Relationship Between Access to Credit and Financial Performance of Small and Medium Enterprises in Nairobi, Kenya.

Abstract

Small and micro enterprises (SMEs) have become important players in the Kenyan economy, but at the same time they continue to face constraints that limit their development. Lack of access to credit is one of the main constraints, and a number of factors have been identified to explain this problem. These include the segmented and incomplete nature of financial markets, which increases transaction costs associated with financial services. On the supply side, most formal financial institutions consider SMEs uncreditworthy, thus denying them credit. This study sought to find out whether there is relationship between access to credit and financial performance of SMEs in Nairobi, Kenya. The study employed descriptive analysis as well as regression analysis to analyze the data collected. The target population under study was the licensed SMEs by Nairobi City Council in 2013. Of the licensed SMEs in Kenya, an estimated 50,000 licensed SMEs are located in Nairobi. Cluster sampling of SMEs in the central business district in Nairobi was done by clustering the SMES based on the streets where they are located. A sample of 40 SMEs within the central business district was selected for the survey. Quantitative data was analysed with the use of statistical package for social sciences (SPSS). Descriptive analysis as well as regression analysis found that there was a positive relationship between access to credit and ROA. The study recommends financial institution to have special lending lending structures for SMEs to enable them access credit.