Credit access and productivity among micro and small enterprises in Kenya

Abstract

The aim of this study was to determine the effect of credit access on the productivity of micro and small enterprises in Kenya. The study used data from the 2007 World Bank Enterprise Survey. Total factor productivity (TFP) was estimated using estimates of a linear Cobb-Douglas production function obtained by ordinary least square (OLS). TFP was then used as the measure of firm performance to test for the effect of credit access and other firm and entrepreneur characteristics. Estimates of the production function revealed that firms were operating under increasing returns to scale while distribution of TFP showed that firms had very low productivity. The model to test for effect of credit was estimated using OLS and again using instrumental variable to control for potential endogeneity. A test for endogeneity however showed that the credit variable was not endogenous hence OLS results were taken as the main results of the study. The results showed that access to credit has a negative but insignificant effect on firm productivity which implies that access to credit has no important role in improving firm performance. The impact of both formal and informal credit was also negative and insignificant. Enterprises located in Mombasa and Kisumu and those that had a female as principal owner were found to have low productivity. The results of this study imply that the current emphasis by the government to enhance credit access as a strategy of improving performance within the MSE sector may not yield the desired results. This study has contributed to existing literature by providing further evidence on the link between access to credit and firm performance using productivity as the measure of firm performance. This study also provides empirical evidence on link between source of credit and firm productivity.