Factors Affecting Small And Micro Enterprises Access To Finance In Kirinyaga County, Kenya

Abstract

SMEs play an essential role when it comes to the health of an economy through their contribution to the GDP and creation of employment to many young and vibrant people in the country. SMEs are important for Kenya's development and growth towards becoming an industrialized country. They contribute 18% to the country's economy and employ 80% of the workforce, but often struggle to get the funding they need to grow because of difficulty accessing credit. Access to credit is crucial for private sector growth, especially for SMEs that typically don't have enough capital to expand. SMEs are a great source of creativity and talent for starting new businesses. In Kirinyaga County, Kenya, this research aimed to investigate the effects of interest rates, credit profile, SME’s performance, and collateral requirements on SMEs' access to finance. Credit rationing, information asymmetry, and pecking order theories served as the study's guiding theories. A sample of 136 out of 206 SMEs in Kirinyaga County was chosen using stratified random sampling. The questionnaires were distributed using the drop-and-pick strategy to collect primary data. Descriptive statistics like frequencies, means, standard deviations, and variances were used to examine the data. It was established that holding all other factors to a constant zero, access to finance would be at 1.167. This meant that access to finance would have significant effect even without being affected by interest rates, credit profile, and SME’s performance and collateral requirements. It was also observed that for every unit increase in standardized interest rates, standardized access to finance would increase by 0.067 units, while keeping other variables constant. The study found that for every unit increase in standardized credit profile, standardized access to finance would increase by 0.053 units, while holding other variables constant. For each unit increase in standardized SME's performance, there was a corresponding increase of 0.048 units in standardized access to finance, even after considering other variables. A unit increase in standardized collateral requirements resulted in a corresponding increase of 0.061 units in standardized access to finance, while keeping other factors constant. The study found that SMEs' access to financing was significantly influenced by a number of factors. In particular, the review featured the impact of interest rates, credit profile, SME performance, and guarantee necessities on SMEs' capacity to get funding. Thus, the study concluded that interest rates and collateral requirements have a negative influence on access to finance while credit profile and SME performance had a positive influence on access to finance and play a crucial role in determining the ability of SMEs to access finance in Kirinyaga County. As a recommendation, the study suggests a review of interest rates charged by banks and other financial institutions. By revising and potentially reducing these interest rates, more SMEs would be able to access funds, facilitating the expansion of their businesses and fostering economic growth in the region. The study also recommends the necessity to find alternative collateral securities as most SME’s do not own titles and logbooks that are majorly required by financial institutions as securities to access funds, and that credit rating policies should be made more accommodative to the SME’s to enable them access to finance that translates to SME’s operating viable businesses.