Working Capital Management and Loan Uptake by Small and Medium Enterprises in Langata Constituency, Nairobi City County, Kenya

Abstract

According to the CBK report the rate of loan uptake by SMEs in Kenya has been declining at a rate of 3.6 percent for the past 3 years. This trend is alarming since the general expectation is that the loan uptake should have an upward trajectory of up to 9 percent as envisaged in vision 2030. Therefore the general objective of this study was to access the link between working capital management and loan uptake by small and medium enterprises (SMEs) in Nairobi County. The study was guided by the following specific objectives; to establish the relationship between cash management practices and access to microfinance loans by SMEs in Nairobi County, to determine the association between the creditors management and access to microfinance loans by SMEs in Nairobi County ,to evaluate the relationship between debtors management and access to microfinance loans by SMEs in Nairobi county and to evaluate the relationship between inventory management and loan uptake in microfinance by SMEs in Nairobi county, Kenya. The theories guiding the study will be The Net Trade Cycle Theory, liquidity preference theory, inventory theory and the Finance Theory. Descriptive research design was used. The study adopted stratified random sampling method to select 362 respondents from a target population of 1712 respondents who were the SMEs in Langata Constituency. Primary data was used in this study. The questionnaires were dropped and collected later by the researcher. Data was analysed by the use of SPSS and presented in tables and figures. The findings indicated that changes in the dependent variable (loan uptake) is explained by the changes in the independent variables (cash management, account receivable management, account payable management, inventory management) and there was a significant correlation between the two variables. The study found that there was a significant negative relationship between cash management and loan uptake and that a positive change of a unit of cash management will result to the negative change of loan uptake. The study found that there was a significant negative relationship between inventory management and loan uptake and that a positive change of a unit of cash inventory management will result to the negative change of loan uptake. The study concluded that the relationship between account receivable management and loan uptake was positive and significant and that a positive change in the values of account receivable management will result to a positive change in the loan uptake. The study also concluded that the relationship between account payable management and loan uptake was negative and significant that a positive unit change of account payables resulted to negative units changes of loan uptake. The study recommends that SMEs should practice keeping an optimal levels of cash and the excess held cash should be used to purchase quick moving inventories. The study recommends that the SME owner should actively continue selling their commodities on cash basis and that receivables should be collected within the shortest time possible. The study recommends the SMEs to build a pool of funds to enable them borrow from it and expand easily other than depending on the bank loans which takes a lot of time before they are approved. The study recommends that the SME owners should create good relationships with the suppliers to increase the account payable period which will act as a loan to enable SME have enough cash to cater for operational expenses.