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Causes of Financial Distress: A Survey of Firms Funded by Industrial and
Commercial Development Corporation in Kenya.
Dr. Florence Memba (Corresponding Author)
Lecturer Department of Commerce and Economics Studies in the School of Human Resource Development,
Jomo Kenyatta University of Agriculture and Technology, Nairobi (62,000-00200), Kenya.
Abuga Nyanumba Job
MBA Student- Department of Commerce and Economics Studies in the School of Human Resource
Development, Jomo Kenyatta University of Agriculture and Technology, Kisii (1952-40200), Kenya.
This study was undertaken with the aim of analyzing the causes of financial distress and its effects in firms funded
by Industrial and Commercial Development Corporation in Kenya. The study analyzed the causes of financial
distress using Weighted Mean Score and Factor Analysis. The period of study was from 2009 to 2012. It was
established that the main causes of financial distress are endogeneous variables which had the highest weighted
mean score as compared to exogeneous variables. Similarly, it was noted that the most significant causes of distress
were improper capital decision, inadequacy of capital, access to credit, shortage of skilled manpower, poor
accounting records and poor internal Management. Through Factor Analysis, Finance Factor was the main cause of
financial distress in comparison with Management, Accounting System, Policy Changes and Liquidity Factors.
Key Words: Financial Distress, Liquidation, Bankruptcy, Leverage, Non-Performing Loans and Insolvency.
1.1. Background
Immediately after independence, the financial sector in Kenya was unable to serve the interest of Africa farmers
and businessmen, or provide adequate long- term capital to finance economic growth. This was largely due to the
inherent weak structure of the sector at the time as reported in The Kenya Institute for Public Policy Research and
Analysis (KIPPRA) of 2006. In response, the government of Kenya took deliberate efforts to set up various
Development Financial Institutions (DFIs) with the responsibility to provide enterprises and projects with equity
and long-term loans that commercial banks were unable or unwilling to supply (Popiel, 1994).
Some of the key DFIs in Kenya include the Industrial and Commercial Development Corporation (ICDC), the
Development Financial Corporation of Kenya (DFCK), the Kenya Industrial Estates (KIE) and Industrial
Development Bank (IDB) (Namusonge, 2004). The Government of Kenya established the Industrial Development
Bank (IDB) as a financial institution in 1973. Its main objective was to help further the economic and industrial
development of the country. IDB is mandated by the government to facilitate the industrial and economic
development of the country through the provision of: medium and long term finance, working capital, machinery
finance, export trade related banking facilities and guarantee for loans from other sources and corporate advisory
service (IDB, 2007).
Kenya Industrial Estates (KIE) which is a wholly government owned financial institution, finances small scale
industries in Kenya. KIE was curved out of the ICDC by an Act of Parliament in 1967 to promote small indigenous
enterprises in Kenya (Namusonge, 2004). Since the establishment of KIE in 1967, the institution has been keen in
promoting entrepreneurship by financing small and medium enterprises managed by indigenous Kenyans.
ICDC was established in 1954 under the name, Industrial Development Corporation (IDC). Its main objective was
to encourage local and foreign entrepreneurs to work together in promoting industrial development in the country
(ICDC, 2006). After Kenyas independence in 1963, the introduction of commercial activities under its purview
expanded the Corporations scope, necessitating the change of name to ICDC (Namusonge, 2004). Its objective at
the time was to accelerate industrial and commercial development in the country by assisting indigenous African
entrepreneurs by providing credit facilities to purchase business premises and establish enterprises. This was in

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response to the corporations new task of assisting the people to participate actively in the economic development
of their nation (Namusonge, 2004). The table 1.1 shows the list of DFIs in Kenya, the year of incorporation and the
products they offer.
Table 1.1 Development Finance Institutions in Kenya
DFI Year Established Products Offered
1. ICDC 1954 Equity and loans in medium-and large scale industrial and
commercial projects & Loans for small-scale projects
2. DFCK 1964 Equity and loans in SME projects mainly manufacturing
3. ADC 1965 Management of state and private farms and equity and loans in
agro- industrial enterprises
4. KTDC 1965 Equity and loans in tourism projects and hotel management
5. KIE 1967 Development of industrial estates
6. AFC 1969 Provision of agricultural loans
7. IDB 1973 Equity and loans in medium and large scale industrial projects
Source: Njenga, Ngugi and Mwaura (2006)
Like in other Sub-Saharan Africa countries, the DFIs were specifically established to alleviate perceived market
failures in the provision of long-term credit and equity to industrial as well as agricultural enterprises (KIPPRA,
2006). Experience shows that Europe was able to go through reconstruction and industrial development because it
was able to access long-term capital from multilateral development institutions. However, unlike some countries,
Kenya has not managed to reap significant benefits from DFIs. For example, the Development Bank of Japan,
which focuses on the provision of supplement long term funding to qualified infrastructure projects, has shown a
favourable performance with a return on equity of 6.5 per cent in 2004. Similarly, the Business Development of
Canada, a leading SME financier in Canada, also has shown encouraging performance with an average return on
equity of 7.1 per cent (Ghani, 2005). In South Africa, the Industrial Development Corporation has evolved from
being a leading industrial player at national level to being the first Africa DFI to have its mandate extended to the
rest of Africa continent (KIPPRA, 2006). In Kenya, DFIs have experienced several constraints that have made
them not fulfill their mandates. These constraints are political interference, poor performance of projects,
inadequate funding and multiplicity of reporting, bureaucracy which slows down decision making process among
others (KIPPRA, 2006).
The many years of DFI mismanagement and lack of adequate funding from government is clearly reflected in the
firms they have funded. For example, in Uchumi Supermarket Ltd, where ICDC has a shareholding of 32%, it has
been experiencing financial and operational difficulties occasioned by sub-optimal expansion strategy coupled with
weak internal control systems (Uchumi, 2010). Similarly, Agro- Chemical Corporation Ltd, where ICDC has a
shareholding of 28.8%, has over the years been unable to service the Government of Kenya guaranteed loan due to
failure in the original business concept. Moreover, 2 ICDC funded firms are under liquidation, 5 under receivership
(ICDC, 2006) and 12 are earmarked by Privatization Commission of Kenya (PCK) for privatization due to non-
performing loans or poor performance in general. This is a clear indicator that the firms funded by ICDC are
experiencing financial distress.
Financial distress can be defined as a situation in which an institution is having operational, managerial and
financial difficulties (Adeyemi, 2011). The value of any company reduces through the costs it undergoes during the
period of distress. Direct costs of insolvency include auditors fees, legal fees, management commissions, and other
payments while indirect costs are those costs related to the action of employees, suppliers, investors and
shareholders (Pandey, 2005). Financial distress decreases the incentives of the employees to work hard and
stimulates them to renegotiate their compensation packages or to leave the company. Both declining productivity
and replacement of employees are costly and destroy the companys value. Competitors also may pursue an
aggressive marketing and price strategy in order to attract customers of the vulnerable company and, therefore,
squeeze the troubled competitor out of the market. As a consequence, the distressed company suffers losses in sales
leading to a loss of the market share (Natalia, 2007).

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According to Pandey (2005), suppliers curtail or discontinue granting credit to the firm fearing liquidation.
Creditors become less tolerant when a firm faces financial problems. For investors, they are not ready to supply
capital to the distressed firm or they make funds available at high costs and rigid terms and conditions. Non-
availability of funds on acceptable terms could adversely affect the operating performance of the distressed firm.
On the other hand, Shareholders may be tempted to undertake risky projects using whatever cash the firm is left
with. If a risky project succeeds, their gain can be substantial. If the project fails, the creditor will suffer loss.
Lastly, the managers generally have a tendency to expropriate the firms resources in the form of perquisites and
avoid risk. When a firm is under distress, they may have higher temptation to pocket firms resources. Managers
may also start making decisions keeping in mind shortterm rather than longterm interests of the company. They
may cut costs that affect the quality of the products and sell productive assets to improve the short term liquidity
of the company. They may pass up profitable investment opportunities to avoid any sort of risk. These sub
optimal decisions will further deepen the problem of a distressed firm, and ultimately cause its liquidation (Pandey,
Therefore, financial distress is destructive not only for the financial system of the company, but also it impairs its
organizational structure, its relationship to external partners and negatively affects the attitudes of the employees
towards their work. The loss of a sufficient amount of financial and human resources is dangerous and can cause
the company to liquidate (Natalia, 2007). Thus, financial distress is a huge wastage of funds either directly or
indirectly which needs to be detected earlier and possibly be eliminated completely.
1.2. Statement of the Problem
An in-depth review of financial distress literature reveals a considerable attention to financial distress prediction
models. These models rely much on financial ratios which may not represent all organizational aspects. Moreover,
lack of a well developed theory on corporate financial distress that specifies what financial statement ratios or how
many ratios to be incorporated in these models or what weighting approach will best allow assessment of the
probability of distress, has limited the applicability of these models (Beaver, Correia & McNicholas, 2011). In
addition, the influence of non- accounting or qualitative variables such as management experience , customer
concentration , dependent on one or a few suppliers , level of diversification , qualified audit opinion among others
have not been incorporated in these models in calculating the level of financial distress (Strathmore, 2011). Hence,
the results of such empirical works are often inconsistent and impossible to generalize.
The influence of underlying non-financial factors both endogeneous and exogeneous have been ignored to the
detriment of many firms. Wholesome studies that relate to the causes of financial distress and that encompass
company characteristics have not been given proper attention by the concerned stakeholders. This study, therefore,
analyzed these causes of financial distress using Weighted Mean Score and Factor Analysis. Identifying these
causes as earlier as possible definitely prevents a company from being financially distressed. Further, the study
analyzed the various effects caused when a firm is experiencing distress. It is for this reason, therefore, that this
study analyzed the causes of financial distress and its effects while incorporating qualitative variables that are
endogeneous and exogeneous to the sample firms funded by ICDC in Kenya.
1.3. General Objective of the Study
The general objective of this study was to analyze the causes of Financial Distress in firms funded by ICDC.
1.4. Specific Objectives
The following specific objectives were analyzed in sample firms funded by ICDC:
1. To identify the nature of the causes of financial distress
2. To establish the effects of financial distress

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1.5. Research Hypotheses
The following alternative hypotheses were analyzed in sample firms funded by ICDC:
: Endogeneous financial distress causes are main causes of financial distress
: Financial distress affects the firms undergoing financial distress
1.6. The Scope of the Study
The study will consider information from companies that operated during the years 2009 to 2012. This period is
appropriate because if it is too long, say 10 years, the study could run the risk of mixing the financial information
from companies that operated in different macro economic contexts. In addition, the researcher decided not to
include any financial information from companies during the years 2007 and 2008 because that period there was an
economic crisis which was as a result of political crashes that affected the normal operations of companies in the
country. This way, the researcher avoids including in the study variations that could bring distortions into the final
1.7. Justification of the Study
The results of this study will be helpful to DFIs and other concerned stakeholders who conduct lending businesses.
For financial sector, it could improve the risk return trade off from investment by not investing in failing business
(Gepp & Kumar, 2008). The government and other policy making institutions will be assisted by the study in
coming up with policies that will be beneficial to companies under financial distress. Micro- Institutions, who are
currently the main financiers to of entrepreneurs, will also benefits by not investing their money in companies that
will eventually go under. Donors often commit large sum of money in support of development. This study will
assist them in choosing companies that are capable in achieving their objectives in development. In addition, the
study of financial distress will assist DFIs managers in understanding the nature of causes of financial distress and
how they will be able to predict financial distress. Moreover, it will also enable them to improve their performance
and efficiency through better managerial practices. Besides the study being helpful to stakeholders, it will also form
the base for further research.
1.8. Limitations of the Study
The limitation of this study was that some of the firms to be studied were in liquidation process or under
receivership and therefore, the researcher had to rely on the secondary data.
2.1. Introduction
This chapter provides a detailed review of the literature which focuses on the role of ICDC, financial distress
definition, theories, and its probable causes and the conceptual framework.
2.2. The Role of ICDC in Kenya
ICDC was established in 1954 as a DFI under the name, Industrial Development Corporation (IDC). Its main
objective was to encourage local and foreign entrepreneurs to work together in promoting industrial development in
the country (Namusonge, 2004).Commercial activities were introduced immediately after independence which
necessitated ICDC to change its name from IDC to ICDC. This was in response to the corporations new task of
assisting the people to participate actively in the economic development of their nation (KIPPRA, 2006).
The mandate of ICDC is to facilitate the industrial and economic development of the country by providing venture
capital finances in a minority capacity; secured long-term loan finance and expert financing and management
advisory (consultancy) service (ICDC, 2006). To qualify for financial assistance from ICDC, prospective clients
ought to be involved in commercial or industrial business ventures, provide security for the loan and have a bank

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account where funds will be dispersed. Prospective clients have also to prepare business plans to determine the
viability of the project (Namusonge, 2004).
2.3. Theoretical Literature
2.3.1. Cash Management Theory
Cash management theory is concerned with the managing of cash flows into and out of the firm; cash flows within
the firm and cash balances held by the firm at a point of time by financing deficit or investment surplus cash. Short-
term management of corporate cash balances is a major concern of every firm. This is so because it is difficult to
predict cash flows accurately, particularly the inflows, and there is no perfect coincidence between cash outflows
and inflows (Aziz & Dar, 2006). During some periods cash outflows will exceed cash inflows because payments
for taxes, dividends or seasonal inventory will build up. At other times, cash inflow will be more than cash sales
and debtors may realize in large amounts promptly (Pandey, 2005). An imbalance between cash inflows and
outflows would mean failure of cash management function of the firm. Persistence of such an imbalance may cause
financial distress to the firm and, hence, business failure (Aziz & Dar, 2006).
2.3.2. Credit Risk Theory
Credit is the provision of goods and services to a person or entity on agreed terms and conditions where the
payments are to be made later with or without interest. During the contract period, not all debtors will repay their
dues as and when they fall due. When the debtor does not pay their dues on the due date, the lender is exposed to
credit risks which may in turn lead to default. Credit risk is therefore the investors risk of loss, financial or
otherwise, arising from a borrower who does no pay his or her dues as agreed in the contractual terms (Nyunja,
2.3.3. Entropy Theory
According to the Entropy Theory (or Balance Sheet Decomposition Measure Theory), one way of identifying
firms financial distress could be a careful look at the changes occurring in their balance sheets (Aziz & Dar, 2006).
This theory employs the Univariate Analysis (UA) and Multiple Discriminant Analysis (MDA) in examining
changes in the structure of balance sheets. Univariate Analysis is the use of accounting based ratios or market
indicators for the distress risk assessment (Natalia, 2007). The financial ratios of each company, therefore, are
compared once at a time and the distinction of those companies through a single ratio with a cut off value is used
to classify a company as either distressed or non- distressed (Monti & Moriano, 2010). MDA (or Multivariate
Statistic or Multivariate analysis) is a statistical analysis in which more than one variable are analyzed at the same
time (Slotemaker, 2008). The aim of MDA is to eliminate the weakness of univariate analysis. First, single ratios
calculated by univariate analysis do not capture time variation of financial ratios. This means that accounting ratios
have their predictive ability one at a time, and it is impossible to analyze, for instance, rates of change in ratios over
time. Second, single ratios may give inconsistent results if different ratio classifications are applied for the same
firm. Third, many accounting variables are highly correlated, so that the interpretation of a single ratio in isolation
may be incorrect. The single ratio is not able to capture multidimensional interrelationships within the firm.
Finally, since the probability of failure for a sample is not the same as for the population, specific values of the
cutoff points obtained for the sample will not be valid for the population (Natalia, 2007). Therefore, if a firms
financial statements reflect significant changes in the composition of assets and liabilities on its balance-sheet it is
more likely that it is incapable of maintaining the equilibrium state. If these changes are likely to become
uncontrollable in future, one can foresee financial distress in these firms (Aziz & Dar, 2006).
2.3.4. Gamblers Ruin Theory
Gambler Ruin theory was developed by Feller, W in 1968 who based it on the probability theory where a gambler
wins or loses money by chance. The gambler starts out with a positive, arbitrary, amount of money where the
gambler wins a dollar with probability p and loses a dollar with a probability (1-p) in each period. The game
continues until the gambler runs out of money (Espen, 1999). The firm can be thought of as a gambler playing
repeatedly with some probability of loss, continuing to operate until its net worth goes to zero (bankruptcy). With

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an assumed initial amount of cash, in any given period, there is a net positive that a firms cash flows will be
consistently negative over a run of periods, ultimately leading to bankruptcy (Aziz & Dar, 2006). The major
weakness of this theory is that it assumes that a company starts with a certain amount of cash. There two main
difficulties with this theory when predicting bankruptcy is that the company has no access to securities markets and
the cash flows are results of independent trials and managerial action cannot affect the results (Espen, 1999).
Despite the fact that there is lack of a well developed theory on corporate financial distress and the limitations of
the above mentioned theories, the study adopted Cash Management Theory.
2.4. Empirical Literature
2.4.1. Financial Distress
Financial distress can be described in many ways. It can mean liquation, deferment of payment to short term
creditors, deferment of payment to interest or principal on bonds or the omission of a preferred dividend. One of
the problems experienced in examining the literature on forecasting financial distress is that different authors use
different criteria to indicate distress (Jamshed, 2012). According to Pandey (2005) financial distress occurs when a
firm is not able to meet its obligations. Adeyemi (2011) defines financial distress as a situation in which an
institution is having operational, managerial and financial difficulties. In this study the working definition is
adopted from Jahur (2012) who defines financial distress as the inability of a firm to pay its current obligations on
the dates they are due.
2.4.2. Causes of Financial Distress
According to Jahur and Quadir (2012), the common causes of financial distress and business failure are often a
complicated mix of problems and symptoms. The most significant causes of financial distress in young companies
are capital inadequacy where the business did not start with enough capital and has struggled from day one. Capital
in any business serves as a mean by which loses may be absorbed. It provides a cushion to withstand abnormal
losses not covered in the current earning pattern (Adeyemi, 2012).
Where other companies have undertaken management succession planning for key roles and identified high
potential s in their companys employees, usually firms in financial distress do not prepare at all for top
management succession (Galloway & Jones, 2006). This could lead to recruiting unbalanced management team
which lack essential skills to steer the company ahead. Any wrong investment decision made may plunge the
company to financial distress since some of the decision s involve huge cash outlay and irreversible.
The importance of innovation to a firms future has been documented extensively, though the level of risk
associated with innovation has been examined to a small degree (Chao, Lipson & Loutskina, 2012). The
probability that innovation will drive a firm to financial distress is high especially where the competitors introduces
innovative and competitive products which reduces the attractiveness of the companys products and services
(Jahur & Quadir, 2012). Therefore, innovation can either give a firm a competitive edge to its rivals or will see its
demise equally.
While most companies rely on their financial performances as the key barometer of financial health, it is important
not to ignore managerial and operational signals (Zwaig & Pickett, 2012). Many profitable businesses have found
themselves in trouble due to rapid expansion like Uchumi Supermarkets or the introduction of a formidable
competitor (Zwaig & Pickett, 2012). In each of these instances, the companies were successful before an
operational event or unheeded signal led to financial problem and in some cases the subsequent failure of the
company. In other countries, the business that were able to recognize earlier warning signs such as Zellers,
Canadians Tire and The Bay have survived by diffentiating themselves or changing and improving their business
model (Zwaig & Pickett, 2012).

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2.5. Conceptual Framework
Independent Variables Moderating Variables Dependent

Figure 2.1: Conceptual Framework

Figure 1: Conceptual Framework
In the above diagram, it shows three variables. The independent variables are classified into endogenous and
exogenous variables. The endogenous finance distress variables usually refer to the internal problems of the
company. Therefore, they negatively affect only a particular firm or a small number of firms within the same
network. According to Karels and Plakash (1987) internal risk factors can be attributed to poor management.
Potential forms of the appearance of bad management are the absence of a sense of a need for change, inadequate
communication over expansion, and mismanagement of projects or fraud.
The exogenous risk factors are pervasive; they can affect all companies in the market. They include: fluctuation
negatively of exchange rates, political instability, and industrial production, changes in the interest rates, economy
weakness, budget shortages and expected or unexpected inflation among others. Exogenous factors are independent
of managerial skills (Karels & Plakash, 1987).
The moderating variable in this study is the company characteristics which includes the companys size, maturity
level of the company, industry in which it operates and flexibility of it changing its business. The company size
plays a big role in determining whether a company will be in distress or not. There are just a few big companies
that have suffered financial problems as compared to medium or small companies (Monti & Mariano, 2010). Large
companies can easily obtain external finances cheaply because they can influence the rate of interest to their
advantage. Moreover, bigger companies can be able to survive during times of crises than small companies due to
reserves they could have accumulated (Ooghe & Prijcker, 2008). There is also theoretical evidence as well as
empirical facts that demonstrate that the return rate of a company increases as the size of its assets increase. This
could imply that a firm with a high asset value would have a lower risk of becoming financially distressed in
comparison to middle or small company even when both show the same financial ratios values (Alexander, 2001).
Similarly, the maturity of a company may influence the financial stability of a company. According to Ooghe and
Prijcker (2008), a young company has to build up external legitimacy and stable relationship with stakeholders.
They are therefore, very vulnerable. Finally, companies in different industries, even with a similar financial profile,
have a different probability of becoming distressed.

Endogeneous Financial Distress Variables
Poor Management Skills and Qualities
Poor Accounting System
Low Productivity and Profitability
Poor Fund Management
Improper Management Succession


Exogeneous Financial Distress Variables
Price War With Rivals
Counter Party Defaults
Low Price Overseas
Unfavorable Exchange Rates
High Credit Interest Rate
Unfavorable Change In Government Policy
Company Characteristics

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3.1. Introduction
This chapter describes the research methodology that was used in the study. According to Saunders, Philip and
Adrian (2009) research methods are techniques and procedures used to obtain and analyze data. Hence, this chapter
contains the Research Design, Target Population, Sampling Frame, Sample and Sampling Technique, Data
Collection Instruments, Pilot Test, Data Analysis Techniques and Presentation.
3.2. Research Design
According to Shukla (2010) a research design is a framework or a blue print for conducting a research. It provides a
clear plan on how the research will be conducted and helps the researcher in sticking to the plan. Hence, this study
was conducted through case study design. A case study is an in-depth investigation of a phenomenon (Mugenda &
Mugenda, 2003). Case study design was appropriate in this study because it provides a wider viewpoint relating to
a research concept (Shukla, 2010). It is also useful for sensitive topics with confidential information dealing with
finances of a company (Ooghe & Prijcker, 2008).
3.3. Target Population
According to Mugenda and Mugenda (2003), the target population is the population to which a researcher wants to
generalize the results of the study. In this study, companies funded by DFIs in Kenya comprised the target
3.4. Sampling Frame
A sampling frame is a representative of the elements of the target population (Shukla, 2010). According to
Mugenda and Mugenda (2003), a sampling frame is a list, directory, or index of cases from which a sample can be
selected. In this study the sampling frame comprised of companies funded by ICDC as shown in appendix 1.
3.5. Sample and Sampling Technique
Sampling is a process of selecting a number of individuals or objectives from a population such that the selected
group contains elements that are representative of characteristics found in entire group (Orodho & Kombo, 2002).
In selecting the sample to be studied, purposive sampling was used to select the cases to be studied. Purposive
sampling is a sampling technique that allows a researcher to use cases that have required information with respect
to the objectives of his or her study (Mugenda & Mugenda, 2003). Case studies, therefore, studied were handpicked
because they possessed the required information.
3.6. Data Collection Instruments
The study obtained both primary and secondary data. Structured questionnaires were used to collect primary data
where the respondent opinion was captured on a Five Point Likert Scale. This method was appropriate in this study
because the study mainly was concerned with variables that cannot be observed directly. Similarly, the
questionnaire method is faster, cheaper and versatile as many business problems can be dealt without much
difficult (Gupta & Gupta, 2008). The questionnaire was administered managers of sample companies and finance
consultants. The secondary data was obtained from the existing annual financial reports of sample firms and
relevant literature contained in magazines, websites and other secondary sources.
3.7. Pilot Test
The questionnaire in this study was pre-tested on companies funded by other DFIs operating in Kisii County. In
addition, the researcher worked closely with the supervisor and other experts in finance to determine whether the
items in the questionnaire accurately represent the concept under study.

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3.8. Data Analysis Techniques
The primary data obtained by the researcher through questionnaires was edited; coded, tabulated and analyzed
using Weighted Mean Score (WMS) and Factor Analysis (FA). WMS of each financial distress cause was
calculated and used to rank it so that they can be classified into most significant, significant and insignificant. FA is
a method of reducing a large number of variables to a smaller number of presumed underlying hypothetical entities
called factors. Marieke (2005) defined factor analysis as a technique for summarizing a usually larger number of
variables into smaller number of factors. The aim of FA is to simplify a complex data set by representing the set of
variables in terms of smaller number of underlying variables, known as latent or factor variables (Sewel, 2008).
The grouping of the financial distress variables was on the basis of their inherent relationship between the
3.9. Presentation
The processed information was presented in tables of frequencies and percentages.
4.1. Introduction
This chapter reports major findings in the study as they relate to the research hypothesis advanced in chapter one.
The research areas considered in this study were the analysis of causes of financial distress as either endogeneous
or exogeneous and the effects of financial distress on sample firms funded by ICDC. The study used primary data
collected using structured questionnaires and secondary data contained in annual reports in responding to these
hypotheses. The questionnaire was structured into three sections which included: general information, causes of
financial distress and the effects of financial distress. Responses on the questionnaire items were summarized in
tables and graphs using frequencies and percentages. The rest of the findings are presented in narration form where
most outstanding responses were cited.
4.2. General Information
This section contains the instrument return rate, work status and the experience of the respondents in the
managerial positions.
4.2.1. Instrument Return Rate
The researches issued out 110 questionnaires to the respondents from which only 86 were returned. This accounted
for 78 per cent response rate. This was above the average number of questionnaires issued and thus the study
proceeded with analyzing the data collected. The respondents cited lack of enough time, transfer to other working
stations among other reasons as to why the response rate was not 100 per cent. Other respondents did not fill the
questionnaires at all.
4.2.2. Work Status
The study sought to establish the work status of the respondents. Majority of the respondents as per the results are
middle level managers comprising 63% followed closely by consultants at 23%. Therefore, the respondents
comprised of highly experienced managers and whose opinions can be highly relied on.
4.2.3. Work Experience
Study sought to establish how experience of service the respondents had been in the field of finance. 69 per cent of
the respondents had experience of below 10 years followed at a distance by managers who had worked for 10-20
years while those above 20 years represent only 4 per cent. Cumulatively it shows that 91 per cent of the
respondents had an experience of less than 20 years.

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4.3. Causes of Financial Distress
The study analyzed the causes of financial distress in two sub-headings namely Mean Weighted Score and Factor
4.3.1. Weighted Mean Score
The study analyzed various causes of Financial Distress in sample firms funded by ICDC using primary data
collected through structured questionnaires. The study classified the causes of financial distress into three groups
depending on the mean score of opinions taken on Five Points Likert Scale which are: most significant, significant
and insignificant causes. Jahur and Quadir (2012) carried out a study on financial distress in SMEs of Bangladesh
also classified the causes of financial distress into similar groupings. In their study the causes of financial distress
were found to belong to lack of financial planning, high cost structure, poor management, poor accounting records,
lack of access to, credit, low financial control among others. In this study, the causes of financial distress are found
to belong to improper capital decision, inadequate financing, lack of access to cheap credit, shortage of skilled
manpower, high cost structure, poor accounting records and poor internal management as the most significant
causes of financial distress in sample firms funded by ICDC. The findings are presented in table 4.1.
Table 4.1: Causes of Financial Distress
4.3.2. Factor Analysis
The researcher identified five latent factors which include Finance, Accounting System, Liquidity, Management
and Policy Changes Factors. Finance factors include inadequate financing, lack of access to affordable credit and
improper capital decision. According to Adeyemi (2011) capital in any business whether bank or company serves
as a means by which losses may be absorbed. It provides a cushion to withstand abnormal losses by current earning
power. Therefore, when a company lacks enough capital it will be faced with shortage of cash to carry its
obligations hence fall into the trap of financial distress. This is aggravated with huge amount of non-performing
loans which erode the capital base of these companies. Many young firms find themselves distressed due to lack of
affordable credit. This is mainly because they lack collateral security to use as a bargain in securing cheap credit
Rank Financial Distress Cause Weighted Mean Score
Most Significant Causes
1. Improper Capital Decision 4.5465
2. Inadequate Financing 4.4884
3. Lack of Access to Credit 4.4651
4. Shortage of Skilled Manpower 4.3372
5. Highly Geared 4.2558
6. Poor Accounting Records 4.1860
7. Poor Internal Management 4.1395
Significant Causes
8. High Turnover of Workers 3.9767
9. Dividing Productivity & Profitability 3.7093
10. Financial Indiscipline 3.3721
11. Lack of Proper Keeping Financial Records 3.3488
12. Poor Management Succession 3.1512
13. Policy Changes of Government 3.0233
Insignificant Causes
14. Inadequate Financial Control & Lack of Awareness 2.8488
15. The Business is in Price War 2.4651
16. Low Price Overseas 2.1628
17. Counter Party Defaults 2.1047
18. Poor Customer Loyalty to the Product 2.0698
19. Contingent Problem 1.8372

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from financial institutions. On the other hand, improper capital decision is where a company invests in projects
without proper feasibility study. Indivisible projects will cause distress if not planned for properly because they
cannot generate any revenue unless they are completed. The findings are presented in table 4.2.
Table 4.2: Financial Distress Latent Factors
Position Factor Individual Score Total Score Average Score
1. Finance Factor
i. Inadequate Financing 4.4884
ii. Lack of Access to Credit 4.4651
iii. Improper Capital Decision 4.5465 13.3000 4.500
2. Management Factor
i. Management Succession 3.1512
ii. High Turnover of Workers 3.9767
iii. poor internal management 4.1395
iv. Productivity and Profitability 3.7093 14.9770 3.7443
3. Accounting System Factor
i. Poor Accounting Records 4.1860
ii. Financial Indiscipline 3.3721
iii. Lack of Financial Records 3.3488
iv. Lack of Financial Control 2.8488 13.7557 3.4389
4. Policy Changes
i. Shortage of Skilled Manpower 4.3372
ii. Policy Changes 3.0233
iii. High Cost Structure 4.2558
iv. Contingent problems 1.8372 13.4535 3.3634
5. Liquidity Factor
i. Low Price Overseas 2.1628
ii. customer loyalty 2.0698
iii. Counter Party Defaults 2.1047
iv. Price Wars 2.4651 8.8024 2.2006

4.4. Effects of Financial Distress

The study analyzed various effects of Financial Distress using Five - Point Likert Scale. Sauntner and Jostarndt
(2007) defined management turnover as a change in position of a companys top executives especially the CEO and
the Chief Financial officer. In this study the Gilson (1989) definition was used where management turnover is any
change in the group of individuals who together hold the titles of CEO, President, and the chair of the board. From
table 4.6 it can be concluded that when a firm is undergoing financial distress, the most affected people are the top
executives. The turnover can take in various forms which may include voluntary or involuntary resignations,
outright dismissal, a change in the advisory board or a quit exit with no official communication to the public. The
management crew is replaced because it is responsible for the inefficient realization of the operating policies and
strategies and ignorance of downward development (Natalia, 2007). Many researchers point out that the fall into
financial distress followed by default should be seen as a sign of the incompetence of the current top executives
when they cannot cope with the problem or they themselves are the problem (Bibeault, 1982).
Financial distress is harmful to employees especially those who are less productive because they will be fired to cut
the costs. This leads to these former employees leading inhuman life in absence of any alternative income source.
The few employees left in the distressed firm, their attitude towards work is severally affected leading to low
productivity. The reduction of manpower also is a negative signal to potential investors and lenders. Beside the
above reasons as to why financial distress affects employees, the firm incurs indirect costs due to loss of talented
and experienced human capital the firm has fired. Dividends are earnings distributed to shareholders in the form of
cash or shares. When a firm is experiencing distress, it means that it cannot generate enough cash to pay its own
debts. Therefore, any firms experiencing financial distress, retains its earnings to pay its debts and thus dividends
are affected either by reducing the rate if their payment or non-payment until the firm reorganizes itself and
becomes financially stable.

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It can be convincingly stated that the level of Corporate Social Responsibility (CSR) in a firm is a significant
determinant of financial distress. When a firm is investing more in CSR it is an indicator that there is a low
probability in distress levels. Thus, when a firm is distressed, it cannot invest its cash in CSR but it concentrates in
paying its debts. Other variables that are affected with increase is distress in a firm in ascending order are: lenders
will be affected by not getting or forfeiting their interests earned in loans advanced to distressed firms, suppliers
through non-payment of goods supplied, investors for lack of viable projects to invest their funds, retained earnings
will suffer in that profits made will be used to pay debts instead, market share which will be lost to competitors,
government will not get corporation tax hence reduction of its earnings, customers by not getting products or
services they need, value of the firm will decline through direct and indirect costs associated with financial distress
and ownership structure will change to accommodate new financiers or through restricting process and
shareholders who are likely to lose their investment.

Table 4.6: Effects of Financial Distress
Rank Item likely to be affected Mean Average Score
1. Management Turnover / Management Replacement 4.6793
2. Employees 4.5411
3. Dividends 4.3588
4. Corporate Social Responsibility 4.3248
5. Lenders 4.1827
6. Suppliers 4.0032
7. Investors 3.9625
8. Retained Earnings 3.8273
9. Market Share 3.6772
10. Government 3.4231
11. Customers 3.1537
12. Value Of The Firm 3.0299
13. Ownership Structure 2.7321
14. Shareholders 2.2719
5.1. Introduction
This chapter summarizes the whole research process. It provides a brief summary of the whole study with
particular reference to the research problem, research methodology and avails the findings and conclusions from
the study. It goes further to give recommendations on the phenomenon being studied besides giving areas for
further research.
5.2. Summary
The aim of this study was to analyze the causes of financial distress in the sample firms funded by ICDC. The
study identified some of the most significant causes of financial distress through the use of questionnaires
presented to financial managers. Most significant causes of financial distress include improper capital decisions,
lack of access to affordable credit, shortage of skilled manpower, highly geared firms, poor accounting records and
poor internal management in that order. Therefore, firms should develop proper detection mechanisms in order to
foresee the likely causes as earlier as possible so that prevention action can be taken.
5.3. Conclusion
The causes of financial distress are classified as endogenous or exogenous. The study sought to find out between
the two which is likely to cause financial distress. The findings reaffirmed that endogenous causes are predominant
over the exogenous causes. This can be arrived at by averaging the mean weighted score of both internal and
external causes. Therefore, more emphasis should be dwelt on endogenous variables than exogenous because they
are more likely to causes financial distress than exogeneous variables.

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APPENDIX 1: The List of Companies Funded by ICDC

Company Name Number of shares % ICDC
held by ICDC shareholding
1. Agro- Chemical & Food Industries Ltd 845,000 28.17
2. Aon Kenya Insurance Brokers Ltd 309,140 20.00
3. Centum Investment Co. Ltd 129,304,130 23.51
4. Development Bank Of Kenya Ltd 15,520,000 89.32
5. East Africa Coast Fisheries Ltd (In Receivership) 511,500 27.46
6. Eveready Batteries East Africa Ltd 36,583,375 25.00
7. Focus Container Freight Station 25,000 25.00
8. Funguo Investment Ltd 2,190,000 21.28
9. General Motors E.A Ltd 313,500 20.00
10. IDP Capital Ltd 1,735,500 4.29
11. Kenatco Taxis Ltd ( In Receivership) 250,000 100.00
12. Kenya National Trading Company Ltd 1,600,000 100.00
13. Kisii Bottlers Ltd 8,046,337 45.03
14. KWA Holding Ltd 69,748,132 72.65
15. Meat Land Processing Ltd (In Receivership) 227,688 31.46
16. Mount Kenya Bottlers Ltd 831,250 19.01
17. Mountain Region Poultry Farmers Ltd (In Receivership) 160,000 27.92
18. Njoka Tanners Ltd 1,250,000 33.16
19. Palm Health International Ltd 50,000 23.07
20. Pan Africa Paper Mills Ltd 3,293,925 5.55
21. Rift Valley Bottlers Ltd 5,051,490 27.50
22. South Nyanza Sugar Company Ltd 125,000 0.69
23. Uchumi Supermarkets Ltd 6,951,949 3.86
Source: ICDC 2010 Annual Report