Business Repayment Capacity and Credit Rationing Among Registered Small and Medium Enterprises in Kiambu County, Kenya

Abstract

Several policies have been developed and implemented with intention to reducing credit rationing among Small and Medium Enterprises (SMEs) worldwide. Despites all this efforts, SMEs in Kenya hold at most 17.4 percent share of a mount of loans available in the credit market. Empirical evidence on business repayment capacity and credit rationing, documents variation in methodological aspects as well as conceptual outlook. These empirical and methodological gaps form a motivation for the current study. Hence, the study sought to establish the effect of business repayment capacity 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, active SMEs in Kiambu-County, out of which, a sample size of 397 was purposely selected. Using logit analysis, the study found that business repayment capacity has a statistical significance effect on likelihood of SMEE being credit rationed as indicated by p-values of (p = 0.000). Additionally, the study found a statistically significant moderating effect of inflation on the relationship between business repayment capacity and credit rationing (p=0.0.017). In view of the findings, the study recommends that SMEs in Kiambu County should improve on the repayment capacity by managing their sales and expenses in a manner to improve on their net profits. Further, due to the fact that determination of repayment capacity of SMEs may be difficult in the presence of information asymmetry, the study recommends to the registrar of businesses that there should be enforcement of financial reporting by the SMEs. The existence of moderating effect of inflation is an indication that the government should maintain inflation rate as per Vision 2030 projections at one-digit figure.