Business Specific Factors And Credit Rationing Among Registered Small And Medium Enterprises In Kiambu County, Kenya

ABSTRACT

The economic potential of Small and Medium-sized Enterprises (SMEs) have been recognized worldwide. However, the existence of credit rationing has hampered realization of the same. The prevalence of credit rationing has been evidenced by the documented SMEs financing gap which is within the range of 2. 1 to 2. 6 trillion British pounds and the proportion of SMEs financing to total lending in the world, which averages 23.4 percent in any financial year. A similar credit rationing situation is being experienced in Kenyan, such that, on average SMEs are awarded at most 17.4 percent share of amount of loans available in the credit market. Hence, the study sought to establish the effect of business specific factors on credit rationing among registered SMEs in Kiambu County, Kenya. The specific objectives were: to determine the effect of business credit history, business repayment capacity, collateral and business size on credit rationing among SMEs in Kiambu County, Kenya. The study adopted positivism research philosophy and utilized explanatory study design. The target population was 41,115 registered and active SMEs located within Kiambu County, Kenya. A sample size of 397 SMEs was randomly selected based on inclusion and exclusion criteria:-that is having applied for credit once during the period of study (2013- 2017) and denied or awarded less amounts than the amount applied. Structured questionnaire was used to collect data relating to business specific factors and credit rationing, while data on inflation was collected from Central Bank website by use of data collection sheet. The data were analyzed using descriptive statistics and inferential statistics got by undertaking logistic regression analysis. The results of correlation analysis indicated that the business specific factors were sufficiently different measures of separate variables, and consequently, this study utilized all the variables in undertaking logit regression analysis. In regard to logit regression analysis, the study found that: credit history, repayment capacity and size of business have statistical significance effect on credit rationing. However, collateral have statistical insignificance effect on credit rationing. The findings from the testing of moderating effect of inflation on the relationship between business specific factors and credit rationing indicated that there exists statistically significant moderating effect of inflation on the relationship between business specific factors and credit rationing. Guided by the findings, a number of recommendations were made. First, SMEs should comply on timely credit repayment as well as repayment of the required credit installment in order to improve their future credit evaluation. Secondly, SMEs should improve on the repayment capacity by managing their sales and expenses in a manner to improve on their net profits. In addition, the proprietors of SMEs should diversify on other sources of income which may increase the repayment capacity. Thirdly, the SMEs should improve on their sizes as reflected by capital employed and sales turnover. With regards to capital employed, the proprietors can enhance the policy of maintaining retained earnings, while the government can introduce seed capital to any new coming proprietors. Lastly, the existence of moderating effect of inflation implies that the government should institute monetary policies geared to maintaining inflation to a levels which should not adversely affect the borrower and the lender.