Major determinants of loan repayment in small Scale enterprises in Kariobangi division, Nairobi

Abstract

One of the most crucial and leading factors constraining Small Scale Enterprises (SSEs)development in developing countries like Kenya is limited access to financial capital andcredit. This is because on one hand, theseenterprises couldn‟t fulfill the bank‟s lending requirements and on the other, the bankingsector considers these enterprises as involving high credit risk. This study was conducted withthe objective of identifying the major determinants of loan repayment in Small Scale Enterprises(SSEs) withparticular reference to SSEs in Kariobangi Division, Nairobi County. In order to achieve this objective, primarily data were collected from 50 randomly selected respondents by using questionnaires. For data analysis, descriptive statistics including mean, frequency and percentages were used to describe the socio-economic characteristics of the borrowers. A regression model was used to analyze the determinants of loan repayment. The study found that even though many factors can lead to loan defaults, some of the factors were regarded to be of higher impact. Business related factors were significant in influencing loan repayment of the respondents with increase in input prices as the major factor that led to loan defaults while death of spouse was seen as the least factor that led to loan default. In addition, education level, family size,amount of loan applied and business experience of the respondents were found to have a positive relationship to loan repayment. Age, interest rate and change in gender had an inverse relationship to loan repayment. The study recommended that more loans should be advanced to female SSE owners aged 30-40s as they proved to be the least loan defaulters. SSEs in Kariobangi division should use prequalified suppliers in order to minimize variation in input prices. The financial institutions should provide financial education and awareness to SSE owners as they are less educated.