Determinants of Small and Medium Enterprises’ Financing by Registered Financial Institutions in Uasin Gishu County, Kenya.

Abstract

Small and Medium enterprises play a key role in development of many economies in the world. Despite SMEs being critical in acceleration of economic growth due to employment creation in Kenya, they have faced many challenges in accessing financing from the registered financial institutions. The registered financial institutions are regulated and as a result risk management is very key to them since they are required by their regulators to comply to lending policies before financing SMEs and at the same time the shareholders of the financial institutions and the investors of funds in the financial institutions expect to get a return for their investment. This research was intended evaluate the Determinants of Small and Medium Enterprises’ Financing by Registered Financial Institutions in Uasin Gishu County, Kenya. The study was guided the following objectives: To evaluate the determinants of SMEs’ financing by the registered financial institutions in Uasin Gishu County, Kenya and to compare financing criteria of banks and Microfinance institutions in Uasin Gishu County, Kenya. The study was underpinned by three key theories which are the financial inclusion theories, the information asymmetry theory and the financial intermediation theory. This study employed descriptive research to gather quantifiable information through use of open and close-ended questions and the target population of the study was 50 registered financial institutions where data was collected from the key informants of the financial institutions who were either Branch Managers, Relationship/ Credit managers or the credit officers. This was a census study where a total of 47 financial institutions were interviewed with respondents being either Credit officers, Branch managers or Credit/Relationship Managers. Exploratory factor analysis was used to analyse data with the aid of the Statistical Package for Social Sciences(SPSS) Version 22. This study adopted a descriptive survey research design and Factor analysis. SPSS was used to analyse descriptive statistics (percentages, and frequencies); and inferential statistics (factor analysis). Analysed data was presented using tables and figures. Using Principal Component Analysis, the key determinants of SMEs Financing by the registered financial institutions in Uasin Gishu County were extracted. The internal factors extracted that are the key determinants of small and medium enterprises financing by registered financial institutions in Uasin Gishu county include the asset tangibility, cost of credit, credit rating and client history of loan repayment, risk and return of the business, entrepreneur experience in business, loan repayment modes and firm size. The external factors from the results that are key determinants of small and medium enterprises financing in Uasin Gishu county are the number of lending institutions, provision of small business support services and location of the business enterprise. Comparison was done for criteria banks and microfinance institutions use in finance to SMEs and the results were that they both use the same financing criteria