_JULY 2018_ _2_

# **I. Introduction**

Support for micro- and small-enterprises is a popular policy option for governments all over the world. In Ethiopia, specifically, increasing efficiency and competitiveness of micro and small-scale enterprises is a focus of the Growth and Transformation Plan II (2015-2019). A common pillar of support to microenterprises has been to facilitate access to credit, often in the form of microfinance. Over time, microfinance has increasingly been utilized as a tool to support female entrepreneurs. Recent reports show in Sub-Saharan Africa among micro- and small- firms there is no longer a gender gap in terms of access to microfinance (Demirguc-Kunt et al. 2014). Aterido et al. (2011) find no evidence that women are disadvantaged in terms of access to capital when controlling for firm and entrepreneur characteristics and argue that this is due to “female favoritism” in the microfinance industry in offering loans to micro and small firms.

While the availability of microfinance has undoubtedly expanded, the question of whether microfinance can help enterprises to grow and ultimately alleviate poverty is under intense scrutiny. A recent review of six randomized evaluations across four continents suggests that, while microcredit has some benefits, it has not led to the transformative improvements in business performance and poverty reduction widely expected (Banerjee et al 2015). Many of the microfinance randomized controlled trial (RCT) studies in the last decade have left people with a common perception that, while microfinance has helped many firms to smooth incomes and has introduced many entrepreneurs to financial services for the first time, it has not been able to propel the majority of firms onto a growth trajectory (Tarozzi et al. 2015).

The existing microfinance studies also paint a broad view that female-operated enterprises benefit from microfinance even less than men. The explanations for this differential impact between women and men focus on the gender-specific constraints that may prevent women from benefiting from the influx of capital, such as the concentration of women entrepreneurs in lower-growth sectors; time and social constraints, including pressures from self or others to spend; and the fact that many women micro-loan clients are ‘necessity’ entrepreneurs that would likely opt for wage employment if it was available (Buvinic and O’Donnell, 2016).

Traditionally, microfinance institutions (MFIs) have primarily catered to female micro-firms with group lending schemes that provide very small loans. These micro-loans, usually in the amount of a few hundred dollars, may be insufficient to fuel business investment and growth. In Ethiopia, a “missing middle” phenomenon in credit markets has been well-documented, by which growth-oriented firms are highly capital-constrained, because their credit needs are too large for microfinance, but not large enough for commercial banks. In Ethiopia, microfinance group loans rarely exceed a value USD 1,500, while commercial banks rarely lend in amounts below USD 50,000. The underserved segment of women entrpereneurs seeking loans between approximately USD 1,000 and USD 50,000 constitutes the missing middle. This paper seeks to explore the impact of credit