An empirical investigation of capital structure determinants for small and medium-sized enterprises in Kenya

Abstract

The precarious employment situation in Kenya has given rise to public policies that aim at giving small and medium-sized enterprises (SMEs) better access to finance. SMEs may face difficulties in raising this much-needed finance due to information asymmetry and other inefficiencies in loan markets. Inevitably, this has a serious impact on their capital structure. The principal purpose of this paper was to determine the factors that influence the capital structure composition of SMEs in Kenya. In order to achieve this objective, primary and secondary data was collected through the use of questionnaires from finance managers/ financial advisers of 50 sample companies, which fitted the definition of an SME. The explanatory variables considered in the model were: (i) the quantitative variables of the enterprise e.g. size, growth rate, collateral, age, and profitability, and (ii) the qualitative variables related to reputation of the enterprise, its ownership and control structure, and those characterizing the lending relationship. Correlation analysis and regression analysis were used to test the relationship between various factors and the debt ratios of the sample enterprises. Correlation analysis showed a very strong negative relationship between total debt and profitability implying that higher profitability reduces gearing in SMEs. Total net assets, on the other hand, showed a significant positive correlation with total debt implying lenders preference for collateral to cushion themselves in the event of SMEs failure to repay loans. Regression analysis revealed the most influential factors of SME capital structure as profitability, collateral, size and growth rate.