The effect of bank credit on financial performance of small and medium enterprises in Dagoreti north constituency

Abstract

The Small and Medium size enterprises present the most dynamic economic foundation for growth, income and employment creation. However, this vital sector has been greatly affected by lack of credit by financial institutions in Kenya. The main objective of the study is to assess the impact of bank credit on the financial performance of Small and Medium Enterprises. The researcher employed descriptive research design. Data was collected based on the objectives and questionnaires were distributed to 40 respondents. Descriptive statistics such as frequency distribution, Percentages, variations and measures of central tendency were used to summarize basic features of the data in the study. Inferential statistics were used to infer the sample results to the population. The study established that availability of capital resources greatly affects the financial performance as well as investment levels among SMEs forcing investors and potential investors to depend on own savings and funds from friends and relatives. Also it is well established that the size of the firm influence its ability to access credit from financiers. The ability of small and medium enterprises to access credit was found to be a significant ingredient towards SMEs growth. This could be out of the fact that unlike established companies, most SMEs do not have goodwill with banks and therefore, their access to financing is limited due to lack of collateral and previous history. The study recommends for establishment of policies to enable SMEs access financing without any hindrance. This will deal with the key issues hindering SMEs access to credit, namely; high cost of finance and availability of required collateral. The study recommends for the establishment of a fund that would be advancing subsidized credit to SMEs this will deal with the issues hindering SMEs access to credit for SMEs. Further proper legal framework should be put in place in order to help small and medium enterprises raise more capital for growth.