Credit Affordability and Financial Performance of Small and Medium Enterprises in Machakos County, Kenya
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Date
2022
Authors
Bitta, Fredrick
Omagwa, Job
Journal Title
Journal ISSN
Volume Title
Publisher
IOSR
Abstract
Financial performance of Small and medium enterprises (SMEs) has continued to decline in Machakos County, Kenya over the past few years with more SMEs closing their doors due to poor financial performance. According to a 2016 study conducted by Kenya's National Bureau of Statistics, majority of SMEs in Kenya failed to survive longer than three years. Previous literature reviewed found that inability to obtain financing was a key cause of SMEs financial instability. The specific objectives were to evaluate the relationship between loan collateral, cost of credit, borrower’s credit history, and loan repayment on the financial performance of SMEs in Machakos County. Financial performance was measured by net profit margin. Four theories anchored the study namely the loanable funds, credit scorecards, pecking order, and tradeoff theories. Purposive sampling was used to select one respondent from each of the firms chosen, while stratified random sampling was employed to select a sample of 100 SMEs. Questionnaires were used for primary data collection. Data was analyzed using descriptive statistics, correlation analysis and multiple regression analysis. The study found a significant relationship between credit affordability and financial performance of SMEs in Machakos County, Kenya. The research found that there was a significant relationship between cost of credit and financial performance (p=0.033); borrowers credit history had a significant relationship with financial performance (P=0.002) and that loan repayment had a significant relationship with financial performance (P=0.002). The study found no significant relationship between loan collateral and financial performance (p=0.307). The study further found a strong positive relationship between credit affordability and financial performance with loan collateral represented by (r1 = 0.794); borrowers credit history was represented by (r3 = 0.895), cost of credit was represented by (r2 = 0.854) and loan repayment was represented by (r4 = 0.903). The study recommended that lending institutions needed to proactively review their credit policies in line with the credit affordability variables to ensure loans were accessible and tailored to SMEs needs. There was need for sensitization of SMEs owners to better understand credit affordability variables to foster SMEs financial growth and stability.
Description
Article
Keywords
Loan Repayment, Cost of Credit, Credit History, Loan collateral, Financial Performance, Credit Affordability