Factors that influence loan defaulting by SME owners in Kenya: A study of SMEs within Thika township in Kiambu county
Kiraithe, Peterson K
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The study focused on the factors influencing loan defaulting by the SME owners operating within Thika Township of Kiambu County. The SMEs play a pivotal role in development and sustenance of world’s economy, but not without many challenges that hinder their development. It focused on the type of loan collateral, purpose/intention of starting the SME, the need for achievement in the SME venture, the nature/type of the SME, the diversion of loan, and mode of loan repayment. The descriptive research design was adopted, where 50 questionnaires were administered to SME owners and detailed discussions of the questions conducted with 10 key informants in the SME sector. The probability and non-probability sampling techniques were used in the study. The data was analysed using descriptive techniques and the findings presented using graphs, tabulations and cross tabulations and percentages. The study found that majority of the respondents were male with college/university level of education. It also found that majority of the SME entities had been in operation for four years or less while the SME owner’s ability to manage a loan was enhanced by education, skills and experience. Majority of the SMEs are accessing loan services from the MFIs and more than half of them have ever defaulted on their loan contract. The direct cash deposits repayment mode was used by majority, with monthly repayment intervals. The majority of the respondents hold that the MFIs loaning services to SMEs have good future prospects. A majority of the SME owners disagree that the purpose of starting an SME entity could influence loan defaulting while majority of the key informants think it could. The study found that lack of need for achievement in business and diversion of loan funds influence SME owners to default on their loans while the type/nature of business and mode of loan repayment was found to be a less influencing factor of loan defaulting. The study recommends that the SME owners learn how to plough their profits back into the business to increase their operating capital in order to grow their entities. In addition, SME owners should conduct sound business research before starting their entities. The study concluded that the SME sector is a fertile ground for investment not just for governments, but SME owners and the MFIs as well.