The effect of credit policy on profitability of manufacturing small and medium sized enterprises in Nairobi county, Kenya

Abstract

It is to be appreciated that SMEs and mostly manufacturing SMEs that deal with value addition are very important in terms of employment, wealth creation, and solving many other social problems which come with unemployment and slower economic growth. However many problems encounter SMEs and as a result most SMEs fail before three years after their start. Given this high failure rate, it becomes vital to study the impact of credit policy on financial returns of manufacturing SMEs. This is to gather more insights that can ensure that SME survive, grow and play their expected role in economic growth and development. Therefore, this study sought to determine the effect of credit policy on profitability of manufacturing SMEs in Nairobi County. The study adopted a descriptive research design. The target population was all the manufacturing in Nairobi County from which 50 SMEs were sampled. The study used secondary data which was obtained from SMEs financial statement for five years from 2009 to 2013. Multiple regression analysis was used to analyze data. The significance of the results was tested using using t-test, z tests and the ANOVA. The study found that credit policy is positively related to manufacturing SMEs profitability with a coefficient of correlation of 0.83 and coefficient of determination of 0.69. Credit policy was also found to have strong positive relationship with growth in sales as shown by coefficient of correlation of 0.896 and R thorough credit appraisal to ensure reduced costs of bad debts and debt administration costs. The government and policy formulators should come up with ways of reducing cost of financing to ensure that manufacturing SMEs are able to finance receivables since the lower the cost of financing, the higher the credit sales hence increase in sales and profitability.