Credit History and Credit Rationing among Registered Small and Medium Enterprises in Kiambu County, Kenya

Abstract

Substantial empirical evidence has shown that credit rationing is strongly experienced by Small and Medium Enterprises in Kenyan. On average Small and Medium Enterprises (SMEs) are awarded at most 17.4 percent share of amount of loans available in the credit market. The paradox surrounding credit rationing among SME is that sufficient credit is always available to SME sector, however the inadequate financing still persists. Several studies have pinpointed the factors contributing to the financial credit rationing; however, they have resulted to conflicting conclusions which creates a motivation for this study. Further, according to Resource Based Theory, business credit history determines the competitive advantage of SMEs in accessing bank credit. Therefore, this study sought to establish the effect of business credit history on credit rationing among registered Small and Medium' Enterprises in Kiambu County, Kenya. The study adopted positivism philosophy and utilized explanatory study design. The target population was 41,115 registered and active Small and Medium Enterprises and a sample size of 397 was used. The study used both structured questionnaire and data collection sheet to collect data. The data was analyzed using descriptive statistics and inferential statistics. Logistic regression model and moderating logistic regression model were used to test the respective hypotheses. The findings from logit analysis indicated that credit history have a statistical significance effect on credit rationing (p-value = 0.046< 0.05). The findings from the testing of moderating effect of inflation on the relationship between business credit history and credit rationing indicated that there exists statistically significant moderating effect of inflation on the relationship between business credit history and likelihood of SME being credit rationing (p- value = 0.002< 0.05). Guided by the findings, a number of recommendations were made. As envisioned by the Vision 2030, it should be mandatory for all SMEs to be registered under credit reference bureaus. By doing this, it will be possible to determine their past credit performance at minimal cost and rate them from facts rather than mere perception. Lastly, the existence of moderating effect of inflation implies that the government should pursue to maintain inflation levels as per Vision 2030 projections of one -digit figure.