Effects of Business Credit Availability on Economic Growth in Kenya

Abstract

Finance is a key input in the development and growth of business enterprise. One of the reasons why firms form linkages and relations with one another as well as with financial institutions is to access credit for business growth. Credit contributes to enterprises development in a number of ways. Access to external resources allows for flexibility in resource allocation and reduces the impact of cash flow problems on firm activity. Firms with access to funding are able to build up inventories to avoid stocking out in periods of crisis, while in conditions of macroeconomic instability, use of credit increases growth of surviving firms. A significant portion of credit in Kenya is extended through the banking system, though there are some other institutions such as savings and credit cooperative societies, finance companies and micro finance institutions that provide credit, mainly targeting small and micro enterprises. However, availability of data for the latter is very limited. The study sought to examine the effect of business credit availability on economic growth in Kenya. A descriptive design was selected for this study where time series data was collected from 1980 to 2014 on GDP in local currency, private sector credit as a percentage of GDP, bank lending rates, and industrial production as a percentage of GDP. The analysis was done using descriptive analysis, correlation analysis and regression analysis. The regression results showed that private sector credit had a negative and significant effect on GDP, p < .05. The results also showed that lending rates had a positive but insignificant effect on GDP, p > .05. Further, the results showed that industrial production had a negative but insignificant effect on GDP, p > .05. The study concludes that business credit availability influences economic growth while lending rate and industrial productivity do not affect Kenya’s economic growth. This study recommends that business credit to the private sector needs to be increased in order to improve how it affects economic growth as higher levels of business credit are desired in the economy.