The Effect Of Interest Rates On Demand For Credit By Small Medium Enterprises In Nairobi County

Abstract

In Kenya, most SMEs use credit from the MFls to finance their operations. This study sought to evaluate the effect of interest rates on demand for loans by SMEs in Nairobi County. To achieve this objective, the study employed a correlation research design. Data was collected using a semi-structured questionnaire from SMEs in Nairobi County. A total of 50 questionnaires were administered to various SMEs but the researcher managed to obtain 48 completed questionnaires representing a response rate of 96% .The researcher adopted a drop-and –pick-later approach where questionnaires were issued in the morning and picked in the evening to allow the respondents to complete the questionnaires. The collected data was edited, coded and entered for analysis using the Statistical Package for Social Sciences (Version 17.0) computer package. Both descriptive and inferential statistics were used. The research findings revealed that there was a very strong positive relationship (R= 0.932) between demand for credit, interest rate, annual profit and owner‟s equity. The study also revealed that 86.9% of demand for credit by SMEs in Nairobi County could be explained by interest rates. From this study it was evident that at 95% confidence level, the variables produced statistically significant values and can be relied on to explain demand for loans by SMEs from lending institutions. The findings further revealed that effective interest rates, annual profits and owners‟ equity explained demand for loans in that order. The research findings were presented in pie charts, bar graphs, and tables for clarity. The findings of this study will be of great use to the government, lending institutions in formulating credit policies so as to promote the uptake of credit facilities in Kenya.