Financial Market Failure Constraints and Access to Finance by Small and Medium Enterprises in Kenya

Abstract

SMEs experience unique constraints in accessing finances from banks and other institutions. The main objective of the study was to establish the effects financial market failure constraints on access to finance by Small and Medium Enterprises in Kenya. The specific objectives of the study were to: examine the effects of information asymmetry on `access to finance by SMEs in Kenya, evaluate the effects of collateral requirement on access to finance by SMEs in Kenya, assess the effects of lending relationship on access to finance by SMEs in Kenya analyse the effects of credit restriction on access to finance by SMEs in Kenya and to analyse the moderating effects of Credit Guarantee Schemes on the effects of market failure constraints on access to finance by SMEs in Kenya. The study used correlational and descriptive design. Questionnaires were used to collect data from the respondents. The target population of the study was 120,000 SMEs who had applied for loans in Co-operative bank, Equity bank and Kenya Commercial bank in the last two years (2014-2015). Purposive, stratified and simple random sampling were used to draw a sample size of 384 SME owners. The SMEs were stratified into small and medium enterprises where 288 were small while 96 were medium. The study used both qualitative and quantitative data. Content analysis was used to analyse the qualitative data where the texts were categorized into themes corresponding to the study’s objectives and interoperated accordingly. The quantitative data was analysed using Statistical Package for Social Science Version 21 which generated descriptive statistics and inferential statistics. Multiple linear regression analysis was used to establish the effects of the market failure constraints on access to finance by SMEs in Kenya. Moderated Multiple Regression analysis was used to establish the moderating effect of CGS on the effects of market failure constraints on access to finance for SMEs. The results indicated that the market failure constraints determined access to finance by SMEs in Kenya. The study indicated that the SMEs faced challenges in xxii accessing finance due to information asymmetry between them and banks, lack of collateral required by banks, poor lending relationship between the banks and SMEs and credit restriction by banks. The study indicated that there is a negative correlation between information asymmetry, collateral requirements, credit restriction and access to finance by SMEs in Kenya, while there is a positive correlation between lending relationship and access to finance by SMEs in Kenya. Regression analysis showed that variation in access to finance by SMEs in Kenya can be explained by information asymmetry, collateral requirements, lending relationship and credit restriction. The overall multiple regression model indicated that all the four market failure constraints affects access to finance by SMEs in Kenya. Credit guarantee schemes were found to have a moderating effect on the relationship between market failure constraints and access to finance by SMEs in Kenya. The study concluded that availability of information required by banks, availability of collateral required by banks, improvement of lending relationship between the banks and SMEs and relaxation of credit restriction by banks can improve access to finance by SMEs in Kenya. The study recommended the use of partnerships by increasing the number of intermediaries between the SMEs and the banks to reduce information asymmetry. The study recommends that as the SMEs acquire assets for their use, they should consider the type of assets required by the banks in order to increase their access to credit from banks. The study concluded that there is a moderating effect of credit guarantee scheme on market failure constraints. The study recommends the government to provide technical assistance to the financial institutions which advance credit to SMEs. The study recommends that SMEs should be encouraged to take loans through CGS in order to reduce the negative effects of the market failure constraints.