Access to Credit and Firm Performance: Evidence from Micro and Small Enterprises in Murang’a County, Kenya

Johnson Muguro Karanja^1, and Stephen Makau A. Muathe¹

¹School of Business, Economics and Tourism Kenyatta University

Cite this paper:
Johnson Muguro Karanja and Stephen Makau A. Muathe. Access to Credit and Firm Performance: Evidence from Micro and Small Enterprises in Murang’a County, Kenya. Journal of Business and Management Sciences. 2025; 13(3):70-80. doi: 10.12691/jbms-13-3-4

Abstract

Report on the Kenya National Human Development showed that among the challenges still facing MSEs in Kenya is lack of access to credit due to financial institutions requiring collateral as well as inadequate entrepreneurial skills. Despite the provision of affordable credit through the funds, micro and small enterprises in Murang’a County that has continued to record poor performance, which begs the question of the effectiveness of the various efforts and their contribution to improved performance of the MSEs. The study focused on collateral requirement, credit assessment, credit information sharing and cost of credit and their implication on performance of micro and small enterprises in Murang’a County, Kenya. The study was anchored on the resource-based view, dynamic capability theory, pecking order theory, entrepreneurship theory of Shane, innovation of entrepreneurship theory as well as the traits theory. The study adopted a descriptive research design where 1,020 registered SMEs in Murang’a County were targeted, of which 287 were selected through a stratified and random sampling techniques. A questionnaire was used to collect primary data which was later analyzed through means and standard deviations as well as multiple regression analysis and presented through tables and figures. The study established that collateral requirements (β=.420, p<0.05), credit assessment (β=.402, p<0.05), credit information sharing (β=.310, p<0.05) and cost of credit (β=.599, p<0.05) all significantly predicted performance of the studied firms. It was recommended that financial institutions should adopt flexible collateral policies such as group-based guarantees to enhance credit access by MSEs lacking traditional collateral. They should also simplify credit assessment procedures and focus on easily accessible data such as sales volume, while offering capacity building to MSE on financial record keeping to improve their credit worthiness. To enhance credit information sharing, the Central Bank of Kenya (CBK) and credit reference bureaus (CRBs) should promote awareness and accessibility of credit reporting for MSEs, enabling them to build positive credit histories. On cost of credit, the CBK should enforce stricter regulations on interest rates and appraisal fees, to make credit more affordable. Financial institutions should also reduce accompanying costs such as legal and valuation fees. Murang’a county government on its part, should, in collaboration with MSEA, implement capacity building programs on financial literacy and entrepreneurial skills to improve the ability of MSEs to meet credit assessment criteria.

Keywords:
Access to credit Business performance Collateral requirement Credit assessment credit information sharing cost of credit regression analysis Kenya

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