Determinants of Loan Repayment by Small and Medium Enterprises in Nairobi County, Kenya

Abstract

Credit is the most common source of external finance for many SMEs and entrepreneurs, which are often heavily reliant on traditional debt to fulfill their start-up, cash flow and investment needs. Potential sources of finance for the small scale enterprises include commercial banks, nonbank financial institutions, non-governmental organizations, multilateral organizations, business associations, and rotating savings and credit associations. However, even though the role of banks and other financial institutions is clear in the small business arena, lending to SMEs remains a laborious and daunting activity as many factors influence the sustainability of these ventures and their loan repayment behavior. The critical problem most public credit-lending agencies face is poor loan repayment from small and medium enterprises. Thus, this study sought to investigate the determinants of loan repayment by Small and Medium Enterprises (SMEs) in Nairobi County, Kenya. The study employed a descriptive research design and a sample of 160 respondents was used. The sample was 2% of the total population and the study target SME owners and managers and focused on SMEs that have obtained a loan facility with any financial institution in Kenya. Simple random and stratified sampling methods were used to select the respondents and a questionnaire was used to collect data for the study. The data collected was classified, summarized analyzed using the descriptive statistical tools and inferential statistics using Gretel. The study used the logit regression to model the determinants of loan repayment by SMEs in Nairobi County. The study findings established that loan, borrower, firm and lender characteristics are major determinants of loan repayment by small and medium enterprises in Nairobi County, Kenya. The study concluded that loan, borrower, firm and lender characteristics influence loan repayment by SMEs. The study recommended that financial institutions should revise their lending policies so that they can reduce loan repayment problems arising from loan xi and lender characteristics while SMEs owners and managers should develop effective policies to ensure they reduce loan repayment problems arising from firm and borrower characteristics.