RESEARCH obtain bank loans than large firms; instead, they






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This chapter gives the general introduction of the
research. It elaborates on the set up of small

and medium enterprises and effect of debt financing on
Small and Medium Enterprises. It

outlines the background of the study, statement of the
problem and objectives of the study,


Small and Medium Enterprises (SMEs) play a major role
in most economies, particularly in developing countries.  Formal SMEs contribute up to 60% of total
employment and up to 40% of national income (GDP) in emerging economies. These
numbers are significantly higher when informal SMEs are included.  According to our estimates, 600 million jobs
will be needed in the next 15 years to absorb the growing global workforce,
mainly in Asia and Sub-Saharan Africa. In emerging markets, most formal jobs
are generated by SMEs, which also create 4 out of 5 new positions. However,
access to finance is a key constraint to SME growth. Without access to capital,
many SMEs languish and stagnate.

SMEs are less likely to be able to obtain bank loans
than large firms; instead, they rely on internal funds, or cash from friends
and family, to launch and initially run their enterprises. About half of formal
SMEs don’t have access to formal credit. The financing gap is even larger when
micro and informal enterprises are taken into account.  Overall, approximately 70% of all micro,
small and medium-sized enterprises (MSMEs) in emerging markets lack access to
credit.  While the gap varies
considerably region to region, it’s particularly wide in Africa and Asia. The
current credit gap for formal SMEs is estimated to be US$1.2 trillion; the
total credit gap for both formal and informal SMEs is as high as US$2.6


A World Bank Group study suggests there are between
365-445 million MSMEs in emerging markets: 25-30 million are formal SMEs; 55-70
million are formal micro enterprises; and 285-345 million are informal
enterprises.  Moving informal SMEs into
the formal sector can have considerable advantages for the SME (for example,
better access to credit and government services) and to the overall economy
(for example, higher tax revenues, better regulation). Also, improving SMEs’
access to finance and finding solutions to unlock sources of capital is crucial
to enable this potentially dynamic sector to grow and provide jobs. (World
Bank, Understanding Poverty 2015).

1.1.1 Growth in
Africa and SMEs

Africa is set to have a decline in economic growth with
less than 3% average growth forecast for 2017. Nevertheless, pockets of
countries in Africa, mainly non-resource intensive countries such as Côte
d’Ivoire, Ethiopia, Kenya and Senegal, are foreseen to continue to grow at more
than 6%. According to the IMF, growth in these countries have been supported by
infrastructure investment efforts and strong private consumption. Many African
countries are turning to entrepreneurs to support future growth. With
entrepreneurship playing a vital role in the development of a vibrant and
formal small business-sized sector, there is much scope for SMEs to support
African growth.



1.1.2 Kenya’s
growth and SME prospects

Kenya’s 2017 overall GDP growth is projected at 6.4%.
This positive growth projection is based on a number of assumptions, including
increased rainfall and enhanced agricultural production, continued low oil
prices, and reforms in governance and justice. Kenya’s 2016 second quarter
growth was supported by agriculture, forestry and fishing, transportation and
storage, real estate, wholesale and retail trade. The manufacturing,
construction, financial and insurance sectors slowed down, while accommodation
and food services, mining, quarrying, electricity, water supply and information
and communication sectors recorded improvements.

In Kenya, SMEs play a key role in economic development
and job creation. In 2014, 80% of jobs created were dominated by SMEs. The term
micro and small enterprises (MSEs) or micro, small and medium enterprises
(MSMEs), is used to refer to SMEs in Kenya. Under the Micro and Small
Enterprise Act of 2012, micro enterprises have a maximum annual turnover of KES
500,000 and employ less than 10 people. Small enterprises have between KES
500,00 and 5 million annual turnovers and employ 10-49 people. Medium
enterprises are not covered under the act, but have been reported as comprising
of enterprises with a turnover of between KES 5 million and 800 million and
employing 50-99 employees.

Most SMEs fall under the informal sector called jua kali, which means hot sun or fierce
sun in Swahili. Initially, jua kali
referred to people working under the hot sun or open air. By extension, the
term now refers to people in self-employment or small-scale industries. In
other reports, jua kali refers to all
enterprises employing between 1-49 employers in all sectors. It therefore
appears that jua kali could refer to
both formal and informal sector SMEs. Kenya does not have a comprehensive
record of SMEs. While estimates put Kenya’s MSMEs at about 7.5 million
enterprises, contributing approximately 44% to the Kenyan GDP in 2008, it has
been suggested that the number of formal SMEs is more in the region of 250,000.
A 2014 CNBC news report puts SME contribution to Kenya’s GDP at about 45%.

The informal sector is estimated to constitute 98% of
business in Kenya, contributing 30% of jobs and 3% of Kenya’s GDP. The
government recognizes the role of the informal sector and seeks ways to
integrate these businesses into the formal sector. According to the 2017 Doing
Business in Kenya report, the ease with which businesses can be registered has
a bearing on the number of entrepreneurs who start businesses in the formal
sector, leading to jobs and more government revenue. In Kenya, starting a
business involves seven procedures, takes 22 days and costs 21.1% income per
capita for both men and women. Although Kenya has generally made progress in
making it easier to start a business, there are questions as to how easy starting
a business is for SMEs.

The benefits that will accrue to Kenya through
integration and skills development of its large, yet unproductive, informal
sector are significant. Fortunately, Vision 2030 acknowledges the need to
support the informal sector to raise productivity and distribution, jobs,
owners’ incomes and public revenues. Vision 2030, the country’s development
blueprint to transform Kenya into a newly industrializing middle-income
country, aims to increase annual GDP growth rates to an average of 10%. Under
its economic pillar, apart from supporting the informal sector, the country
hopes to accelerate economic growth by increasing national savings,
implementing governance and institutional reforms and addressing poor
infrastructure and high energy costs. The government is currently involved in
some infrastructure developments, which have the potential to ease some of the
constraints to doing business, such as the lack of electricity and accessible roads.
( Dr Adefolake Adeyeye , NTU-SBF Centre for African Studies 2017)



Small and medium enterprises cut across all sectors of
the economy, providing a prolific source of employment, income, government
revenue and poverty reduction. The sector comprises 98% of all businesses in
the country, employs more than 4.6 million people (30%) and accounts for 18.4%
of the country’s GDP. Total capital employed in the sector is 28 billion (GOK,
2009). The sector provides goods and services; promotes competition, innovation
and an enterprise culture and provides opportunities for the development of
appropriate technological and managerial competencies. Most SME?s in Kiambu
County face difficulties in accessing credit facilities from financial
institutions due to lack of collateral to obtain loans. This hinder growth and
expansion of these SME?s leading to poor performance of SME?s and Kiambu County
in general. SME?s is a source of employment to the youth and women in Kiambu
County; they form the basis of growth and development of an economy. Access to
credit is one of the key drivers towards development of SME?s.

financing is important in enhancing a firm’s growth. However, credit/debt
financing causes financial problem to a firm when the debt is not properly
managed. The studies particularly on large firms have paid considerable
attention on the relationship between corporate size, fixed assets and financial
leverage with data acquired from macro level. Little has been studied on how
and to what extent what type of credit financing has had   influence on the financial performance of
SMEs using data from the firm on a micro level. It is from this background that
this study established the effect of debt financing on financial performance of
SMEs in Kiambu county, Kenya. This research will focus on which type of credit
financing or credit are preferred by the common small and medium enterprises
commonly referred to as jua kali in the informal sector




investigate the effects of various types of debt/credit financing on financial
performance of small and medium enterprises in Kiambu Town, Kenya.

The rationale
behind this study is that Kiambu County is the leading innovative commercial hub for SME?s that shares its borders with five
counties; Nakuru to the west and Kajiado to the south,
Nyandarua to the North and Murang’a County to the East (GoK, 2007). Most owners of SME?s in Kiambu County invest mostly on agriculture and industries to sustain its economy.


To establish the effects of different types Credit on
financial performance of SMEs in Kiambu county.

To ascertain the effects of short-term loans on
financial performance of SMEs in Kiambu county

To determine the effects of long-term
loans on financial performance of SMEs in Kiambu county

To investigate on the relationship
between financial performance and growth of small and medium enterprises’ in Kiambu county.





The type of credit financing
has no effect on financial performance of small and medium enterprise

Short term loans have no
significant effect on financial performance of small and medium enterprise

Short term loans have no significant
effect on financial performance of small and medium enterprise

There is no relationship
between financial performance and growth of small and medium enterprise


Kiambu County is the leading innovative commercial hub for SME?s that shares its borders with five
counties; Nakuru to the west and Kajiado to the south,
Nyandarua to the North and Murang’a County to the East (GoK, 2007). Most owners of SME?s in Kiambu County invest mostly on agriculture and industries to sustain its economy. The managers and owners of these SME?s access credit from microfinance institutions. However; this cannot be achieved without removing barriers that hinder
SME?s from accessing credit
facilities from financial institutions.
 Despite these contributions   of  
their   major   barriers   to 
 performance   and development appear to be shortage of both equity financing and