FACTORS AFFECTING THE EFFECTIVENESS OF BANK CREDIT IN ENHANCING THE PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES IN KENYA: A CASE OF KISUMU CITY

Abstract

Whereas bank lending to the Kenyan SME sector has grown significantly, the exponential growth has not translated to improved performance of the beneficiary SMEs as shown by the persistent high failure rate in the SME sector. This study examined factors hindering the effectiveness of bank credit in enhancing the performance of SMEs in Kenya in terms of credit terms, loan utilization and managerial competencies. Descriptive survey design was used. The study targeted 1527 SMEs within Kisumu city from which 316 were sampled using proportionate sampling. A structured questionnaire and document analysis were used to collect data. Factor analysis with multiple regression using SPSS was used to determine the influence of the three factors on effectiveness of bank credit. Findings revealed that the three factors cumulatively accounted for 24% of the variance in SME performance. Credit terms was the most significant accounting for 31.1% of the variance, Loan utilization challenges 28.8% while managerial competence contributed 24.4% of the variance in performance for a majority of SMES. Enforcement of the banking amendment act 2015, banks designing more of the products tied to specific assets and building the capacity of SMEs as need to increase investment in capital assets to be used as collateral would help make bank credit more effective on SME performance.