Determinants of credit accessibility in the informal sector: the Case of smallholder businesses in Migori county, Kenya.
Onyango, Francis Ojwang
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The informal sector, estimated to constitute 98% of businesses in Kenya, represents 83% of total employment and created 768,000 new jobs which represents 90.7% of total new jobs created in 2019 alone. Despite the critical role played by the sector in job creation and employment, it is faced with numerous challenges and constraints one of them being access to credit. Access to credit does not only have adverse effects on the informal smallholder businesses alone but on the entire economy. The study seeks to analyze the determinants of credit accessibility in the informal sector for the smallholder businesses in Migori County. The specific objectives of the study were to identify and determine the effects of the Demographic, Socio-Economic, and the Institutional factors that significantly affect credit accessibility by the smallholder businesses in Migori County, Kenya. The study employed descriptive survey research design. Targeting 4,756 traders in total, a three-stage stratified random sampling method was employed to select the smallholder traders in the study area represented by a sample size of 476 businesspersons. Structured questionnaires and interview schedules were developed, pre-tested and used for collecting quantitative data for the study. Piloting of the study was carried out to ascertain the validity and reliability of the data collection instrument. The targeted sample smallholder businesspersons successfully interviewed were 446 in total, representing a response rate of 93.70%. Descriptive statistics and the logit model were used in analyzing quantitative data. The output from the study model indicates that 245(54.9%) of the sampled businesspersons were credit users whereas the remaining 201(45.1%) were non-credit users. Of the demographic factors (gender, age and educational level), only one variable (age) significantly and positively affected credit accessibility by the smallholder traders at 5% level (.045, p =.036). The result was consistent with the prior expectation that those with higher age may have more access to credit from the formal sources than their younger counterparts. The gender of the respondents was statistically insignificant and negatively related to credit accessibility in the study area (-.254, p =.567), contradicting the expected hypothesis that males have more access to credit. The level of education was categorized into three mutually exclusive levels namely less than high school, high school, and college/ university levels. Two dummies for the level of education were statistically insignificant though related consistently to the prior research expectations. For those with less than high school education, access to credit by the smallholder businesspersons was negatively related and statistically insignificant (-1.078, p =.130), consistent with the a priori expectation. The estimated coefficient was consistent with the a priori expectation even though statistically insignificant (.70, p =.895) for those with high school education. The dummy variable for college/university level of education did not show significant variation among the sampled businesspersons. For this reason it was not retained in the model. Experience in credit use, one of the socio-economic factors expected to influence credit accessibility was statistically significant and positively related to credit access at 1% probability (.335, p = .001), in line with the prior research expectations. Even though positively related and consistent with the a priori expectation, the contribution of the propensity to take risks by the smallholder businesspersons was insignificant (.515, p = .743) at 5%. However, all the institutional factors were found to be statistically insignificant and negatively related to credit accessibility. Even though consistent with the a priori expectation, the contribution of distance from credit source in the prediction of the model was insignificant at 5% (-.034, p = 0.215). Membership by the smallholder businesspersons to multi-purpose cooperatives and or business associations was negatively and insignificantly related to credit access by the same group in the study area, contradicting the a priori expectation (-.274, p =.529). The outcome of the study would be useful to policy makers, MFIs, academicians and future researchers in identifying innovative options and institutional arrangements that would serve as an input for formulating credit policy and advancing arguments in future research. The study concludes that a large number of the informal sector smallholder businesspersons have never accessed credit which implies a very huge potential demand for credit.