EFFECTS OF FINANCING CONSTRAINTS ON OPERATION, PROFITABILITY AND GROWTH OF SMALL AND MICRO ENTERPRISES: A SURVEY OF MAU – NAROK DIVISION

Abstract

Small and Micro Enterprises (SMEs) play an important role in the Kenyan Economy. The sector contributes approximately 80.6 percent of new jobs created in the country every year. Despite their significance, SMEs are faced with threat of failures with past statistics indicating that three out of five fail within the first few months. Although the role of factors such as access to funds and culture have been widely studied, influence of financing constraints on operation, profitability and growth have not received much emphasises. To bridge the gap, this research investigated the influence of financing constraints on operation, profitability and growth of SMEs. Survey research design was used because it involves interaction between the researcher and the respondent. Stratified random sampling was applied to select a sample size of 246 SMEs from a population of 677. Primary data was collected through use of questionnaires while secondary data was collected through documentary analysis of past sales records. The data was analysed by use of descriptive statistics. Inferential statistics which include Pearson’s Correlation coefficients, Regression and chi-square test were also applied. The results show that majority of the interest rates between 15% and 31% charged by financial institutions were high but businesses could survive so long as loan availability was not a challenge. Better financial skills had an influence on the SMEs’ growth, operation and profitability. Access to finance was a major constraint to business growth since majority of the respondents (36.3%) cited lack of bank financing as a major problem. This study recommends that the government ought to provide conducive institutional environment in formal banking and non-banking set up, providing regulatory frameworks and fostering competition so that the rates of interest provided by the institutions can reduce to a reasonable market rate. It should revise its regulatory framework in order to create and encourage an environment that encourages more financial institutions in the study area. Since majority of small enterprises lack finance, government should establish friendly small loaning system.