Determinants of participation of micro and small enterprises in microfinance in Kenya

Abstract

Microfinance development is one of the avenues that can potentially promote performance of Micro and Small Enterprises (MSEs) especially in developing nations. Despite the development, MSEs continue to suffer from high levels of financial exclusion as well as low participation in microfinance. In the period 2011-2016, at least 2.2 million businesses closed largely due to financial exclusion and shortage of operating funds. In addition, only about 25% of the firms used microfinance credit in the year 2015. This level of usage is considered low in light of the microfinance developments that have taken place in the last decade. Therefore, an understanding of factors that affect participation of MSEs in microfinance is necessary for designing policies and products towards promoting greater participation in microfinance. This is because MSEs are key contributors of income and employment to the economy. Studies on determinants of participation have tended to focus on the household and not MSEs. This study drew data from the 2016 FINACCESS data set and estimated the determinants using a probit model. The results revealed that, age of firm owner, tertiary education level, financial literacy level, numeracy level, ownership of radio, possession of business permit and age of firm are some of the key determinants of participation in microfinance. It is therefore suggested that government and microfinance providers should encourage and upscale financial literacy programmes so as to influence greater participation in microfinance. In addition, the government should create incentives that will increase acquisition of permits and licences by MSEs