Impact of Credit on Micro-Enterprise Growth in Third World Countries: A Case Study of Kenya 1963 – 2004

Abstract

World countries have initiated micro-credit programs through informal savings and credit associations or cooperative savings and credit societies. The micro enterprise sector in Kenya is also known as informal sector. The micro enterprise sector in Kenya plays an important role in the provision of employment and income to a large section of the population. However, a number of studies have identified various constraints that hinder the growth of micro enterprise sector.  The constraints include lack of credit or capital, infrastructure such transport, premises and markets.  The general objective of this study was to determine the impact of credit on micro-enterprise growth in Third world countries: A Case Study of Kenya 1963-2004. The specific objectives were: to determine impact of the lack of experience of borrowers with credit institutions on the growth of SMEs; to determine the impact of the reluctance by formal institutions to lend to small enterprises on the growth of SMEs; and to assess the impact of the collateral requirements, high interest rates and administrative overheads on the growth of SMEs. The study employed a descriptive approach with a correlation research design. Descriptive design was employed to explore the impact of credit on micro-enterprise growth in Third world countries. The target population was 940 registered SMEs operating in three major cities in Kenya, Nairobi, Mombasa and Kisumu. The sample size was 188 which comprised of 20% registered SMEs. The research employed interviews and a closed questionnaire. Primary data was collected through interviews with selected entrepreneurs' associations who have accessed credit from various sources, institutions that lend principally to the MSE sector such as K-Rep Bank and KIE. The questionnaire was tailored for easy use by the respondents in the study. Document review for secondary data was also used to gather data that had been recorded. Secondary data will be collected through library research from sources such as academic papers, journals, text books, newspapers, documents from Government of Kenya, Reports from Central Bank and other financial institutions, Kenya Chamber of Commerce and the World Bank reports. The respondents were allowed 3 days to fill them after which they were collected for analysis. The questionnaire was pre-tested through piloting on some of the respondents to test its reliability. The same questionnaire was administered to the same category of respondents during the study though excluding the respondents who participated during the piloting. The answers were then compared to determine similarity. The content validity of the questionnaire was ensured by supervisors' expert opinions and colleagues'. Data analysis was done using quantitative methods. The information collected from the survey was analyzed by using statistical, mathematical and data interpretation techniques which included Simple percentage method and the five-point Likert scale. The results indicated that the respondents moderately acknowledge knowledge and willingness to take credit. Results indicated that there were only moderate ratings despite efforts to enhance credit. Further interrogation revealed that access to credit was not without challenges, and this has led to low credit take-up. The procedures and qualification criteria were cited as major impediments to credit accessibility.  Majority of respondents agreed that lending institutions are reluctant to lend to small enterprises at 75%. Government agencies like K.I.E and private institutions like K-rep exercised caution when lending to small enterprises. Although lending programmes exist in Third World countries there is no significant growth or development of microenterprises.  The reasons advanced for the slow growth is limited access to credit.  The respondents generally agreed that collateral requirements were affordable. The same moderate rating was realized on overhead costs since the entrepreneurs were the operators of businesses and some operates from their premises. However, there was a below average rating on interest rates. The respondents were taken aback by the high interest rates and therefore despite the availability of credit, entrepreneurs thought that lending institutions were reluctant to lend the result of which is to  charge high lending rates to discourage small traders.  It can then be concluded that the Third world countries' small entrepreneurs do not possess the requisite knowledge on credit facilities offered to them and this explains their lack of willingness to take up loans. It can also be concluded that the lack of financial services and access to mainstream lending through commercial banks is a major constraint on the part of SMEs.  The high interest rates were to blame for the lack of enough credit up-take. The study recommends that proper credit regulation by third world countries should be enacted to enhance credit advancement to small businesses. Consequently, a study is recommended to determine the extent of lending regulation to small businesses in Third world countries.