Effects of finance on growth of SME in Kenya a case study of Nairobi
Statement of the Problem
In Kenya, SME have little access to finance, which thus hampers their emergence and eventual growth and survival. Financial constraint remains a major challenge facing SME in Kenya Wanjohi and Mugure (2008) and this will be evidence in this research paper. Their main sources of capital are their retained earnings and informal savings and loan associations, which are unpredictable and not very secure.
SME can rarely meet the conditions set by financial institutions, which see them as a risk because of poor guarantees and lack of information about their ability to repay loans. The financial system in most of Africa is under-developed however and so provides few financial instruments.
The researcher has come up with some of the reasons why SME find it hard to access finance in Kenya:
High interest rates by the financial institutions
Delay in the loan processing due to lack of securities and other requirements by the financial institutions.
Some of the SME do not have a good track records hence most of the local banks fear to give them the unsecured loans.
Banks are particularly nervous of smaller businesses due to a perception that they represent a greater credit risk. Kariuki’s (1995) study of bank credit access in Kenya illustrates this point further. A survey of 89 small and medium-scale firms in manufacturing and service industries, combined with secondary information from commercial banks, found that from 1985 to 1990 the average real volume of credit for the sample firms fell, except for the year 1986 which showed a marginal increase of 1.5 per cent. Small scale borrowers were found to be faced with higher nominal interest rates at higher inflation rates in the latter half of the 1980s. Moreover, the explicit transactions costs of borrowing were found to be high in relation to interest costs.
Briefly explain role of the following Financial Institutions in the economic development of Kenya: a) Kenya Industrial Estates: Kenya Industrial Estates (KIE) Limited was established in 1967 as a subsidiary of Industrial and Commercial Development Corporation (ICDC) with a major role of promoting indigenous entrepreneurship by financing and developing small scale and micro enterprises. KIE Limited ...
Because the information is not available in other ways, SME will have to provide it when they seek finance. They will need to give a business plan, list of the company assets, details of the experience of directors and managers and demonstrate how they can give providers of finance some security for amounts provided.
The researcher recognized that in the current context of the most severe financial and economic crisis in decades, various factors such as increased risk aversion, decreased liquidity, bleak prospects for economic growth, etc. are having or are expected to have a highly negative effect on SME and entrepreneurs’ access to short and long term financing.
Small firms are particularly vulnerable because:
It is more difficult for them to downsize since they are already small.
They are individually less diversified in their activities.
They have weaker financial structures or lower capitalization.
They have lower or no credit ratings.
They are heavily dependent on credit.
They have fewer options for finance, especially in financial markets. With this in view, the measures that most governments are taking or planning to take to counteract the effects of the crisis and stimulate their economies should include easing SME and entrepreneurship access to finance. Numerous money lenders in the name of Pyramid schemes comes up, promising hope among the SME that they can make it to the financial freedom through soft borrowing. The rationale behind turning to these schemes among a good number of entrepreneurs is mainly to seek alternatives and soft credit with low interest rates while making profits.
For example: - In USA small businesses represents 99. 7% of all employers, it represents 26% of America’s exports and they create 80% new jobs each year. Growth and success of a business can be measured on many different variables which also includes annual turnover, profit and employment growth. As in other businesses small businesses have been helped by factors which had contributed to its ...
The general objective of the research is to establish the effects that the financial constraints have on the survival and growth of the small and medium enterprises in Kenya.
Some of the specific objective that the researcher will bare in the study will evolve around the small and medium sized enterprises in Kenya.
To establish effect of economic activities on the survival and growth of the SME in Kenya.
To assess the impact of local commercial banks on the survival and growth of the small and medium sized enterprises in Kenya.
To establish the effect of the firm capital structure on the growth and survival of the small and medium enterprises in Kenya.
To establish the impact of government policies in Kenya on the economic growth on the survival and growth of the small and medium business.
1.5 Research Questions
How do high interest rates affect the survival and growth of the firm in Kenya?
What effect do the banks lending policies and access to credit have on the growth and survival of the SME in Kenya?
How do the government policies in Kenya on the economic growth affect the survival and growth of the small and medium sized business?
What effect do the external borrowings have on the survival and growth of the small business enterprises in Kenya?
How the economic activities affect the growth and survival of the firm in Kenya?
1.6 The significance of the study.
Small and medium sized enterprises are the backbone of virtually all economies in the world. However, the process has long been constrained by the limited availability and accessibility of financial resources to meet a variety of operational and investment needs within the SME sectors. SME and entrepreneurs play a significant role in all economies and are key agents of employment, innovation and growth. A significant number of entrepreneurs and SME could use funds productively if they were available, but are often denied access to financing, thus impeding their creation, survival and growth. Although SME form a broad spectrum as far as their relative size, sector of activity, seniority, location and performance are concerned; there is a vital need for innovative solutions for their financing in particular for innovative and high- growth SME in a globalised knowledge-based economy.
The business world has witnessed a transformation in past years. Technological innovations, cultural progress, and connectivity have all influenced the habits and customs of businesses all across the world. Globalization has been behind this change, fuelling the revolution and shaping the businesses and society of today. Globalization is defined as “the process of interaction and integration among ...
The researcher however will be interested to know how does this financial constraints really affect the growth and survival of SME and she will undertake the study t establish the necessary fact that make the growth of SME restrained in Kenya.
1.7 The scope of the study.
The Kenya government is commitment to foster the growth of SME emerged as one of the key strategies in the 1986 report Economic Management for Renewed Growth. It was reinforced as a priority in the 1989 report, The Strategy for Small Enterprise Development in Kenya a document that set out the mechanisms for removing constraints to growth of the SME sector. In 1992, the government published the SME policy report, Sessional Paper No. 2, Small Enterprises and Jua Kali Development in Kenya. This report was reviewed in 2002, leading to a new policy framework that provides a balanced focus to SME development in line with the national goals of fostering growth, employment creation, income generation, poverty reduction and industrialization
SME in Kenya have not seen much development since Kenyan independence due to financial constraints and other factors that are not going to be discussed on this research paper. Small enterprises have a potentiality of boosting a kenya economy. Although they are faced by many challenges, they still have opportunities to grow. These include linkage with multinational companies, networks with other businesses, diversification of market and products, enabling environment and franchising opportunities which is geatly being encouraged the coalition government that is currently running the government of Kenya although the impact has yet to felt on the small and medium enterpeises due to its size and limied resources
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