Discussion Paper No. 176 of 2015 on Access to Formal Finance: Constraints for Small and Medium Manufacturing Firms in Kenya

Abstract

Small and Medium manufacturing firms are an integral sub-sector to the Kenyan economy. However, they have limited access to finance, which limits their growth. This paper examines the constraints of access to formal finance by small and medium manufacturing firms in Kenya. The study uses the World Bank (2013) Enterprise Survey data on Kenyan manufacturing firms and applies the Probit regressions technique. The study finds that registration of firms at the start of operation, as well as the experience of the manager of the firm significantly improves access to formal finance by the small and medium enterprise. However, the perception of the firm towards corruption, as well as informal competition, negatively and significantly worsens the possibility of access to finance by the SMEs.Based on these findings, the study suggests that the government should simplify and computerize business procedures in order to curb corruption, introduce formal incentives that will entice firms to formalize, strengthen the Competition Authority to carry out advocacy on anti-competitive behaviours, and initiate joint public-private partnerships with manufacturing entrepreneurs on areas of financial management and managerial skills. The study also recommends further studies on practices of competitors from the informal sector, so as to inform specific policies. Such studies would highlight various malpractices in the informal firms, which are detrimental to the formal manufacturing SMEs in terms of accessing formal finance and their growth in general.