| dc.description.abstract | The Small and Medium Enterprise (SME) Sector has continued to play an important role in the economy of this country. The sector‘s contribution to the Gross Domestic Product (GDP) has increased from 13.8 per cent in 1993 to about 40 per cent in 2008. It is agreed that most SMEs heavily depend upon bank loans and generally experience a ‗financing gap, even in developed countries. This financing gap, often defined as the difference between the demand for funds by SMEs and the supply of funds, occurs because of various reasons. It is on this premise that the researcher sought to study the effects of changes in interest rates on the demand for credit and loan repayment by SMEs in Kenya. The main objectives were to determine interest rates influence the demand for credit by SMEs in Kenya and also establish whether interest rates influence the repayment of loans by SMEs in Kenya. The study targeted the 43 banks in Kenya and various sectors under SMEs in Kenya namely; Agriculture, Manufacturing, Building & Construction, Mining, Energy & Water, Trade, Tourism, Hotel & Restaurant, Transport & Communication, Real Estate and Financial Services. This represented the population and the sample. Secondary data was obtained from CBK supervisory report‘s financial statements and analyzed further. The data covered a period of 5 years from 2008 to 2012. Descriptive approach was used to determine the weights of the variables. Interpretation of data was done using SPSS and MS Excel. Inferential statistics involving use of ANOVA and regression analysis was done.The study concluded that high interest rates do not necessarily affect the demand for credit. It was observed that high interest rates were not a major concern for SMEs. In this study, SMEs still had a high demand for credit even at annual interest rate of 21.75% in the year 2011 and even a higher demand for credit at an annual interest rate of 18.1%. Those who are willing to pay high interest rates may, on average, be worse risks; they are willing to borrow at high interest rates because they perceive their probability of repaying the loan is low. The researcher therefore concluded that the repayment ability of SMEs is directly affected by changes in interest rates. Looking at the analysis, the researcher noted that the year 2011 was most harsh in terms of changes in interest rates. It is in the same year that categorization of loan repayment ability also changed sharply. The researcher recommends that further research be done to investigate why the demand for credit is high despite high interest rates. It would be expected that the demand for credit reduces with increase in interest rates. There is more room to come up with other reasons that cause this position to arise. It is not clear whether SMEs would increase demand for credit to be able to execute their projects even in the event they may not be optimal and considering the fact that it is difficult for SMEs to get financing from financial institutions. | en |
