ownership and credit application was expected to be negative due to the high credit constraints perceived by women. However, the results show a non-significant positive link (β = 0.014, p > 0.1, Model 1a). Such an outcome confirms that some female owners now feel confident and are convinced that they can approach a financial institution and apply for credit or loans, despite inequality in the system. This relative shift reveals a promising future in sub-Saharan Africa. Thus, H3 is almost fully supported. There is a significant negative relationship between corruption and credit perception, confirming the estimation. In the case of education, there is a negative relationship with credit perception. Firms that run formal training programmes and provide a high level of education are likely to have a better experience in establishing a line of credit because financial institutions equate high educational attainment to a high level of knowledge in running a business. Thus, such SMEs perceive fewer credit access constraints.

Interestingly, having a sophisticated firm in the form of commitment to education and training does not encourage firms to apply for credit and obtain financing. Furthermore, firms that have an international certification for their business or product have fewer credit constraints. However, such credentials do not boost their chances of being successful in their applications. To demonstrate the reliability (robustness) of these results, the analysis controlled for business type and country fixed effects by adding them to the first set of equations (a). The results of these estimations are presented in the second column (b) of all three models in Table 3. They show consistent results for collateral, collateral value and female ownership. Thus, this extra test confirms that the results are robust.

6 Discussion

6.1 Contributions

In response to a lack of insights into contextual credit access issues constraining SMEs in Africa, this study’s comprehensive analysis of entrepreneurship and SME financing advances the scholarly dialogue. Focusing on the cross-fertilisation between entrepreneurship, entrepreneurial financing and SMEs, the study makes theoretical, empirical and practical contributions with policy implications. Theoretically, new theorisations are provided regarding credit access for African manufacturing SMEs. The stakeholder-agency theory of debt financing is used in such a way as to extend its application. The literature is advanced by elaborating on the impact of the measures that African lenders use when assessing the creditworthiness of SMEs. The overlay between collateral security, collateral security value and gender on the one hand and credit access on the other provides new theorisations depicting the relationship between SMEs and lenders in the financial markets found in many parts of the developing world. This overlay amounts to involuntary financial exclusion (Wasiuzzaman & Nurdin, 2019). Transaction lending based on credit ratings or the value of a firm’s assets (Van Caneghem & Van Campenhout, 2012) has limited application in relation to credit access by SMEs in Africa because of Africa’s reported market imperfections, policy gaps (UN, 2021), institutional voids (Dekel–Dachs et al., 2021), information asymmetry issues (Beck et al., 2007; Beck et al., 2009) and gender biases (Bullough et al., 2022).

Based on arguments about the usability of transaction lending in Africa, this study provides an indigenous understanding with contextual sensitivity. The position expounded in this paper advances knowledge in line with the recently revisited debate on contextualising entrepreneurship and management research (see Bruton et al., 2022; Filatotchev et al., 2022; Hamann et al., 2020) that was brought to light by Zahra (2007) and Welter (2011). In some sense, this study shows that African contexts are distinct enough to require indigenous theorisations to foster contextual reflection in the theorising process.

Empirically, the study confirms that collateral security, collateral security value and gender biases embedded in Africa’s financial markets not only reduce the ability of owners of SMEs to access credit but also have knock-on effects on their perceptions of their likelihood of obtaining funds for business ventures. Observations of 13,783 SMEs in 41 African economies reveal a distinct pattern, highlighting reduced motivation amongst SME owners to apply for and obtain credit as a result of expected outcomes. Thus, in the context of Africa, the use of transaction lending measures has profound implications for business development and decision making for SMEs owners.

Practically, limiting access to credit through harsher credit requirements on the basis of gender remains a concern (Seema et al., 2021). In African SMEs with female ownership, establishing lines of credit poses more of a challenge. Cultural and social assumptions embedded in African societies seemingly magnify gender biases, which significantly afflicts businesswomen in many parts of the continent (Le et al., 2018). Such a situation only deepens financial exclusion, especially for female-owned SMEs in the region, limiting their participation in the social and economic spheres. Because of social views about women, it is conceivable that businesswomen who own manufacturing businesses experience sceptical, prevention-focused questions in their applications for credit (cf. Kanze et al., 2018). Research suggests that, in general, businesswomen encounter stricter credit approval processes, higher interest rates and lower loan ceilings when they apply for business investments through regulated financial services (Cozarenco & Szafarz, 2018). Africa has many gender-related issues in relation to regulatory institutions (e.g. policies and laws) and normative institutions (e.g. cultural expectations). These issues are subtle and hard to detect at the surface and are ingrained in commonly accepted social rules, norms and practices (Brush et al., 2019; Bullough et al., 2022).

6.2 Policy implications and recommendations

In addition to developing new theorisations, the present analysis of entrepreneurship and SME financing has policy, business and social implications. For policy institutions, the findings can stimulate debate on entrepreneurship policy, institutional and financial service reforms. To address the situation facing African manufacturing SMEs, governments and formal institutions in 41 countries, including global institutions such as the World Bank and non-governmental organisations (NGOs), this study reveals the need to come together to find ways of reconciling existing support mechanisms with the financial demands of SMEs (cf. Aggarwal & Goodell, 2014). Moreover, this study provides SMEs not only in the manufacturing sector but also in other industries with knowledge about the parameters used in transaction lending in many financial markets. Such insights can inform their business funding strategies.

An important implication of this research relates to the involuntary financial exclusion of SMEs by lending institutions. This exclusion limits their access to finance and financial services through universally applied credit assessment measures that are not only blind to context but also have severe economic and social implications for SMEs. Also, gender biases in the financial markets deepen inequalities in society. Considering the above, several recommendations can be proposed. First, African governments should establish joint private partnerships to work collaboratively with investors, including NGOs, banks, financial services and lending institutions. Doing so could lead to the reform of financial markets in such a way that would not limit SMEs’ access to credit on the basis of size and limited liability. The growth potential and role of SMEs as agents of economic and social change should form core components of how they are assessed for funding. Moreover, African governments should offer grant provisions through dedicated government bodies in a more targeted fashion.

Second, key policy-making institutions in these African countries should work towards policies that prioritise productive sectors, including manufacturing, in terms of their financial needs. Such policies should eliminate widely reported distortions in the financial markets by reconciling entrepreneurship policies with business needs, especially for key sectors. This approach would address agency problems derived from biases about borrowers and their businesses, as well as conflicts of interest between borrowers and lenders (Kautonen et al., 2020) in Africa’s financial markets. Thus, the issue of involuntary financial exclusion for SMEs in the continent can be alleviated to a considerable degree.

Third, entrepreneurship or financial policies should be implemented in a way that encourages wider participation in economic development by involving all citizens. Policy-makers should aim to eliminate gender biases to widen participation and financial access for business. In a sense, such efforts would have a social impact in Africa by enabling the continent to move towards developing equal societies, whilst creating decent employment for all, in line with the UN’s SDGs.

6.3 Research limitations and future research opportunities

Like any research, this study has limitations. For example, the decision to focus on manufacturing businesses in 41 African countries led to the omission of 13 countries. A wider sample transcending the sub-Saharan African region would have provided more insights into entrepreneurial financing and the entrepreneurial phenomenon unfolding within the continent’s most productive sector. Moreover, despite being a cross-country study of Africa, the study suffered from limitations derived from the WBES data set. The data set prevented the study of the effect of other potentially relevant individual-level factors on credit access. Also, the narrow focus on the manufacturing sector provides only a partial picture of the African financial markets. Other types of sectors such as the informal economy, whose businesses support many livelihoods in Africa, may experience far greater challenges in seeking credit to support their business activities.

Research suggests that small businesses often engage in several credit-seeking events because of the difficulties they face when seeking credit (Kim, 2006). However, more clarity is needed in terms of these credit-seeking events. This lack of clarity in the literature provides an avenue for future research. Therefore, scholars should consider exploring the possibilities of African solutions that enable manufacturing SMEs, firms in the informal economy or companies in any other sector to access finance for their business ventures. Insights from such research could provide missing pieces of the puzzle about emerging entrepreneurial financing alternatives for SMEs in financial markets such as those discussed in this paper.

7 Conclusions

Why do African SMEs struggle to obtain credit? Based on the current study, the answer seems to be that the criteria used by financial lenders to assess credit applications are problematic. The empirical results of this study confirm a tenuous relationship between financial lenders and SMEs in many African countries.

The use of collateral security, collateral security value and gender biases embedded in Africa’s financial markets not only reduces credit access potential but also undermines perceptions of the likelihood of obtaining credit for business purposes. Africa is characterised by institutional and market imperfections, along with uncoordinated domestic policies. In this context, transaction lending based on credit ratings and collateral has limited applicability. When universal application of transaction lending is combined with gender biases, it often amounts to the involuntary financial exclusion of SMEs, which has far-reaching policy implications. In conclusion, an important message that can be derived from this empirical study is that the explanatory power of the stakeholder–agency theory of debt financing is enhanced when combined with contextual analysis of entrepreneurship and SME financing.