Improving financial accessibility to micro and small scale enterprises in Kenya: a case study of Gikomba and Kibera, Nairobi

Abstract

Lack of access to finance has been identified as a major constraint on the ability of MSEs in Kenya to fulfil their potential for dynamic growth. This study investigates the high propensi ty of MSEs to identify lack of access to finance as their primary constraint and the view of banks that MSEs have low demand for loans, in an attempt to come up with recommendations to enhance credit accessibility to MSEs. Since 1991, financial liberalisation has been pursued initially as part of the structural adjustment reforms and subsequently under the financial sector adjustment program. These included issues such as policies of direct controls over interest rates and the allocation of credit, the historical orientation of banks towards import-export trade and large firms, and the lack of competition among banks. Although financial liberalisation has created some necessary conditions for increased MSEs lending, the effect so far has been limited. Oketch ~. al. (1995), notes that there are 105 formal institutions with MSEs support packages in the country. These assistance programs are diverse in terms of their orientation (finance, training, marketing, e.t.c.), geographical coverage (rural vs urban, national vs regional), intensity (amount of support) and targeted population groups (women, men, youth, sectors, e.t.c.). As MSEs continue to increase, it is important for policy makers and planners to have an understanding of what percentage of MSEs are being reached by any form of assistance. To help shed light on these issues, the survey collected information on access to financial assistance. The study revealed that despite the loans applications put forward, only a small minority of MSEs have benefitted from any form of credit, and most entrepreneurs rely primarily or exclusively on own savings to finance the enterprise. This has been due to high interest rates charged on loans, lack of adequate information about loan facilities and lack of collaterals required to back the loans. Banks are usually not . willing to lend out money to MSEs because of a (supposed) lack of collateral, small loans are relatively expensive to administer and therefore can only be extended in return for higher rates of interest. The study suggests measures that banks and financial institutions could adopt to overcome the problems of high transaction costs and risks in MSEs lending, for example by . settln~ tip ~redlt reference bureau to provide information on clientele creditworthiness and facilitate easier processing of loan application. The study found out that the financial assistance agencies are concerned about security of tenure in advancing loans. To gauge the extent of tenure security the study found out that only about 37 percent of the entrepreneurs had some form of tenure securi ty, while the rest face the risk of displacement. The study recommends the need to plan MSEs sites to improve their tenure security and access to loans. Nevertheless, the evidence suggests that exploitation of highly profitable opportunities by MSEs could be accelerated if MSEs entrepreneurs had greater access to external financing.