The effect of interest rates on the accessibility to credit by micro and small sized enterprises in Gitaru division kenya
The ease of access to finance for small and micro enterprises is of particular significance for the creation of new businesses, for growth and development of the existing ones, which in turn promote economic and social development of a country. Moreover, under crisis conditions, supporting the access to finance can contribute to the recovery of national economies. The thesis aims to highlight the importance of interest rates in loan accessibility to small and micro enterprises in Kenya. The study is descriptive and targeted 1746 small and micro enterprises in Gitary Division, out of which 384 were sampled. Primary data was collected through a self-administered semi-structured questionnaire. Data was analysed through descriptive and inferential statistics. The study found a great influence of interest rates on loan accessibility by small and micro-enterprises in Gitaru Division. Less than half of the businesses have applied for business loans I the past ten years due to sky rocketing interest rates. The rates of bank interest rates varied from a low of 10% and a high of 34%. There was a significant negative average association between the loan accessibility and interest rates (r=-0.418, P-Value<0.05); and a significant positive weak association between deposit rate and loan accessibility by small and micro-enterprises (r=-0.302, P-Value < 0.01). Interest rates and deposit rates combined can explain 51.86% of the changes in accessibility to loans in Gitaru Division. The study concludes that loan accessibility in Gitaru area by small and micro enterprises is highly dependent on the level of interest rates that are charged by the banks, with a negative relationship between the two. As the levels of interest rates increase, the level of loan accessibility by this target group decreases, and vice versa. Financial institutions are working hard to make their presence felt in the rural areas as was evidenced by the high rate of ownership of bank accounts by respondents in the area. This has not, however, increase the levels of loan accessibility as the bank terms remain prohibitive to local businesses, most of which can be categorized as small and micro enterprises.The study recommends that banks in Kenya need to establish cheaper loans to fit into the needs of the small and micro enterprises, through the setting up of partnerships and joint ventures with the local communities, and businesses. Further, the central government will also have to participate in the empowerment of small and micro-businesses through the provision of education and offering cheaper financing to these businesses. The local businesses on their part need to plan their finances better to equip them with better business management skills and financial management capability to enhance their cash flow capability, which will lead to more certain cash flows and lower the interest rates offered by banks eventually.