Factors Affecting Access to Loans by Small and Medium Enterprises in Kibuye Open Air Market, Kisumu County, Kenya

Abstract

Small-scale traders, are integral to the economy, driving job creation and fostering economic development. These enterprises, however, encounter significant challenges in securing financial resources, particularly in accessing loans, which are crucial for their growth and sustainability. The general objective of this study was to determine the factors affecting access to loans by Small Medium Enterprises in Kibuye Open Air Market, Kenya. The specific objectives guiding the study were; to establish the effect of firm specific factors, bank related factors, macro-economic factors and institutional and regulatory factors on access to loans in in Kibuye Open Air Market, Kenya. This study was guided by Credit Rationing Theory, Agency Theory, Keynesian monetary theory, theory of constraints and Resource Dependency Theory. Descriptive survey research design was employed for this study. The study targeted SMEs owners or managers operating in the market where the study population was 500 respondents. A sample size of 222 was selected through stratified and simple random sampling techniques. Primary data was collected using structured questionnaires which were the main data collection instrument. Analysis of data was done using descriptive statistics that included frequencies, percentages standard deviation and means. The inferential statistics was linear and multiple regression analysis to present the findings and showed relationships where tables were used to present the findings. The study determined the relationship and influence of firm specific factors given and the access to loans by SMEs. The study results showed that there was a significant positive relationship between firm specific factors such as age, size, ownership type, availability of collateral and access to loans at Kibuye open Air market (P=0.04, p < 0.05). The study findings indicated that bank related factors such as interest rates, bank-firm relationship, lending policies, and loan application process were significant on access to loans by SMEs, with a correlation of 0.525 and a p-value of 0.00 indicates a significant positive correlation between bank related factors and access to loans. The study determined the relationship between macro-economic factors and access to loans with reference to SMEs and it was established that macro-economic factors had an influence on access to loans since the correlation coefficient was with a P value of 0.002. The results obtained from the study signify that institutional and regulatory factors have a significant and positive influence accessing loans by owners of the SMEs. The findings revealed that credit bureaus and government regulations had significant influence, indicating that these factors contribute to loan access variation (p < 0.05). This suggested that all the four factors had a statistically significant effect on the access to loans by SMEs. The study recommends that SMEs should be encouraged to build assets that can serve as collateral, which would improve their creditworthiness and align with financial institutions' lending requirements. By expanding their asset base, SMEs can increase their repayment capacity, enhancing their ability to secure loans. financial institutions are advised to offer SME-friendly interest rates and to streamline the loan application process. Simplifying these procedures could promote better loan accessibility for SMEs, which face procedural hurdles and often struggle with high-interest rates. Policymakers should prioritize economic stability to reduce inflation and interest rate volatility. A stable economic environment would help SMEs make better-informed borrowing decisions, ultimately supporting their growth and sustainability. Regulatory bodies are encouraged to maintain SME-friendly policies and enhance transparency in loan frameworks, which would improve loan access by clarifying requirements and reducing bureaucratic barriers.