Determinants of Financial Accessibility by Small and Medium Enterprises in Eldama Ravine Sub – County, Kenya

Abstract

Importance in the role of the SME in the development process continues to be in the forefront of policy debates not only in developing countries but also in developed countries. In spite of the generally fast pace by which access to financial services for SME is being developed, significant segments of the SME sector do not yet benefit from the expansion and deepening of outreach. In attempting to gain access to financial services SME continue to face financial constraints. Thus this research intended to study the determinants of financial accessibility by Small and Medium Enterprises in Eldama Ravine Sub–County in Baringo County, Kenya. Of specific focus was the influence of cost of credit, interest rates, credit rationing and business risk in Eldama Ravine Sub-County, Baringo County. Transaction cost theory, the capital channel model, credit rationing theory and prospect theory guided the study. A cross-sectional survey research design was used. Stratified random sampling technique was adopted to draw a sample of respondents from the accessible population. This study used a self-administered semi-structured questionnaire to collect data. A pre-testing of questionnaires was conducted before carrying out the main study. This study employed the Cronbach alpha coefficient to test the instrument’s reliability. Content validity test was used for validity test. The collected data was analyzed with the aid of the Statistical Package for Social Sciences Version 22. Data analysis captured both descriptive and inferential statistics. Descriptive statistics included modes, medians, means, standard deviations and variances. Inferential statistics included Pearson’s correlation and regression analysis. The results of the analysis were presented in form of tables, graphs and charts. The significance of the study will be to the financiers of the SMEs who will be interested with this information since they will be able to evaluate SMEs performance, to the firm management team in the capital structure decisions and to the academicians and scholars, the study will form the basis for future research study. From the findings the study concluded that high transaction costs increase the cost of borrowing and also restrict access to external finance for some borrower groups. From the study the researcher further concluded that lending institution consider the size of an enterprise while approving loan application. From the conclusion the study recommended that there is need for the lending institution to simplify loan application process to avoid unnecessary expenses. This will encourage more SMEs to apply for loans. Lending institution should also ensure that loan repayment process is flexible for SMEs. The study further recommended that SMEs should form groups so as to enable them access loans easily, Majority of financial institution would prefer group lending compared to individual. This will have a positive impact on the performance of SMEs.