The Effect of Cost of Credit on the Financial Performance of Commercial Dairy Small and Medium Enterprises in Kiambu County

Abstract

Despite the liberalization of the financial sector, high interest rate spreads is still an issue of concern in Kenya. The financial sector plays a dominant role particularly with respect to mobilization of savings and provision of credit. An analysis of bank interest rate spreads is therefore central to the understanding of the financial intermediation process and the macroeconomic environment in which banks operate. This study is motivated by the fact that although Kenya’s financial sector was liberalized in the early 1990s to allow for market determination of interest rates, concerns about high interest rate spreads have persisted and attracted a lot of debate in both public and policy forums. The aim of this study is to establish the effect of the cost of credit on the financial performance of commercial dairy SMEs in Kiambu County majority of which are beneficiaries of business development services initiatives in the region under various USAID funded projects. Quantitative studies provided this study with data that was expressed in numbers. Because the data collected in this study was mainly in a numeric form, statistical tests were applied in making statements about the data. These included descriptive statistics like the mean, median, and standard deviation, but also included inferential statistics like t-tests, ANOVAs, or multiple regression correlations (MRC). Statistical analysis helped this study to derive important facts from research data, including preference trends, differences between groups, and demographics. Semi structured questionnaires were the main instruments in the study. Closed questions, with open ended ones and five part Likert Scales were applied to measure specific indicators that were to be investigated. Specific nature of data collected included; financial performance measures of commercial dairy small and medium scale enterprises as measured by the return on assets, loan interests payable per year for the various SMEs, age of the various SMEs surveyed, the sizes of SMEs, their net incomes and capital injected in the firms inform of debt. Results show that the cost of credit has direct influence on the financial performance of commercial dairy SME’s in the county of Kiambu. There is a positive relationship between the interest payable in the year by SMEs as a result of loans borrowed by SMEs over time, loan outstanding from financial institutions, the age of commercial dairy SMEs, their sizes and the values of loans borrowed from financial institutions by commercial dairy SMEs to the financial performance of these entities , further confirming the positive relationship observed under the exploratory analysis —that is, the higher the cost of credit the larger the impact on financial performance of the SMEs. There is need to explore policy options meant to enhance competition in the industry and measures to break market dominance will be one such option. Efforts to promote pricing transparency for loans offered by financial services providers with the hope of stimulating competition in the sector will go a long way in educating the masses on fair financial product pricing as offered in the market.