Credit Access from Commercial Banks and Growth of Small and Micro Enterprises in Nairobi Central Business District

A Project Report Submitted to the Chandaria School of Business in Partial Fulfilment of the Requirement for the Degree of Masters in Business Administration (MBA)Lack of access to credit is a major constraint inhibiting the growth of the SMEs sector. The issues and problems limiting SMEs acquisition of financial services include lack of tangible security coupled with an inappropriate legal and regulatory framework that does not recognize innovative strategies for lending to SMEs. Limited access to formal finance due to poor and insufficient capacity to deliver financial services to SMEs continues to be a constraint in the growth and expansion of the sector. Formal financial institutions perceive SMEs as high risk and commercially not viable and as a result only a few SMEs access credit from formal financial institutions. The purpose of this study was to analyse the effects of credit access from commercial banks and growth of small and micro enterprises operating in Nairobi Central Business District. The study sought to answer the following research questions; How does collateral requirements by commercial banks affect growth of SMEs? How does financial information required by Commercial Banks at the appraisal stage affect growth of SMEs, How does interest rates charged by Commercial Banks affect growth of SMEs? and how has interest rates capping affected uptake of credits by SMEs? This study used descriptive survey research design and targeted a population of 838 respondents operating SMEs in the Nairobi Central Business District. A sample size was computed using Yamane (1967) formulae. 225 respondents were interviewed from each shop selected. Questionnaires were used to obtain important information about the population. The study used both primary and secondary data. Primary data is the information the researcher obtained from the field. Primary data was collected using semi-structured questionnaires. The questionnaires were administered using the drop and pick method. Descriptive statistics such as means, standard deviation and frequency distribution was used to analyze the data. In addition to descriptive statistics regression was conducted to establish the effects of credit access and growth of SMEs. Quantitative technique was used to analyze the closed-ended questions where a computer program (SPSS software) and MS Excel was used. Tables and figures were used appropriately to present the data collected for ease of understanding and analysis. This enabled the researcher to summarize responses for further analysis and to facilitated comparison. Qualitative data was analyzed through content analysis and presented in prose form. The research established that a unit increase in collateral requirements would lead to a decrease in growth of SMEs by a factor of - 0.417, and that there was strong negative correlation between SMEs growth and development and collateral requirements where the correlation value = 0.653. The effect of financial information on credit access from Commercial Banks showed that a unit change in knowledge on financial information promoted growth of SMEs by a factor of 0.596. The study also found a strong positive correlation between SMEs growth and development and knowledge on financial information where the correlation coefficient was 0.633. E2More so a strong negative correlation between SMEs growth and development and high interest rates was found as the correlation coefficient was - 0.602. Lastly the study also found a strong negative correlation between SMEs growth and development and interest rates capping (correlation coefficient = -0.648). The study concludes that Collateral requirement has been one of the major hindrances for SMEs access to credit from commercial banks. Majority of the SMEs owners do not have sufficient collateral which is a major requirement for credit access. SMEs encounter problems of raising capital, accessing finance and accessing credit. Majority of the businesses obtain start-up capital from self-financing. Most SME owners lack adequate financial information and literacy to evaluate the cost of credit and the various financial products offered by Banks, most SMEs borrowers borrowed only a small amount of money from the financial institutions. The current banks’ lending rates have discouraged many SMEs owners to go for short term and long loans for their businesses, SMEs owners were not satisfied with the lending terms because of high interest rates, short repayment period and long-time taken to process the credit facility. Interest rate capping in Kenya has led to a high degree of exclusion from small loans for SMEs and that Interest rate capping is harmful to SMEs, interest rate caps reduce returns on saving which ultimately reduce both the quality and quantity of investment. The study recommends for revision of loan interest rates with a view of accommodating all borrowers at different economic levels. Offering of financial training seminars and workshops for entrepreneurship skill acquisition and loan investment and servicing, total nullification of interest capping in Kenya and formulation of repayment schedules that are flexible and highly adjusted to accommodate SME cash flow pattern. It is important for the government to set up policies that will ease microfinance credit to SME’s. These policies should be in line with both the owners of SME’s and financial institutions in order to prevent putting hindrances to potential and credit worthy customers who seek to expand or start up a business