Financial factors affecting access to credit among small and medium enterprises in Machakos town sub-county, Kenya

Abstract

Small and medium enterprises (SME's) play a critical role in an economy. They improve the standard of living to both the employees and employers. They are a major source of innovations and entrepreneurial skills. The study was guided by the following objectives; to establish financial factors that affect access to credit among SMEs in Machakos Town Sub-county. Specifically, the study sort to find out the influence of collateral requirements, the effect of cost of credit on access to credit and the effect of business risks on access to credit among SMEs’ in Machakos Town Sub-county, Kenya. It also sorts to establish the effect of financial information asymmetry on access to credit among SMEs in Machakos Town Sub-County. The study was guided by relevant theories such has; Credit rationing theory, Information asymmetry theory, pecking order theory and trade-off theory also, the study relied on the following independent variables; collateral, cost of credit, business risks and financial information asymmetry, with the dependent variable; access to credit among SMEs in Machakos town sub-county. The target population was 380 SMEs proprietors located in Machakos Town sub-county. The sample size was 57.The study employed descriptive study design. A stratified sampling technique was used in coming up with strata’s and then a simple random sampling was applied to select respondents from the stratus. Primary data was collected using semi-structured questionnaires. The questionnaires were administered using the drop and pick method. The data analysis was done using SPSS and it captured both descriptive and inferential statistics. Descriptive statistics covered frequencies, mean, standard deviations and variances. Inferential statistics included Pearson’s correlation and regression analysis. The results of the analysis were presented in tables. The study found out that cost of credit such as process and insurances fees are key determinant to access to credit among small and medium enterprises in Kenya. The study also found out that business risk affect access to credit thus financial institutions would not want to finance such businesses with high risks. The study found out that it is difficult to avail all financial information required about the businesses in order to access to credit. From the findings the study concluded that access to credit by SMEs from financial institutions has been constraint by a number of financial factors such as lack of conventional security as demanded by financial institutions, perceived business risks, associated cost incurred by SMEs in acquiring the credit and financial information asymmetry between borrowers and lenders of money. From the conclusion the study recommends that the government should provide credit guarantee to financial institutions lending to SMEs. This will act has a buffer them incase SMEs fails to honor their financial obligation. Further the study recommends that there is need for financial institutions to have flexible terms of loan repayment as well as simplified loan application process. This will encourage increased number of SMEs applying credit facilities.