Access to Credit and Growth of Micro, Small and Medium-scale Enterprises in Kenya

Abstract

Micro, Small, and Medium-Scale Enterprises (MSMEs) are considered the backbone of emerging economies and play a major role in generating job opportunities and ensuring equitable economic growth and development. The unique role of MSMEs makes them pillars on which objectives of the economic growth of developing nations are anchored. Despite the critical role of this sector in developing economies and the concerted efforts by most governments to promote their growth, it is estimated that about 70 percent of MSMEs collapse within the first 3 years from the start of the businesses. Insufficient funds is the most cited cause of their collapse. It is against this backdrop that this study seeks to investigate the effect of access to credit on the growth of MSMEs. The study uses the KNBS 2016 MSMEs survey, a cross-sectional firm-level data collected from a population of 50,043 enterprises. The study estimated using an Ordinary Least Square estimation technique. The findings indicate that access to credit positively influences the growth of MSMEs in Kenya. The study also establishes that initial capital, age of the enterprise, male manager, secondary education, location in Nairobi and access to electricity positively influence the growth of MSMEs in Kenya. Further, the study finds that the MSME sector experiences reduced growth when micro-enterprise transit to small and medium enterprises. The study’s main policy implication is that the Kenyan government should ensure the credit and startup capital needs of MSMEs are met for speedy growth of MSMEs. Secondly, the government should promote education especially secondary and higher levels of education. Lastly, the government through the Micro and Small Enterprises Authority (MSEA) should carry out training of the owners of MSMEs on how to ensure efficiency in their businesses as they transit from micro to small and medium enterprises