Financial constraints of small and medium enterprises: A case study of Kisumu county, Kenya

The objective of this paper is to analyse and present the financial constraints faced by the small and medium enterprises in Kisumu County. According to national baseline survey (1999), 36.2% of the Small and Medium sized Enterprises (SMEs) in Kenya, reported that their business closed down due to shortage of working capital. Despite the fact that the SMEs had operated for some years, about 94.2% of the respondents still found it difficult to obtain bank funds to finance business development. The survey also showed that only 5.8% of the Small and Medium sized Enterprises interviewed in 1999 applied for loans. The survey therefore suggested the existence of a gap between the demand for bank credit by SMEs and the supply of funds by banks. This gap poses a question mark and triggers the need to conduct a study on the financial constraints of small and medium enterprises in Kisumu County. The factors identified to affect the supply side were creditworthiness of the borrower, collateral requirement by the banks, Risk default and business plan. Amongst Kenyan banks, the lack of acceptance collateral or security as a guarantee towards repayment of loans was the biggest SME-specific hindrance and obstacle to SME lending, cited by 100 percent of the banks. It was followed by risk default, creditworthiness of the borrowers, a suitable business plan and finally quality of management.