BUSINESS SPECIFIC FACTORS AND MICROFINANCE CREDIT RATIONING AMONG REGISTERED SMALL AND MEDIUM ENTERPRISES IN KAKAMEGA COUNTY, KENYA

Abstract

Most businesses limit credit in order to ensure accountability. Insufficient loan facilities from financial institutions limit the full potential of small and medium-sized businesses. According to Financial Sector Deepening, enterprises SMEs get about 23.4% of all loans in the world, while big businesses get more than 70% of all loans. National and county governments continue to give money to the Kakamega Trade Development Board. Nevertheless, only 1,200 small businesses being 16.5% of the 12,108 registered SMEs in Kakamega County have gained from the Ksh 28.1million from joint SMEs board as of 2022. According to this, the Kakamega Trade Development Board and the two states are still a long way from reaching their goals. The primary goal of the study was to look into the impact of business-specific determinants on microfinance credit rationing among registered small and medium-sized firms in Kakamega County, Kenya. The specific objectives were to determine the impact of business size, collateral, and repayment capacity on microfinance credit rationing among registered small and medium enterprises in Kakamega County, Kenya, as well as to investigate the moderating effect of profitability on the relationship between business specific factors and microfinance credit rationing. Credit rationing theory, information asymmetry theory, and Financial Accelerator Theory all contributed to the study's development. This study utilized a combination of causal and descriptive research designs. The study employed primary data, which were collected by questionnaires. Cronbach alpha was used to assess reliability, while content validity was examined. Descriptive analysis consisted of frequencies and percentages, and inferential analysis included Pearson correlation and regression analysis. Data was given in tables. The study discovered that firm size influenced credit award. The results showed that there is a direct association between firm size and credit rationing (R=0.689, P=0.000), as well as collateral and credit rationing (R=0.693, P=0.000). The findings indicated that there is a direct association between repayment capacity and credit rationing (R=0.701, P=0.000). The results revealed that there is direct relationship between profitability, business specific factors and credit rationing (R=0.729, P=0.001). This implies that profitability had a significant moderating effect. This led to rejection of hypotheses H01-H04: The analysis concludes by deriving policy and practical suggestions based on the specified objectives. It was hypothesized in the study that management of the SMEs in the Kakamega County must establish a credit policy manual that would be used in recovering the debts, regardless of the size of the organization. The management of SMEs in Kakamega County should monitor the collateral base to enhance their power of borrowing. Management of Sacco should involve stakeholders in formulating the sensitivity to repayment capacity policies. Repayment capacity increase cost of credit and therefore impede ability of borrowers to service their credit. In regard to profitability SMEs in Kakamega County should strive to make profits that would make them easily access capital and avoid excessive credit rationing shocks.