The role of SMEs in rural development: Access of SMEs to finance as a mediator.

Abstract

Small and Medium Enterprises (SMEs) are considered as the fundamental tool for economic growth, nevertheless, they face continuous financing challenges. SMEs are a major source for generating employment, creation of wealth and alleviating poverty from the rural regions in developing countries. Their access to finance is key to the expansion of this sector. The paper aims to discover the intervening role of "access of SMEs to finance" in the link between SME's evolution and rural development, in the context of Pakistan. In total 338 entrepreneurs operating SMEs in rural areas completed a survey for the study. Through a multi-stage stratified random sampling technique, entrepreneurs were selected from three districts. Confirmatory factor analysis and structural equation modeling were used to test hypotheses. This study shows that SME's evolution has a positive and optimistic influence on rural development. Further, the study also reveals that on SME's progress a positive influence happens by the "access of SMEs to finance". Particularly, the study finds that "access of SMEs to finance" significantly mediated the effect of SME's evolution on rural development. The findings of this paper hold significant implications for both the research society and loan-issuing institutions and departments.