A historical analysis of credit access to micro and small enterprises in Kenya

Abstract

In 2006, the government-supported microfinance programmes implemented by the Kenyan government started lending credit to Micro and Small Enterprises (MSEs) using a group-lending mode, a change which represented a paradigm shift from individual lending mode. The overall aim of this research is to provide an investigation of whether the transformation of this lending policy was backed by any theoretical and empirical support. Specifically, the entirety of this study is intended to give an insight of what might have influenced the change, what informed it and what might have been overlooked. To achieve clarity and the study aim, the research is compartmentalised into three discrete studies. In the first study, a historical investigation into the factors which hindered MSEs from acquiring credit was undertaken. The second study investigated the reasons MSEs were credit rationed. The third study investigated whether the problems experienced by MSEs, associated with lack of credit access (lack of credit demand and rationing), could have been mitigated by group lending. The research utilised quantitative research design, the first two studies utilised data derived from National MSEs Baseline survey conducted in 1999. The third study utilised primary data collected from micro credit groups of the Kenya Rural Enterprise Programme (K-REP) in 2006 in Nairobi, Kenya. Various economic models and regression analysis were utilised in analysing different outcomes. In particular, the research utilised Univariate Probit, Bivariate Probit and Heckman Two-Stage Models to model various credit access outcomes. The study found that group lending largely mitigated information asymmetry- the main cause of MSEs failure to access credit. However, the study concludes that asymmetric information was not the only source of credit failure in Kenya. For group lending to work, or to have worked, it required support by other pro-MSE programme dynamics. This suggested that the government decision to change policy was partially informed by theory and practice.