Determinants of Small and Medium Enterprises’ Financing by Registered Financial Institutions in Uasin Gishu County, Kenya

Abstract

Purpose: This research intended evaluate the Determinants of Small and Medium Enterprises’ Financing by Registered Financial Institutions in Uasin Gishu County, Kenya. The study was guided the following objectives: To evaluate the determinants of SMEs’ financing by the registered financial institutions in Uasin Gishu County, Kenya and to compare financing criteria of banks and Microfinance institutions in Uasin Gishu County, Kenya.

Methodology & Approach: The study employed descriptive research to gather quantifiable information through use of open and close-ended questions and the target population of the study was 50 registered financial institutions where data was collected from the key informants of the financial institutions who were either Branch Managers, Relationship/ Credit managers or the credit officers. This was a census study where 47 financial institutions were interviewed with respondents being either Credit officers, Branch managers or Credit/Relationship Managers. Exploratory factor analysis was used to analyse data. This study adopted a descriptive survey research design and Factor analysis. SPSS was used to analyse descriptive statistics (percentages, and frequencies); and inferential statistics (factor analysis). Analysed data was presented using tables and figures. Using Principal Component Analysis, the key determinants of SMEs Financing by the registered financial institutions in Uasin Gishu County was extracted.

Findings: From the study findings, cost of credit is key determinant in SME financing. Cost of credit includes fees charged on loans and interest rates. High interest rates and loan costs hinders SMEs from borrowing loans since it affects their ability to repay the loans. SMEs’ shy away from borrowing especially when interest rates are high. On the other hand, financial institutions are hesitant to offer financing to SMEs when the interest rates are low, capped, as they prefer lending to government, and consider SMEs risky borrowers. When interest rates are regulatory banks, the interest rate risk premium is low to cater for default of borrowers.

Recommendations: This study recommends that; Training and advisory services should be offered to SMEs by the government in collaboration with the financial institutions on the requirements for accessing the loan facilities since most SMEs’ are not aware of the requirements hence they are not able to access financing. Banks should be flexible in financing SMEs by coming up with friendly policies that does not bar SMEs from getting loans and consider financing start-ups businesses so as to spur economic growth in the country and also come up with tailor-made loan products for SMEs.

Keywords: Determinants, Financing, Small and Medium Enterprises, Financial Institutions