EFFECTS OF ACCESS TO CREDIT ON FINANCIAL PERFORMANCE OF SMALL AND MEDUIM ENTERPRISES IN NAIROBI COUNTY

Abstract

Purpose: SMEs have been recognized as being great contributors to the Kenyan economy offering both employment and a platform for innovative ideas. They form a larger percentage of the businesses that operate in Kenya as compared to their counterpart, the large companies. They are however faced with many constraints that hinder their performance and consequently their growth. One of the main constraints that have been highlighted over the years is the financial constraint. The need for finance is of paramount importance for the success of any firm, be it big or small. The purpose of this research was to investigate the effect of credit access on financial performance of SMEs in Nairobi County.

Methodology: The literature explored in this research highlight three main factors, namely firm size, loan amounts, access to credit and financial performance. These form the independent variables in the theoretical framework that influence the dependent variable, that is, access to external funding. The analysis involves primary data obtained through questionnaire and interviews and secondary data from journals, books and internet. The data covered a period of five years ranging from the year 2012 to 2016.

Findings: The regression model has an R of 0.724 which indicates a strong positive relationship between the variables. The coefficient of determination, R square indicates how well data fits in the statistical model; how successful the fit is in explaining the variation of the data. In this model, 52.4% of the variations in the dependent variable are explained by the independent variables.

Implications: This report contributes as a wakeup call to the financial system to be more and more SMEs’ sensitive and offer financial services that are all inclusive. The financing gap, in the credit market, that exists between large and small companies need to be abridged. This can be achieved by creating an enabling environment for SME, formulating regulatory framework that is SMEs friendly, segmenting NSE for SMEs’ listing. SMEs are also called up to keep good financial reports and to form linkages or associations to ease the burden of accessing funds.

Value: This research is motivated by the increasing importance in Kenya’s economy of SMEs, and the continuing constraints they face in their activities. The development of SMEs has been identified as one of the strategies in the Kenyan economic blueprint of vision 2030 as one of the pillars for addressing key economic issues for generating industrialization, employment generation and poverty reduction in Kenya and in working towards a sustainable economy that achieves the Millennium Development Goals like solving the problem of unemployment. The government in its goal through Economic Recovery Strategy (ERS) is employing all players to make this dream come true. The research is also resourceful for prospective entrepreneurs wishing to start a small business. It is also a wakeup call on the lending institutions to work up a strategy that would have a wider financial inclusion.