Effect of Credit Financing on Financial Performance of Small and Medium Enterprises (Smes) in Thika Town, Kiambu County
DOI:
https://doi.org/10.47941/ijf.1395Keywords:
Credit financing, Bank Credit, Micro-Finance Credit, Informal Associations Credit, Trade Credit, Financial Performance.Abstract
Purpose: To determine effect that credit financing has on the financial performance of SMEs in Thika Town, Kiambu County.
Methodology: The study adopted a descriptive survey design and the targeted population was 468 registered SMEs in Thika town. A structured questionnaire was used to collect both qualitative and quantitative data. The quantitative data collected was analyzed for both inferential and descriptive statistics and the qualitative data from the open-ended questions were analyzed using content analysis.
Results: The study found that trade credit has a significant effect on financial performance of SMEs in Thika town (B=0.804; p=0.026) and that bank credit has a significant effect on financial performance of SMEs in Thika town (B=0.956; p=0.000). The study also revealed that micro-finance credit has a significant effect on financial performance of SMEs in Thika town (B=0.783; p=0.000) and that informal associations credit has a significant effect on financial performance of SMEs in Thika town (B=0.892; p=0.002).
Unique contribution to theory, policy and practice: The study concluded that bank credit had the greatest effect followed by informal associations credit, then trade credit while micro-finance credit had the least effect on financial performance of SMEs in Thika town. The study recommends that the Kenyan government should devise strategies of regulating and reducing interest rates in order to protect small and medium-sized enterprises (SMEs) from unfair shylocks who lend money at unsustainable high interest rates coupled with undisclosed fees.
Downloads
References
Achode, B. M., & Rotich, G. (2016). Effects of accounts payable as source of financing on performance of listed manufacturing firms at the Nairobi Securities Exchange. International Journal of Research Studies in Agricultural Sciences, 2(4), 24-32.
Akerlof (1970). Introduction to Information Asymmetry Theory. Sage publications
Akerlof, G. A. (2020). Sins of Omission and the Practice of Economics. Journal of Economic Literature, 58(2), 405-18.
Andrieş, A. M. (2009). Theories regarding financial intermediation and financial intermediaries–a survey. The USV Annals of Economics and Public Administration, 9(2), 254-261.
Auma, L. A. (2018). Factors Affecting the Effectiveness of Bank Credit in Enhancing the Performance of Small and Medium Enterprises in Kenya: A Case of Kisumu City (Doctoral dissertation, JKUAT-COHRED).
Bach, T., Le, T., & Bui, Y. (2021). Informal short-term borrowings and SMEs’ performance in a credit crunch: Evidence from vietnam. The Journal of Development Studies, 57(8), 1321-1335.
Baker, H. K., Pattnaik, D., & Kumar, S. (2020). Trade credit and firm profitability: Empirical evidence from India. International Journal of Finance & Economics, 27(4), 3934-3953.
Benigno, M. B., & Khristina, K. E. (2018). Analysis of People's Business Credit in The Bank Rakyat Indonesia.
Cole, R. A. (2018). Bank credit, trade credit or no credit: Evidence from the Surveys of Small Business Finances. Trade Credit or No Credit: Evidence from the Surveys of Small Business Finances (July 31, 2018).
Emery, G. W. (1984). A pure financial explanation for trade credit. Journal of financial and quantitative analysis, 19(3), 271-285
Fischer, G., & Ghatak, M. (2011). Spanning the chasm: Uniting theory and empirics in microfinance research. In The handbook of microfinance (pp. 59-75).
Fisman, R., & Love, I. (2003). Trade credit, financial intermediary development, and industry growth. The Journal of finance, 58(1), 353-374.
Ghatak, M., & Guinnane, T. W. (1999). The economics of lending with joint liability: theory and practice. Journal of development economics, 60(1), 195-228.
Gichuki, J. A. W., Njeru, A., & Ondabu, I.T. (2014). The challenges facing micro and small enterprises in accessing credit facilities in Kangemi Harambee Market in Nairobi City County, Kenya. International Journal of Scientific and Research Publications, 4 (12), 1-25.
Gumbo, N. (2020). The impact of trade credit use on corporate profitability: The case of manufacturing firms listed on the Zimbabwe Stock Exchange (2009-2017) (Doctoral Dissertation, University of Zimbabwe).
Hassan, D. N., Aku, S. U., & Habakuk, A. (2017). Small and medium enterprises: A tool for economic growth and development in Nigeria. International Journal of Advanced Academic Research, Social & Management Sciences, 3(9), 130-143
Kapkiyai, C., & Mugo, R. (2015). Effect of trade credit on financial performance of small-scale enterprises: evidence of Eldoret town, Kenya. International Journal of Economics, Commerce and Management, 3(9), 184-189.
Kenya National Bureau of Statistics (2019). National Micro and Small Enterprises Baseline Survey 2019, Survey results, The Kenya National Bureau of Statistics (KNBS), Kenya.
Kinsella, A., Well, B., & Cart, S. (2017). Drivers SMEs Performance. A holistic and multivariate approach. Small Business Economics, 48(4), 883-911.
Kinyua, J. (2014). Effect of access to micro financing on financial performance of small and medium sized enterprises in Gikomba Market, Nairobi County (Doctoral dissertation, University of Nairobi).
Klapper, L., Laeven, L., & Rajan, R. (2012). Trade credit contracts. The Review of Financial Studies, 25(3), 838-867.
KNBS. (2018). Economic Survey Report. Nairobi: Ministry of Devolution and Planning.
Leshem, S., & Trafford, V. (2007). Overlooking the conceptual framework. Innovations in education and Teaching International, 44(1), 93-105.
Makena, P., Kubaison, S., & Njati, C.I. (2014). The challenges facing women entrepreneurs in accessing business finance in Kenya: A case study of Ruiru Township, Kiambu County Kenya. Journal of Business and Management, Vol. 16, 83-91.
Mbugua, C. (2017). Effect of informal financial sector services on the performance of women owned enterprises in Nakuru town, Kenya (Doctoral dissertation, Kabarak University).
Mulwa, P. N. (2014). The effect of bank credit on financial performance of small and medium enterprises in Dagoreti north constituency (Doctoral dissertation, University of Nairobi).
Muriithi, S. M. (2017). African small and medium enterprises (SMEs) contributions, challenges and solutions. European Journal of Research and Reflection in Management Sciences, 5(1), 36-48
Muriu, W. M., & Thiongo, K. (2021). Effects of Informal Saving Schemes on Livelihoods in Laikipia County, Kenya. International Journal of Research in Social Science and Humanities (IJRSS) ISSN: 2582-6220, DOI: 10.47505/IJRSS, 2(8), 1-16
Ndemi, E. G., & Mungai, J. (2018). Formal credit financing and financial performance of SMEs in Nanyuki town, Kenya. International Academic Journal of Economics and Finance, 3(2), 179-196.
Njenga B., K. (2018). The effect of selected factors on the choice of Capital structure of SMEs in Kiambu County, Kenya. (Masters’ thesis, Egerton University).
Nshimirimana, E., Githui, T., & Muhavani, A. (2021). Effect of Credit Financing on Financial Performance of Small and Medium Enterprises in Nairobi Central Business District, Kenya. Journal of Finance and Accounting, 5(2), 21-33
Omondi, R.I.A & Jagongo, A. (2018). Microfinance services and financial performance of small and medium enterprises of youth SMEs in Kisumu County, Kenya. International Academic Journal of Economics and Finance, 3(1), 24-43.
Rokkan, S. (2018). I. Cross-national survey research: historical, analytical and substantive contexts. In Comparative survey analysis (pp. 5-55). De Gruyter Mouton.
Rono, J. (2018). Role of financial knowledge on extent of credit access and performance of women farm enterpreneurs in Kericho County, Kenya (Doctoral dissertation, Egerton University).
Santos, P., & Barrett, C. B. (2011). Persistent poverty and informal credit. Journal of Development Economics, 96(2), 337-347.
Spence, A. M. (1973). Time and communication in economic and social interaction. The Quarterly Journal of Economics, 87(4), 651-660.
Tambunan, T. (2019). Recent evidence of the development of micro, small and medium enterprises in Indonesia. Journal of Global Entrepreneurship Research, 9(1), 1-15.
Tekola, H., & Gidey, Y. (2019). Contributions of micro, small and medium enterprises (MSMEs) to income generation, employment, and GDP: Case study Ethiopia. Journal of Sustainable Development, 12(3), 46-81.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2023 Joseph Makau David, Dr. Lucy Wanjiru Njogu, PhD
This work is licensed under a Creative Commons Attribution 4.0 International License.
Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution (CC-BY) 4.0 License that allows others to share the work with an acknowledgment of the work’s authorship and initial publication in this journal.
