FACTORS AFFECTING THE EFFECTIVENESS OF BANK CREDIT IN ENHANCING THE PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES IN KENYA: A CASE OF KISUMU CITY.

Abstract

Whereas bank credit is given in an attempt to raise the performance of SMEs, the performance of the beneficiary SMEs in Kenya still remains low. Existing reports indicate that although bank lending to the SME sector has grown significantly, the exponential growth in SME lending has not translated to improved performance of the beneficiary SMEs. A high failure rate in the SME sector is still reported despite the increased access to bank credit. Consequently there was need to investigate why access to bank credit has not enhanced the performance of the recipient SMEs in Kenya. If this situation is not arrested many more firms will continue to close down despite the increased lending to the sector. Therefore, this study sought to examine factors that hinder the effectiveness of bank credit in enhancing the performance of SMEs in Kenya. Specifically, it investigated whether credit terms, loan utilization and managerial competence affect the effectiveness of bank credit in enhancing the performance of SMEs in Kenya. Specific objectives of the study were; to establish the influence of credit terms on the effectiveness of bank credit in enhancing SME performance. To find out how bank loan utilization influenced the effectiveness of bank credit in enhancing SME performance in Kisumu city and to examine the influence of managerial competence on the effectiveness of bank credit in enhancing SME performance in Kisumu city. The study targeted a population of 1527 SMEs within Kisumu city with at least 3 employees who borrowed loans ranging from 1 million and maximum of 50 million. The study adopted a descriptive cross sectional survey design. Proportionate sampling technique was used to select respondents where a sample of 316 SMEs was selected based on Yamane‟s formula at 95% confidence level. A structured questionnaire was used to collect primary data while document analysis was used to collect secondary data. Data was analyzed using percentages, frequencies and means using SPSS version 17.0. The analysed data was presented in form of tables, graphs and charts from which statistical inference was made. Factor analysis and multiple regression was used to determine the relationship between bank loans and the performance of SMEs. Findings revealed that credit terms on aspects of interest rate, cost of credit, and lack of collateral and small loans were the most significant challenge for a majority of SMES which made bank loans less effective in enhancing SME performance. Loan diversion challenges were also rated as significant while managerial competency challenges were considered insignificant since majority had requisite skills. Recommendations made include; enforcement of the banking amendment act 2015, banks to design more of the products tied to specific assets and building the capacity of SMEs on the need to increase investment in capital assets to be used as collateral.