The Relationship Between Access to Credit and Financial Growth of Small and Medium Enterprises in Nairobi County

Abstract

The ability to access affordable credit is a critical element of private sector led growth, particularly for small businesses that often lack the initial capital needed to grow and expand and also for agricultural households, where expenditures on inputs precede the returns from harvest; it also increases a business or household’s ability to bear and cope with risk. This study sought to establish the relationship of access to credit on financial growth of SME’s in Nairobi County. To achieve the objective of this study; a descriptive survey design was used. The population of this study was SME’s registered in Nairobi County. The researcher did a cluster sampling of 40 small and medium enterprises in Nairobi based on geographical locations. Four main streets namely: Moi Avenue, Kenyatta Avenue, River Road and Tom Mboya Street were selected. The study used secondary sources of data. Secondary data was sourced from the financial records of the SME’s from year 2009 to 2013. Other sources of secondary data included relevant literature and records from the library. Access to credit was measured through checking the loan book records from SME’s, asset turnover was measured using sales revenue divided total assets while the size of the firm was measured using the return on sales which is net income divided by sales. The dependent variable was financial growth which was measured using increase in net assets. Data collected was purely quantitative and it was analyzed using descriptive analysis. Regression analysis was used to come up with the model. The study used a multiple regression equation. Provision of credit to SMEs is still a fundamental problem faced by most owners and managers of SME’s since most of them lack security or collateral to be able to access credit facilities. The findings of the study revealed that a few owners of SME’s that obtained credit were able to grow and expand their businesses significantly. variables. The study also revealed that 97.3% of financial growth in the SMEs could be explained by the variables under study. From this study it is evident that at 95% confidence level, the variables produce statistically significant values and can be relied on to explain growth in the SMEs sector in Kenya. The government should formulate policies that ensure commercial banks and other financial institutions provide adequate information on the requirements and procedures for applying for a loan. This will enhance efficiency and effectiveness of financial institutions since the borrowers are aware of what is expected. This will enable the owners of SME’s to easily access credit since they are informed of what is expected. The government should try hard to meet the credit needs of the SMEs in the country for a speedy economic growth through creating an enabling environment for financial institutions to thrive. This study focused on SMEs in Nairobi County and therefore the findings of this study cannot be generalized to SME’s outside Nairobi County. The study recommends that further research could be conducted on SME’s countrywide to investigate on the effects of access to credit on financial growth of SMEs to find out whether there are commonalities or unique factors. The study recommends that future research should lay more focus on SME’s in the rural setting in order to find out whether similar relationship exists between access to credit and financial growth in SME’s. This would provide more evidence on the level of access to credit for SME’s in the rural setting and in urban areas then the causes and effects can be documented.