An empirical investigation of capital structure determinants for small and medium-sized enterprises in Kenya
Abstract
The precarious employment situation in Kenya has given rise to public policies that aim at giving
small and medium-sized enterprises (SMEs) better access to finance. SMEs may face difficulties in
raising this much-needed finance due to information asymmetry and other inefficiencies in loan
markets. Inevitably, this has a serious impact on their capital structure.
The principal purpose of this paper was to determine the factors that influence the capital
structure composition of SMEs in Kenya. In order to achieve this objective, primary and
secondary data was collected through the use of questionnaires from finance managers/ financial
advisers of 50 sample companies, which fitted the definition of an SME. The explanatory
variables considered in the model were: (i) the quantitative variables of the enterprise e.g. size,
growth rate, collateral, age, and profitability, and (ii) the qualitative variables related to reputation
of the enterprise, its ownership and control structure, and those characterizing the lending
relationship.
Correlation analysis and regression analysis were used to test the relationship between various
factors and the debt ratios of the sample enterprises. Correlation analysis showed a very strong
negative relationship between total debt and profitability implying that higher profitability reduces
gearing in SMEs. Total net assets, on the other hand, showed a significant positive correlation
with total debt implying lenders preference for collateral to cushion themselves in the event of
SMEs failure to repay loans. Regression analysis revealed the most influential factors of SME
capital structure as profitability, collateral, size and growth rate.
Sponsorhip
University of NairobiPublisher
School of Business, University of Nairobi