Effect of Credit Financing on Financial Performance of Small and Medium Enterprises (Smes) in Thika Town, Kiambu County

Abstract

Purpose: To determine effect that credit financing has on the financial performance of SMEs in Thika Town, Kiambu County. Methodology: The study adopted a descriptive survey design and the targeted population was 468 registered SMEs in Thika town. A structured questionnaire was used to collect both qualitative and quantitative data. The quantitative data collected was analyzed for both inferential and descriptive statistics and the qualitative data from the open-ended questions were analyzed using content analysis. Results: The study found that trade credit has a significant effect on financial performance of SMEs in Thika town (B=0.804; p=0.026) and that bank credit has a significant effect on financial performance of SMEs in Thika town (B=0.956; p=0.000). The study also revealed that micro-finance credit has a significant effect on financial performance of SMEs in Thika town (B=0.783; p=0.000) and that informal associations credit has a significant effect on financial performance of SMEs in Thika town (B=0.892; p=0.002). Unique contribution to theory, policy and practice: The study concluded that bank credit had the greatest effect followed by informal associations credit, then trade credit while micro-finance credit had the least effect on financial performance of SMEs in Thika town. The study recommends that the Kenyan government should devise strategies of regulating and reducing interest rates in order to protect small and medium-sized enterprises (SMEs) from unfair shylocks who lend money at unsustainable high interest rates coupled with undisclosed fees.