Abstract:
Whereas bank lending to the Kenyan SME sector has grown significantly, the exponential
growth has not translated to improved performance of the beneficiary SMEs as shown by the
persistent high failure rate in the SME sector. This study examined factors hindering the
effectiveness of bank credit in enhancing the performance of SMEs in Kenya in terms of credit
terms, loan utilization and managerial competencies. Descriptive survey design was used. The
study targeted 1527 SMEs within Kisumu city from which 316 were sampled using proportionate
sampling. A structured questionnaire and document analysis were used to collect data. Factor
analysis with multiple regression using SPSS was used to determine the influence of the three
factors on effectiveness of bank credit. Findings revealed that the three factors cumulatively
accounted for 24% of the variance in SME performance. Credit terms was the most significant
accounting for 31.1% of the variance, Loan utilization challenges 28.8% while managerial
competence contributed 24.4% of the variance in performance for a majority of SMES.
Enforcement of the banking amendment act 2015, banks designing more of the products tied to
specific assets and building the capacity of SMEs as need to increase investment in capital assets
to be used as collateral would help make bank credit more effective on SME performance.
