The Moderating Role of Financial Innovations on the Relationship between Interest Rate Cap and Access to Credit by Micro, Small and Medium Enterprises in Kisumu County.

Abstract

Purpose: The purpose of this study was to investigate the moderating role of financial innovations on the effect of monetary interventions on access to credit by micro, small and medium enterprises in Kisumu County, Kenya. The specific objectives were to assess the effect of interest rate cap on access to credit by MSMEs and to investigate the moderating role of financial innovations on the effect of interest rate cap on access to credit by MSMEs in Kisumu. This study was guided by the Keynesian Liquidity Preference Theory. Methodology: The study adopted a descriptive research design with a target population of the 1,472 micro, small and medium enterprises registered at the Department of Social Services in Kisumu County, Kenya. At a confidence level of 95%, a representative sample of 420 MSMEs was obtained based on Yamane Taro’s formula. A closed ended questionnaire was administered to a stratified sample of the finance managers of the micro, small and medium enterprises. A Cronbach’s alpha of 0.801 confirmed the reliability of the instrument while its validity was assessed by expert opinion of finance professionals. Data was analyzed using regression analysis. Results: Results showed that interest rate cap had a statistically significant effect on access to credit by micro, small and medium enterprises. Further, financial innovations moderated the relationship between interest rate cap and access to credit. The study concluded that MSMEs’ access to credit depended on the direct and the hierarchical effects of interest rate cap and also that financial innovations moderated these effects. Unique contribution to theory, practice and policy: The study recommends that the MSMEs could save with commercial banks to enable them access credit made available through lower interest rates unlike those charged by MFIs. Also, they should take advantage of financial innovations at their disposal to enable them access credit cheaply and fast. The policy makers ought to aim at enhancing access to credit by employing sector specific interventions as opposed to blanket interventions like cushioning MSMEs from high interest rates by providing such funds as funds for inclusion of the informal sector (FIIS) and should also derive policies targeting on improving the process and role of financial innovations in the relationship between interest rate cap and access to credit by MSMEs in Kenya. The study supported the Keynesian liquidity preference theory by positing that interest rates are controlled by the rise and fall of supply and demand for money and should be allowed to adjust freely. This theory could therefore be applied to similar studies.