Cost of Credit and Performance of Small and Medium Enterprises (SMEs) in Kenya: The Moderating Role of Financial Literacy
Abstract
Access to affordable credit remains a decisive factor in the growth and sustainability of small and medium enterprises in developing economies. This study examined the effect of the cost of credit on the performance of small and medium enterprises (SMEs) in Kenya, with financial literacy considered as a potential moderating factor. The study was Guided by Transaction Cost Theory, Credit Rationing Theory, and the Balanced Scorecard framework. The study adopted a descriptive research design and targeted more than 1.5 million registered SMEs across the country. A sample size of 385 was used. Data was collected through structured questionnaires and analyzed using descriptive statistics and multiple regression. Descriptive results showed that respondents rated the cost of credit highly as a barrier (mean = 3.99), while financial literacy averaged 3.98 with gaps in practical credit management skills, and business performance averaged 3.93 with constrained profitability and employment outcomes. Regression analysis revealed that the cost of credit explained 71.7 percent of the variation in performance with a significant negative effect (B = -0.832, p < 0.05), while the moderating effect of financial literacy remained insignificant (p = 0.231) thus indicating that knowledge alone cannot offset systemic credit costs. The study concludes that policy measures to reduce borrowing costs, enforce transparent lending practices, and promote flexible repayment structures are critical for enhancing financial inclusion and enterprise sustainability in Kenya.
Keywords: Cost of credit, business performance, financial literacy, small and medium enterprises, SMEs, Transaction Cost Theory, Kenya.
References
Ahiawodzi, A. K., & Adade, T. C. (2012). Access to credit and growth of small and medium scale enterprises in the Ho Municipality of Ghana. British Journal of Economics, Finance and Management Sciences, 6(2), 34–51.
Ayele, S. (2018). Small and medium enterprises in Ethiopia: Development, challenges, and policy responses. Journal of Business and Economic Development, 3(2), 17–25.
Beck, T., & Demirgüç-Kunt, A. (2006). Small and medium-size enterprises: Access to finance as a growth constraint. Journal of Banking & Finance, 30(11), 2931–2943.
Beck, T., Demirgüç-Kunt, A., & Maksimovic, V. (2008). Financing patterns around the world: Are small firms different? Journal of Financial Economics, 89(3), 467–487.
Central Bank of Kenya. (2023). Credit survey report. CBK.
Coase, R. H. (1937). The nature of the firm. Economica, 4(16), 386–405.
Haritone, R., & Mirie, M. (2016). The effect of capital structure on financial performance of small and medium enterprises in Nairobi County, Kenya. International Journal of Finance and Accounting, 1(1), 1–16.
International Energy Agency. (2023). Africa energy outlook 2023. OECD/IEA.
Kaplan, R. S., & Norton, D. P. (1992). The balanced scorecard: Measures that drive performance. Harvard Business Review, 70(1), 71–79.
Kenya Bankers Association. (2019). SME banking industry report. KBA.
Kenya National Bureau of Statistics. (2019). Economic survey 2019. KNBS.
Liedtke, M. (2019). Constraints of credit access on SMEs in South Africa. South African Journal of Business Management, 50(1), 1–9.
Lusardi, A., & Mitchell, O. S. (2018). The economic importance of financial literacy: Theory and evidence. Journal of Economic Literature, 52(1), 5–44.
Mburu, P., & Njogu, L. (2021). The effect of cost of credit on financial performance of SMEs in Kenya. International Journal of Economics and Finance, 13(2), 112–122.
Mutinda, P. (2020). Role of small enterprises in economic development in Kenya. African Journal of Business Management, 14(5), 154–163.
Noman, A. (2021). Access to finance for SMEs: Issues and challenges. International Journal of Business and Management, 16(1), 45–55.
Odhiambo, J. O. (2023). Lending rates and performance of SMEs in Kenya. African Journal of Finance & Management, 32(1), 67–79.
Ondabu, I. T. (2019). Effects of hidden costs of credit on SME sustainability in Kenya. International Journal of Business and Social Science, 10(3), 45–52.
Sang, P. (2021). Credit access and SME growth in Kenya. Journal of Finance and Investment Analysis, 10(2), 67–79.
Stiglitz, J. E., & Weiss, A. (1981). Credit rationing in markets with imperfect information. American Economic Review, 71(3), 393–410.
Tita, A., & Aziakpono, M. (2017). Determinants of SME access to finance in sub-Saharan Africa. African Finance Journal, 19(1), 1–26.
Williamson, O. E. (1985). The economic institutions of capitalism. Free Press.
World Bank. (2019). World development report 2019: The changing nature of work. World Bank Publications.
