Effect of microfinance practices on credit accessibility by consumer based small scale business in Kisumu city

Abstract

The SME sector is important for the growth of any economy, and responsible for job creation, contribution to GDP, mopping up of productive labour and alleviation of poverty in developing economies. However, consumer-based SMEs face a number of operational challenges; ranging from financial insufficiency, credit rationing, lack of proper documentation, high interest rates and lack of collateral; all of which affect their growth and sustainability. Access of sufficient credit by SMEs leads to income creation and reduction of unemployment rates; making it a strategy in enhancing financial growth, creation new jobs, expanding tax base, and promoting innovation in a country. Whereas existing information show that financial institution’s credit lending to SME sector has increased significantly following increase in number of credit lending firms in Kenya, majority of the SMEs still face credit access challenges. Empirical studies still revealed high rate of failure in the SMEs’ sector despite the rise in bank credit accessibility. The purpose of this study was therefore to determine the effect of microfinance practices such as training programs, repayment period, and credit availability on credit accessibility parameters like loan amount and collateral security by consumer-based SMEs. The specific objectives of the study were; to establish the effect of microfinance practices on loan amount accessed by consumer-based SMEs in Kisumu City and to determine effect of microfinance practices on collateral security by consumer-based SMEs in Kisumu City. The study was guided by three theories which are financial inclusion theory, quasi-hyperbolic preference theory and the theory of financial intermediation. This study was a quantitative study which adopted correlational research design. The study was conducted in Kisumu city covering a geographical area of 297km2.The target population for the study was 80 consumer-based respondents consisting of managers and owners. A sample size of 80 potential respondents was selected through stratified random sampling. The study was conducted primarily based on primary data collected using structured questionnaire in which the study variables were measured on a Likert scale. Cronbanch’s Alpha coefficient was employed to establish the study’s reliability where all the variables showed a strong alpha of greater than 0.7 while content validity measured the instrument’s validity. Through ordinary correlation the study found that training programs, repayment period and credit availability had strong positive correlation with loan amount of Pearson correlation 0.932, 0.922 and 0.913 respectively and all significant with p values of 0.000(p<0.05). Training programs, repayment period and credit availability had strong positive correlation with collateral security of Pearson correlation 0.964, 0.897 and 0.909 respectively and all significant with p values of 0.000 (p<0.05). Regression results on effect of microfinance practices on loan amount found the proportion of variance between microfinance practices and loan amount to be at 0.894 (89.4%). The study model was positively significant with p value 0.000. The regression analysis from ANOVA indicated that there was a significant relationship between microfinance practices and loan amount with significance of 0.000 and the results had unstandardized B valuesof 0.289, 0.388, and 0.373 for credit availability, repayment period and training programs respectively. Notably, the study found that training programs, repayment period and loan availability had a statistically significant effect on loan amount with p values of 0.039, 0.024 and 0.012 respectively (<0.05) hence H01 was rejected. On the effect of microfinance practices on collateral security, the study achieved a proportion of variance of 0.935 (93.5%). The study model achieved a 0.000 significance level meaning the model is positively significant. The regression results from ANOVA showed a significant link between microfinance practices and collateral security with a significance of 0.000. Results also achieved unstandardized B values of 0.136, -0.334 and 1.390 for loan availability, repayment period and training programs respectively. The results ascertained that training program, repayment period and loan availability had a statistically significant effect on collateral securitywith p values of 0.000, 0.038 and 0.019 respectively (<0.05).The study rejected null hypotheses H02. The study concluded that microfinance practices-training programs, repayment period, and loan availability-and credit accessibility parameters; loan amount and collateral security had a positively significant correlation. The study concludes that training programs, repayment period and loan availability has a statistically significant effect on loan amount accessed by consumer-based SMEs. Noteworthy, the study concludes that training programs, repayment period and loan availability has a statistically significant effect on collateral security. The study recommends that government to put up policies and strategies that ensure SMEs access microfinance practices with ease and sufficiency. The study also recommends a partnership between MFIs and county governments and institutions in order to create awareness of their existence and the MFI loans access processes as well as the MFI practices that are beneficial to SMEs. The study therefore suggests that further research be carried out on consumer-based SMEs in the entire country to investigate the effects of microfinance practices on credit accessibility to ascertain whether there are similarities or different factors.