Determinants of Financial Constraints on Small and Medium Enterprises in Kisumu County-kenya

Abstract

Small and medium enterprises (SMEs) in both developing and developed countries play an important role in the process of industrialization and economic growth. An economic survey of 2007 in Kenya puts the contribution of SMEs to employment at 78%. This figure is bound to increase considering that the government of Kenya is keen on improving the economic and social well being of Kenyans through initiatives such as Youth Enterpries Fund, Women Enterprise Fund and Uwezo Fund which are intended to enable the beneficiaries set up SMEs for income generation. It was therefore critical that a serious study was done on the existing SMEs in Kenya so that the prospective entrepreneurs can find a document that can guide them as they get started in business.The research objective was to establish the determinants of financial constraints of SMEs in Kisumu County. The population of study was the 964 registered SMEs as per the Kenya National Chamber of Commerce and Industry (KNCCI) Kisumu chapter (2013). They were randomly sampled to come up with a representative size that formed the basis of the study. The primary method of collecting data was employed to achieve the objective of study. Data analysis involved organizing, accounting for and explaining the data in terms of the respondents definition of the situation using patterns, themes and categories. The statistical package for social sciences (SPSS) was employed in analyzing data. Majority of respodents revealed that their business faced numerous constraints that hindered growth. Findings of the study revealed that contribution from friends was a major source of financing accounting for 55 % of respondents. 40% of respondents indicated that they depended on loans as a financing source and only 5% depended on personal savings. Majority of respondents indicated that lack of information was a major constraint when sourcing for funds, accounting for 60% of the respondents. 13% of the respondents revealed that lack of collateral was a major constraint and 27% of the respondents indicated that transaction costs were a major constraint. Majority of respodents indicated that the major determinanants of financial constraint included: Size of the Firm, Age of the firm, Firm ownership, Professional experience, Level of Education, Business Strategies and Location of the firm. These findings will be useful to policy makers and enterprenuers in finding ways to address these obstacles.