Impact of Financial Institutions on the Financial Stability of Small and Medium Enterprises in Wolaita Zone, Sodo Town Administration, Ethiopia

Abstract

Background: Small and medium enterprises (SMEs) are central to Ethiopia’s employment creation and industrialization goals but face persistent financial constraints. Understanding how financial institutions foster SME stability informs evidence-based policy.

Methods: A descriptive cross-sectional survey was conducted among SMEs in three sub-cities of Wolaita Sodo (Arada, Mehal, Merkato). Using Yemane’s formula, 288 SMEs were randomly selected from a population of 1,019. Primary data were collected through structured Likert-scale questionnaires and analyzed in SPSS-21 using descriptive statistics, correlation, and multiple linear regression.

Results: Financial institutions significantly enhanced SME financial stability. Regression analysis revealed positive associations between financial stability and (i) provision of start-up capital (β=0.23, p<0.01), (ii) financial skills training (β=0.28, p<0.01), (iii) savings opportunities (β=0.19, p<0.05), (iv) access to finance (β=0.26, p<0.01), and (v) entrepreneurial skills training (β=0.21, p<0.05).

Conclusion: Microfinance institutions play a pivotal role in strengthening SMEs by improving financial literacy, increasing access to capital, and promoting a savings culture. Tailored credit products and continuous skills training are recommended to ensure sustainable SME growth