EFFECT OF CREDIT AND EDUCATION ON PERFORMANCE OF MICRO

AND SMALL ENTERPRISES IN KENYA

VALENTINE LYNDA MUSAVI

A RESEARCH PROJECT SUBMITTED TO THE DEPARTMENT OF APPLIED

ECONOMICS, IN THE SCHOOL OF ECONOMICS, IN PARTIAL

FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF THE

DEGREE OF MASTERS OF ECONOMICS (INTERNATIONAL TRADE AND

FINANCE) OF KENYATTA UNIVERSITY.

JUNE, 2018.
 DECLARATION

This project is my original work and has not been presented for award of a degree in

any other University or any other award.

Valentine Lynda Musavi B.ED (Economics and Business Studies)

K102/PT/CTY/21513/2010

Signature: ………………………… Date: ……………………

I confirm that the work reported in this thesis was carried out by the candidate under my

supervision

Dr. James Maingi

Signature: …………………………Date: ………………

Department of Applied Economics, School of Economics

Kenyatta University

Nairobi, Kenya

i
 DEDICATION

I dedicate this study to my mother for her inspiration and endless support.

ii
 ACKNOWLEDGEMENT

First and foremost, I am eternally grateful to the Almighty God, to whom I owe my life.

I give thanks for wisdom, divine intervention and guidance He has provided me

throughout my study period.

I wish to express sincere gratitude to my supervisor, Dr. Maingi, for support, patience,

overall guidance, prompt comments, understanding and helpful remarks.

iii
 TABLE OF CONTENTS
DECLARATION ............................................................................................................................i
DEDICATION ...............................................................................................................................ii
ACKNOWLEDGEMENT .......................................................................................................... iii
TABLE OF CONTENTS .............................................................................................................iv
LIST OF TABLES .......................................................................................................................vii
LIST OF FIGURES ................................................................................................................... viii
ABBREVIATIONS AND ACRONYMS ....................................................................................ix
OPERATIONAL DEFINITION OF TERMS ............................................................................ x
CHAPTER ONE ............................................................................................................................ 1
INTRODUCTION ......................................................................................................................... 1
1.1 Background of the Study ........................................................................................................... 1
1.1.1 Government Policy on MSEs ................................................................................................. 7
1.1.2 Role of Micro and Small Enterprises ................................................................................... 10
1.1.3 Performance of Micro and Small enterprises in Kenya....................................................... 12
1.1.4 Access to Credit by MSEs in Kenya. .................................................................................... 16
1.1.5 Educational Qualification of Owner/Manager ..................................................................... 18
1.2 Statement of the problem......................................................................................................... 22
1.3 Research Questions ................................................................................................................. 23
1.4 Objective of the Study ............................................................................................................. 23
1.4.1 Specific Objectives ............................................................................................................... 24
1.5 Significance of the Study......................................................................................................... 24
1.6 Scope of the study ................................................................................................................... 24
1.7 Organization of the Study ........................................................................................................ 25
CHAPTER TWO ......................................................................................................................... 26
LITERATURE REVIEW ........................................................................................................... 26
2.1 Introduction ............................................................................................................................. 26
2.2 Theoretical Literature .............................................................................................................. 26
2.2.1 Classical Theory of Output Growth...................................................................................... 26
2.2.2 Pecking Order Theory .......................................................................................................... 28

iv
2.2.3 Human Capital Theory ......................................................................................................... 30
2.3 Empirical Literature................................................................................................................. 31
2.4 Overview of Literature ............................................................................................................ 39
CHAPTER THREE..................................................................................................................... 41
METHODOLOGY ...................................................................................................................... 41
3.1 Introduction ............................................................................................................................. 41
3.2 Research Design ...................................................................................................................... 41
3.3 Theoretical Framework. .......................................................................................................... 41
3.3.1 Output Determination by Level of Education ...................................................................... 41
3.3.2 Output Determination by Credit ........................................................................................... 42
3.4 Model Specification................................................................................................................. 43
3.5 Definition and Measurement of Variables .............................................................................. 46
3.6 Data Type and Sources ........................................................................................................... 46
3.7 Data Analysis and Presentation ............................................................................................... 47
3.8 Statistical Test ......................................................................................................................... 48
3.8.1 Test for Multicollinearity ...................................................................................................... 48
3.8.2 Test for Heteroscedasticity .................................................................................................. 48
CHAPTER FOUR ....................................................................................................................... 49
EMPIRICAL FINDINGS ........................................................................................................... 49
4.1 Introduction ............................................................................................................................. 49
4.2 Diagnostic Tests ...................................................................................................................... 49
4.2.1 Multi-Collinearity Test ......................................................................................................... 49
4.2.2 Heteroscedasticity Test ......................................................................................................... 49
4.3 Descriptive Statistics ............................................................................................................... 50
4.3.1: Access to Credit Services by MSEs .................................................................................... 51
4.3.2 Educational Qualification of Owner/Manager ..................................................................... 52
4.4 Empirical Results..................................................................................................................... 53
4.4.1 Effect of Credit Services on Performance ........................................................................... 54
4.4.2 Effect of Educational Qualifications on Performance .......................................................... 55
4.4.3 Joint Effect of Access to Credit and Educational Qualification on Performance ................ 56

v
CHAPTER FIVE ......................................................................................................................... 58
SUMMARY, CONCLUSIONS AND POLICY IMPLICATIONS ......................................... 58
5.1 Introduction ............................................................................................................................. 58
5.2 Summary of the Study ............................................................................................................. 58
5.3 Conclusions of the Study ......................................................................................................... 60
5.4 Policy Implications .................................................................................................................. 60
5.5 Areas for Further Study ........................................................................................................... 62
REFERENCES ............................................................................................................................ 64
Appendix I: Secondary Data ......................................................................................................... 71

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 LIST OF TABLES

Table 1.1: Distribution of the Enterprises by monthly turnover .................................... 13

Table 1.2: Major sources of capital for Kenyan MSMEs ............................................... 17
Table 1.3: Highest education qualification of business owners by size of business ...... 20
Table 1.4: Percentage distribution of employees by higest qualication. ........................ 21
Table 1.5: Percentage of business development services per sponsor ........................... 21
Table 3.1: Definition and measurement of variables...................................................... 46
Table 4.1: Multicollinearity Results using VIF .............................................................. 49
Table 4.2: Modified Wald Test for Heteroscedasticity .................................................. 50
Table 4.3: Descriptive Statistics ..................................................................................... 50
Table 4.4: Percentage of Enterprises that Received Credit and Those that Did Not ...... 52
Table 4.5: Individual Effect of Education Qualification and Access to Credit Services
on Performance ............................................................................................................... 53
Table 4.6: Joint Effect of Access to credit services and Education on Performance of
MSEs .............................................................................................................................. 56

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 LIST OF FIGURES

Figure 1.1: Distribution of licensed MSMEs in Kenya ................................................................... 6

Figure 1.2: comparison of value added ......................................................................................... 11
Figure 1.3: Percentage distribution of employment in licensed establishments ........................... 12
Figure 1.4: Distribution of closed enterprises by age .................................................................... 14
Figure 1.5: Percentage distribution of reasons for closure of establishments ............................... 15
Figure 1.6: Reasons for the low uptake of loans by MSEs ........................................................... 16
Figure 1.7: Academic qualification of business owners/operators. ............................................... 19
Figure 4.1: Demand for Credit by MSEs....................................................................................... 51
Figure 4.2: Educational qualification of MSE owner/operator ..................................................... 53

viii
 ABBREVIATIONS AND ACRONYMS

CBK Central Bank of Kenya

GoK Government of Kenya

ILO International labor organization

KNBS Kenya National Bureau of Statistics

MDGS Millennium Development Goals

MSEs Micro and Small Enterprises

MSMEs Medium Small and Micro Enterprises

TVET Technical and Vocational Educational Training Institutions

WHO World Health Organization

ix
 OPERATIONAL DEFINITION OF TERMS

Business/Enterprise: An economic unit that produces goods and services.

Credit Reference Bureau: This refers to a business organization that collects and

maintains information pertaining to the credit information for individual customers.

This information is used by banks and other financial institutions to gauge the risk

level of each borrower.

Establishment: refers to an economic entity that produces and/or sells goods or

services and operates from a physical location (MSME Survey, 2016).

Informal sector: Is the sector that comprises of jobs that are not legally recognized

as sources of income and are therefore not subjected to tax (IEA, 2012).

Micro enterprise: Refers to a firm, trade, service, industry or a business activity

whose annual turnover does not exceed five hundred thousand Kenyan shillings,

employs less than ten people and whose total assets and financial investment shall

be as determined by the Ministry of Industrialization from time to time (MSMEs

Act, 2012).

Small enterprise: Refers to a firm, trade, service, industry or a business activity

whose annual turnover ranges between five hundred and five million Kenyan

shillings, employs between ten and fifty people and whose total assets and financial

investment shall be as determined by the Ministry of Industrialization Cabinet

Secretary from time to time (MSME Act, 2012).

x
 ABSTRACT

Micro and small enterprises are pivotal to the Kenyan economy through
employment creation, provision of goods and services, fostering innovation and
enhancing competition. Research has however shown that most of these enterprises
experience stagnated growth with 46 percent closing business within the first year of
their operation. Key among the reasons for closing business is due to shortage of
operating funds and lack of proper managerial skills to carry out the day-day
operations of the enterprises. Various studies have been undertaken to determine the
effect of support services on enterprise performance but no study has been carried
out using the 2016 enterprise survey data which is the most recent and
comprehensive survey in Kenya. The purpose of this study was to establish the
effect of credit and owner/manager educational qualification on performance of
micro and small enterprises in Kenya and their joint effect using the 2016 MSMEs
survey data. This is cross-sectional data collected from a population of 50,043
enterprises. A sample of 384 enterprises was used in the analysis as obtained using
Fisher’s (2003) formula for computing sample size from a large population.
Inferential statistics was used to interrogate the relationship between the variables.
Regression results indicated that both access to credit services and educational
qualification had a positive and significant effect on performance of the sampled
enterprises. Further analysis indicated that the joint effect of the two variables was
greater than their individual effect. Recommendations of this study are that the
central Bank of Kenya should focus more on lending and credit facilitation programs
in order to encourage greater bank-led financing to the sector to help bridge the
unmet demand for credit and that micro and small enterprises should be encouraged
to establish good credit history with various lending institutions to enable them
access credit facilities from financial institutions. In addition, owners/managers of
the enterprises should be provided with training on managerial and technical skills to
complement their educational qualifications in running the enterprises.

xi
 CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Over the years, the Micro and Small Enterprises (MSEs) sector has attracted attention

from diverse fields in business and economics given its important role towards delivery

of essential goods and services, enhancing competition, employment generation and

nurturing modernization towards the economic prosperity of various economies around

the world. In Kenya, Vision 2030 blue print highlights the all-important feature of

elevating the country to become an independent middle income entity to ensure quality

for all inhabitants by the Financial Year 2030. Vision 2030 identifies and prioritizes the

MSE sector as crucial towards the achievement of the objective of transforming Kenya

towards becoming a Middle Income Status (KNBS, 2016).

A study by Kongolo (2010) established that small business owners globally have the

same characteristics, face the same obstacles but differ in their understanding of how

small businesses assist in economic growth. MSEs have ability to fuel economic growth

because they create new jobs, expand the tax base, and are drivers of innovation. MSEs

enhance competition and entrepreneurship hence has external benefits on economy wide

efficiency, innovation and aggregate productivity (Beck & Levin, 2005). Globally there

is an agreement that MSEs hold the key to economic growth based on the fast growth of

enterprises and the role of MSEs in generation of employment.

According to Normah (2007) the concentration of Small and Medium Sized Enterprises,

SMEs has a close relationship with the dominant economic activities. SMEs dominate

1
the world economies in terms of employment and number of companies, yet their full

potential remains remarkably untapped (Schlogl, 2004; Omar, Arokiasamy & Ismail,

2009). This is due to a number of reasons including legal, institutional, cultural, societal

and economic factors which makes the role of SMEs on economic development

different across countries.

There were about 2.4 million small and medium-sized enterprises at the end of 2001 in

China, accounting for 99 per cent of all registered corporations (Information Office of

the State Council, 2004). If those SMEs such as self-employed businesses, leasehold

farm households and individual partnerships that are not legal persons are also included,

the number is far larger. Chinese SMEs have played an important role in stimulating

economic growth, increasing employment, expanding exports and promoting science

and technology innovations.

Chen (2006) conducted a study on the historical development and current status of

Chinese small and medium-sized enterprises (SMEs) and examined major political

initiatives contributing to SMEs’ development. The researcher argues that the

fundamental role of the market in allocating resources and the self-operation status of

SMEs should be respected. It is imperative to encourage SMEs to optimize industrial

structure. Further, it is important to properly handle the government-enterprise relations

and bring the role of the government in macro control into full play so as to create a fair

competitive environment for SMEs.

In the Netherlands, SMEs account 98.8% of all private sector companies, contribute

31.6% to Gross Domestic Product (GDP), and employ 55% of total workforce (Indarti,

2
& Langenberg, 2004). In Australia Small businesses account for approximately 97

percent of all private sector businesses, and 51 percent of private sector employment

(Australian Bureau of Statistics 1996; Wijewardena, & Tibbits, 1999). In Italy, SMEs

contribute to USD 35 million in exports and absorb 2.2 million of national labors

(Patrianila, 2003; Indarti, & Langenberg, 2004). Recent evidence shows that SMEs

contribute to 32 percent to Gross Domestic Product, 56.4 percent to employment

opportunities and 19 percent to export in Malaysia (SMIDEC, 2008; Omar, Arokiasamy

& Ismail, 2009). A survey conducted in Malaysia, in 2010 to assess the performance of

SMEs, established that more than three-quarters (76%) of the SMEs across all sectors of

the economy experienced better performance in 2010. Indicators such as production and

profit margin also showed an increase of up to 5% (Malaysia Government, 2010).

There are an estimated 365–445 million formal and informal micro, small and medium

enterprises (MSMEs) in the developing world, employing about 90 per cent of all

workers. Only 25 million to 30 million of these firms are formal SMEs (5 to 250

employees). More than 90 per cent are either formal enterprises with fewer than 5

employees or enterprises that are not formally registered (McKinsey, 2011). Not

surprisingly, in the wake of the Arab Spring small firms have increasingly come to be

viewed by the donor community as job creators for the young and growing populations

of Africa, the Middle East and Asia.

At the 2012 spring meetings of the IMF and World Bank, Andrew Mitchell, then the

UK Secretary of State for International Development, declared that ‘small and medium

enterprises are a vital engine of job creation in developing countries’. The European

3
Union recently asserted that for developing countries, the expansion of the private

sector, notably MSMEs is a powerful engine of economic growth and the main source

of job creation (EU, 2012).

Muriithi (2017) noted that micro and small enterprises (MSEs) are notably the engines

that drive economic development. The businesses account for almost 90% of businesses

in both leading and developing economies through job creations, employment, tax

provision and contribution to Gross Domestic Product (GDP). However, in Africa,

besides their critical and positive role, many MSEs face numerous challenges ranging

from power shortage, lack of capital, poor management skills and competencies, and

inadequate information and corruption. It is notable that most African governments give

very little support to MSEs thereby neglecting a vital economic trigger and should form

pillars of development.

The Kenyan regulatory and institutional framework on MSEs is based on the number of

employees and the yearly revenue of an enterprise (MSME Act, 2012). Micro

enterprises are defined as any firm, trade, service, industry or a business activity with an

annual turnover not exceeding Ksh 500, 000, less than 10 employees and whose total

assets and financial investment shall be as determined by the Ministry of

Industrialization Cabinet Secretary from time to time (MSMEs Act, 2012). On the other

hand, small enterprise refers to any firm, trade, service, industry or a business activity

whose annual turnover ranges between Ksh 500,000 and Ksh 5,000,000, employs

between 10 and 50 workers and whose total assets and financial investment shall be as

4
determined by the Ministry of Industrialization Cabinet Secretary from time to time

(MSME Act, 2012).

From the Survey Conducted in 2015, the total number of licensed MSMEs in Kenya

was recorded at 1.56 million while that of unlicensed was 5.85 million. These firms run

their operations in both the formal and the informal sectors (MSME Survey, 2016).

Formal or licensed enterprises refer to those enterprises that are registered at the

Registrar of Companies as provided for in the Business Names Act, Partnerships Act

and Company’s Act (IEA, 2012). Majority of the MSEs however fall under the informal

sector based on their size, ownership, location, status of formality and economic activity

(KNBS, 2016).

In Kenya, over 70 per cent of all licensed MSMEs operate from marketable

establishments, approximately 28 per cent of the unlicensed establishments operate at

their local environs, majorly their homes while majority of the unlicensed operate in

residential areas that are deficient of distinctive features for operations or have no fixed

location. The distribution of licensed MSMEs in Kenya as at 2016 is as shown in Figure

1.1.

5
Figure 1.1: Distribution of licensed MSMEs in Kenya

Source: KNBS (2016)

Micro enterprises form the bulk of licensed establishments at 92.2 per cent followed by

small enterprises at 7.1 per cent and then medium enterprises at 0.7 per cent. The

declining trend in the number of enterprises with increasing enterprise size is an

indication of the failure of many micro enterprises to evolve from micro to small, small

to medium, and medium to large enterprises.

Micro and small enterprises have increasingly become important in Kenya as they

comprise activities considered as sources of employment, competition, economic

dynamism and innovation (Ong’olo & Awino, 2013). These are the engines to income

generation and employment growth accounting for almost 80 percent of Kenya’s

employment (Ngui, 2014). In developing countries like Kenya, Micro and Small

Enterprises make great contribution to economic growth and development; in

6
comparison to the large enterprises in terms of alleviation of unemployment by creating

job opportunities, ensuring efficiency and growth as this sector utilizes locally available

resources and less of what the country Lacks (Admassie & Matambalya, 2002).

Characteristics of MSEs are that of an enterprise that have ease of entry, rely on

resources that are locally available, are family-owned and small scale operations make

use of high degree of labor and adaptive to technology, employ skills acquired out of

formal sector and operate in free, unregulated and competitive markets (IEA, 2012).

1.1.1 Government Policy on MSEs

This sector was formally recognized in Kenya in 1972 following a study by the

International Labour Organization (ILO) on employment and incomes (Government of

Kenya, 2005). Findings of this study indicated that the MSE sector had huge potential to

create employment and generate income to a greater proportion of the Kenyan

population. Since the time of the ILO study, various Development Plans have been

undertaken starting with the Development Plan of 1974-1978 on the introduction of

policy prescriptions that are geared towards resolving issues pertaining to the MSE

sector. Thereafter was the 1986 Sessional Paper No. 1 on Economic Management for

Renewed Growth.

However, Sessional Paper No. 2 of 1992 on Small enterprises and Jua Kali

Development was the first paper that comprehensively addressed small enterprises and

defined them as those establishments with 1 to 50 employees (Gok, 2005). The other

area covered by this paper was on negative effects of the government’s tight controls on

the sector giving room for it to call for support by other stakeholders to the sector. The

7
paper further advocated for addressing of the legal and regulatory framework in which

the MSE sector operates by the pertinent ministries, working hand-in-hand consultation

with the Attorney General’s office for creation of a conducive business environment for

the enterprises.

There was also an extensive assessment of laws and licenses that govern on the MSE

sector and especially those that curtailed improvement and expansion of the sector.

Sessional Paper No. 2 of 1992 acknowledged the minimal control and knowledge of

MSEs with regard to issues on taxation, licensing and legal requirements (Gok, 2005).

Alongside recognition of the underlying challenges, it campaigned for development of

partnerships that were to ensure provision of information to the enterprises.

Other government programmes developed after Sessional Paper No. 2 of 1992 include

the establishment of a Division to deal with matters pertaining to MSEs within the

Ministry of Planning and National Development which was later transferred to the

Ministry of Labour and Human Resource development (Government of Kenya, 2005).

The Ministry of Labour and Human Resource Development commissioned a specialized

unit on micro and small scale enterprises that recommended the formation of Jua Kali

Council and Jua Kali Authority and increased competitiveness of MSEs through the

enhancement of their coordination, managerial capacities and competencies, and

technological development alongside productivity mainstreaming for effective response

on challenges of creating productivity and sustainable employment opportunities.

Sessional Paper No. 2 of 2005 on development of Micro and Small Enterprises for

Wealth and Employment Creation for Poverty reduction outlined various measures
8
geared towards addressing matters of business registration, licensing and tax regime.

Key recommendations were on recognition of MSE’s contribution alongside other

economic activities and within an elaborate view of the country’s economy

(Government of Kenya, 2005).

The main guiding principles on Sessional Paper No. 2 of 2005 were: removal of rules

and regulations that curtail growth and development of the private sector by imitating

economic enhancement strategies; an economic, social and technological trend that will

work on micro, small, medium and large enterprises development; correlation between

the various business sizes; A group of workers that are organized, productive and cost

effective; complimentary competition; and diverse markets for MSE products and

services.

There were also recommendations on institutional reforms that were meant to enhance

coordination and inform on the implementation of sector activities which was a major

challenge facing the MSE sector. Finally, the paper advocated for public procurement

allocation of 25 per cent of all public procurement for MSEs.

The Private Sector Development Strategy (PSDS) Kenya recognizes MSMEs as a

crucial element in poverty eradication, underdevelopment in correlation with the private

sector. According to this strategy, the enterprises are labor intensive hence they should

transit and graduate into large firms upon their effective facilitation. Goal 5 of the

strategy envisaged for facilitating of MSMEs competitiveness through supporting on

growth and enlargement of the firms, improving capital accessibility, promoting

9
improvement of new enterprises, important firm linkages, and wider MSME

representation in business arenas.

Kenya’s vision 2030 blue print outlines the crucial role played by MSEs in transforming

Kenya into a middle-income country that provides high quality life to all its citizens by

the year 2030 (Government of Kenya, 2010). It singles out the MSE sector as growth

drivers for the achievement of its vision. In addition, it outlined the need to deal with

the country’s informal economy through measures that are geared towards raising

productivity, job creation, improved owner’s income and revenues. There is also need

to capacity building and provision of apt financial services for MSEs and the proposal

on establishment of MSE industrial parks.

1.1.2 Role of Micro and Small Enterprises

Micro and small enterprises have proved to be instrumental to many countries’

economic development through increased competition, employment creation, fostering

innovation and as a source of various goods and services. These enterprises are crucial

in complementing large firms in form of sub-contract agreements and provision of

inputs.

In 2015 for example, the MSMEs sector contributed to an estimated Ksh 3,371.7 billion

in terms of value added against the national output of Ksh 9,971.4 billion which

accounts for a 33.8 per cent contribution. Its gross value addition in the same year was

recorded at Ksh 1,613.0 billion against a contribution of Ksh 5,668.2 billion for the

whole economy (MSME Survey, 2016). This comparison of value addition by the

MSME sector in 2015 is presented in Figure 1.2.

10
Figure 1.2: comparison of value added

Source: KNBS (2016)

In terms of employment generation, close to 14.9 million persons are actively engaged

by the sector with bulk trading and trading through distribution channels, and

reconstruction of motor vehicles and motor cycles accounting for over half of the total

number of people that are engaged (more than 8 million persons). Manufacturing,

accommodation and food service sectors account for 11.8 per cent and 11.1 per cent

respectively. Given their high flexibility and response to various market dynamics,

MSEs are in a position to play a critical role towards Kenya’s economic development.

The percentage distribution of employment in licensed establishments is presented in

Figure 1.3.

11
Figure 1.3: Percentage distribution of employment in licensed establishments

Source: KNBS (2016)

Micro enterprises account for 55.2 per cent of the establishments while small and

medium establishments account for 32.3 per cent and 12.5 per cent respectively.

1.1.3 Performance of Micro and Small enterprises in Kenya.

MSEs Performance has been measured conveniently in other countries using

profitability index of the business or growth in employment (Chirwa, 2008). Profit

margin has been captured as the annualized ratio of net profits to total sales and the

growth in employment defined as the ratio of the difference in logarithms of the current

employment and the initial employment to the age of business.

The other variable used to measure performance in total sales turnover. Turnover is

one of the most accurate measures of assessing the size and performance of businesses.

The distribution of Kenyan MSMEs by monthly turnover is as presented in Table 1.1.

12
Table 1.1: Distribution of the Enterprises by monthly turnover
Licensed Unlicensed
Less 50,001 200,001 Greater Less 50,001 Greater
than to to than than to 200,001 to than
Size/Ksh 50,000 200,000 1,000,000 1,000,000 50,000 200,000 1,000,000 1,000,000
All
MSMEs 49.2 31.31 4.35 0.2 93.8 5.5 0.8 0
Micro 52 32.31 2.92 0.9 93.8 5.5 0.8 0
Small 12.3 19.03 5.43 3.2
Medium 25.78 0.9 11.7 53.6

Source: KNBS (2016)

From Table 1.1, it can be shown that 93.8 per cent of unlicensed establishments

reported monthly turnover of less than Ksh 50, 000. No enterprise recorded a turnover

of more than Ksh 1,000,000 with more than half of them recording monthly turnover of

less than Ksh 50,000.

Previous research (e.g. Fatoki, 2013) has shown that about 3 out of 5 Kenyan MSEs fail

within their first year of operation. Between the year 2011 – 2016, a total of 2,210

thousand enterprises closed down as a result of shortage of operating funds, lack of

market and shortage of raw materials. The distribution of closed establishments by age

at closure is presented in Figure 1.4.

13
Figure 1.4: Distribution of closed enterprises by age

Source: KNBS (2016)

A large number (46 per cent) of the establishments closed down within the first year

with a further 15 per cent closing by the second year. Only 5 per cent of the

establishments are able to make it up to 15 years. The average age of establishments at

closure is 3.8. The slowdown in trend in closing rate with age of the enterprises could

imply that the establishments stabilize over time.

Majority of these closures are attributed to shortage of operating funds (29.6 per cent),

personal reasons (22.9 per cent), lack of market for the products (15.3) and shortage of

raw materials (6.2). Other reasons for closure of establishments are as shown in Figure

1.5.

14
Figure 1.5: Percentage distribution of reasons for closure of establishments

Source: KNBS (2016)

From Figure 1.5, majority of the closures are as a result of lack of finances required to

run the business, peculiar non-business related reasons, customer scarcity, shortage of

stock or raw materials, too many competitors and government regulations in that order.

Various proposals have been advanced on ways to upscale MSEs performance in

developing countries in order to enhance their role in employment generation and hence

economic growth. Previous researchers (e.g. Gikonyo & Zainalaludin, 2006) proposed

that for MSEs to be successful in employing more people, entrepreneurs should be

provided with elementary entrepreneurial training on management of the enterprise and

be given access to cheap loans and backing from their family members. In particular, to

promote performance of Kenyan MSEs, factors such as ability to create savings, better

education levels for entrepreneurs could play a major role not only to their survival, but

also their sustained competitiveness.

15
1.1.4 Access to Credit by MSEs in Kenya.

Over time, Kenyan entrepreneurs have reported challenges in their attempts to raise

startup finances and access to financial services to support their entrepreneurial

activities. Access to loans from commercial banks by MSMEs has proved difficult as

compared to accessing the services from other small financial institutions. This is

mainly attributed to high interest rates or lack of collateral on the side of entrepreneurs

to complement their application for the loans. Some of the other reasons for the low

uptake of loans by owners of the enterprises include risk-averse nature of entrepreneurs

who do not desire to be indebted and the idea that loans are a source of unnecessary

trouble that is not worth them going through (KNBS, 2016). Reasons for low uptake of

loans by Kenyan MSEs are as shown in Figure 1.6.

Figure 1.6: Reasons for the low uptake of loans by MSEs

Source: KNBS (2016)

A larger proportion of businesses are sufficiently funded, and consequently they do not

require business loans to facilitate their operations. These proportions of businesses that

are self-sufficient comprise of 62.0 per cent of licensed establishments and 46.2 per cent

16
of unlicensed enterprises. On the other hand, 12.3 per cent of licensed and 16.0 per cent

of the unlicensed feel that the loans are too expensive to bear.

Inaccessibility of loan facilities from banking institutions has seen majority of the

establishments result to use of traditional sources of financing such as personal savings,

soft loans from their apprentices and family members alongside other informal sources

(KNBS, 2016). The main sources of capital for the businesses are as shown in Table

1.2.

Table 1.2: Major sources of capital for Kenyan MSMEs

Source of Capital Licensed Unlicensed
Family/own funds 71.9 80.6
Family/Friends loan(Not Free) 4.2 4.2
Money Lender 0.7 0.3
Bank 5.6 0.8
Non-Bank Credit Institution 0.7 1
ROSCAs 0.9 1.1
Government Loan 0.1 0
NGOs 0.1 0.1
Cooperatives 0.4 0
Trade Credits 0.2 0
In-Kind 0.3 0.3
Postal Savings 0.5 0.1
Chamas 1.4 1.4
Others 2 2.1
Source: KNBS (2016)

Family/own funds are the highest source of capital at 80.6 per cent and 71.9 per cent for

unlicensed and licensed establishments respectively. Family/friend loans are the second

source at 4.2 per cent for both the licensed and the unlicensed establishments. Banks

17
finance only 5.0 per cent of the businesses. This shows the large gap that exists between

the demand for business loans by MSEs and the available funds.

There have however been various attempts put in place by the Central Bank of Kenya

(CBK) so as to help bridge the gap between demand for finances and the available

funds through various lending and credit programs. Between the year 2013 and 2016,

the total amount of loans applied for by licensed MSMEs amounted to Ksh 707.3 billion

of which Ksh 644.1 billion was given (about 91.1 per cent). On the other hand,

unlicensed establishments received a total of 42.9 billion translating to 92.3 per cent of

total loans applied for (KNBS, 2016).

1.1.5 Educational Qualification of Owner/Manager

Educational qualification and vocational training for entrepreneurs and their workers are

regarded as essential for business performance and sustained competitiveness. The

Majority of business owners and operators in Kenya are either CPE/KCPE or

KCE/KCSE/EACE certificate holders. Educational qualification of both licensed and

unlicensed business owners is shown in Figure 1.7.

18
Figure 1.7: Academic qualification of business owners/operators.

Source: KNBS (2016)

MSE owners with post-secondary qualification for licensed establishment’s accounts

for only 13.8, 9.8 and 2.4 per cent for diploma, degree and post graduate respectively;

and 3.9, 1.2 and 0.0 per cent for unlicensed establishments. Further, 30.3 percent of the

business owner-manager of Licensed establishment have attained secondary education,

23.3 per cent attained just a CPE/KCPE certificate and 9.8 per cent of the business

owners hold degrees certificates from institutions of higher learning(MSME Survey,

2016). For the case of bigger businesses, there was a higher proportion of business

operators who are university graduates.

On the other hand, 72.1 per cent of owners of unlicensed establishments have no basic

education or CPE/KCPE as their highest education attainment unlike in the case of

licensed operators where only 7.8, 1.9 and 5.2 per cent of operators of micro, small and

19
medium establishments in that order did not have any education attainment. Table 1.3

presents the highest education qualification of business owners by size of business.

Table 1.3: Highest education qualification of business owners by size of business

Licensed
Education Qualification Micro Small Medium Unlicensed
None 7.8 1.9 5.2 31.4
CPE/KCPE 26.2 7 12.8 39.7
KAPE 0.2 0.1 0.1
KJSE 0.2 0.2
EACE/KCE/KCSE 33.1 19.1 13 19.1
KAGE/EAACE 0.4 1.3 0.2
Certificate 7.8 6.9 3.2 3.7
Diploma 14 19.3 14.6 3.9
Degree 8.2 30.7 40.1 1.2
Postgraduate 1.5 12.4 11.2 0
Basic/Post Literacy Certificate 0.1 0
Other(Specify) 0.5 1.4 0.2
Source: KNBS (2016)

The number of licensed business owners with no educational qualification accounts for

14.9 per cent. Micro enterprises account for the highest at 7.8 per cent followed by

small enterprises at 1.9 per cent and then medium at 5.2 per cent. On the other hand,

owners of unlicensed establishments that haveno educationalqualification total to 31.4

per cent. Table 1.4 presents the percentage distribution of employees by highest

qualification.

20
Table 1.4: Percentage distribution of employees by higest qualication.
Highest Education Licensed Unlicensed
Post Graduate Degree 0.1 0.1
Post Graduate Diploma 0 0
Degree 3 0
Higher Diploma 0.2 0
Diploma 6.3 0.3
Certificate 2.8 0.2
CPE/KCPE 48.2 93.5
KCE/KCSE 38.2 30
KJSE 0
None 0.9 2.9
Others 0.2 0.1
Source: KNBS (2016).

Management skills, technical advice, information technology and informal advice have

been singled out as the main areas of entrepreneural training. Table 1.5 presents the

types of training received by licensed business owners and the type of sponsor for

Kenyan MSEs.

Table 1.5: Percentage of business development services per sponsor

Private
Other Business Religious Self-help
Self Individuals NGO Govt. Institution Organization Saccos Groups
Don't Know 1 0.2 0.7
Others 22.4 27.9 17.3 20.1 10.4 12.3 26.5 25.8
Management 24.6 24.1 40.6 36.2 31.6 44.5 15.2 13.3
Technical
Advice 20.5 17.1 15.9 20.8 20.2 6.1
Marketing 3.5 7.1 6.3 5.4 11.8 8 21.1 7.1
Information
Technology 10.5 6.5 0.9 2.6 1.6 0.9 10.4 15
Informal;
Advice/Training 6.8 6.9 4.1 5.5 6.2 0.8 17.7
Consultancy
Advice 1.2 0.1 3.1 0.9 1.5 2 21.1 0.5
Business
Counseling 4.8 3.4 8.9 7.4 9.8 25.3 0.5 17.3
Finance &
Accounting 4.8 4.8 2.8 1.1 6.3 5.3 3.3
Source: KNBS (2016)

21
Religious organizations, NGOs and Government gave sponsorship for 44.5, 40.6 and

36.2 per cent of business owners respectively for training on managerial skills. This is

attributable to the beneficial role of management skills to opeartions and success of

MSEs. The second ranking type of training was on technical advice as it complements

managerial skills of enterprise owners in running of their businesses.

More than 50.0 per cent of all training services to business owners are self-sponsored.

Both Licensed and Unlicensed owner manager firms received training from private

enterprises.18.3percent of the training offered to the licensed enterprises and 3.5

percent of training offered to unlicensed enterprises was delivered by private business

institutions that support entreprenurship. On the other hand, Non-Governmental

Organization (NGOs) offered 6.7 percent while Religious Organization offered 0.8

percent of business training to business owners. The government gave sponsorship of

5.4 per cent and 2.7 per cent on training for licensed and unlicensed businesses

respectively.

1.2 Statement of the problem.

Over the years, the Micro and Small Enterprises (MSEs) sector has attracted attention

from diverse fields in business and economics given its important role towards delivery

of essential goods and services, enhancing competition, employment generation and

nurturing modernization towards the economic prosperity of various economies around

the world (Kongolo, 2010).

However, over time the Kenyan entrepreneurs have reported challenges in their

attempts to raise startup finances and access to financial services to support their

22
entrepreneurial activities. Access to loans from commercial banks by MSEs has proved

difficult as compared to accessing the services from other small financial institutions.

This is mainly attributed to high interest rates or lack of collateral on the side of

entrepreneurs to complement their application for the loans. Some of the other reasons

for the low uptake of loans by owners of the enterprises include risk-averse nature of

entrepreneurs who do not desire to be indebted and the idea that loans are a source of

unnecessary trouble that is not worth them going through (KNBS, 2016).

Numerous studies have been undertaken previously on the effect of business

development services like access to education and managerial training on performance

of Kenyan MSEs. Of interest though is that there have been limited or outdated findings

to inform MSEs’ policy formulation and implementation. Based on premise, the current

study sought to bridge the gap by determining the effect of credit and education on

financial performance of Kenyan MSEs.

1.3 Research Questions

This study was guided by the following research questions;

i) What is the effect of credit on performance of MSEs in Kenya?

ii) What is the effect of educational qualification on performance of MSEs in Kenya?

iii) What is the joint effect of education and credit on performance of MSEs in Kenya?

1.4 Objective of the Study

The general objective of the study was to establish the effect of credit and education on

performance of MSEs in Kenya.

23
1.4.1 Specific Objectives

Specific objectives of the study were:

i) To establish the effect of credit on performance of MSEs in Kenya.

ii) To establish the effect of educational qualification on performance of MSEs in

Kenya.

iii) Determine the joint effect of credit and educational qualification on performance

of MSEs in Kenya.

1.5 Significance of the Study

The findings of this study will be important in identifying the areas that are pertinent to

MSEs financial performance. Institutions that offer credit and education services will

benefit from the findings by gaining a better understanding on the existing need and

type of service required by business owners. The government and other policy makers

are able to come up with relevant policies that can adequately address issues pertaining

to the MSE sector. The study will also add to the existing body of literature on the

effect of education and credit on performance of MSE.

1.6 Scope of the study

The study was on enterprises from wholesale and retail trade subsector that had

between one and Forty-nine employees according to the Kenyan definition of micro

and small enterprises. It was further narrowed to those enterprises that had received

credit and owner’s manager education levels, to determine their effect on sales

turnover.

24
1.7 Organization of the Study

This project consists of five chapters. Chapter one gives the background of the study

which looks at the overview of the study, the problem statement and justification of the

research. Chapter two is about literature review and is subdivided into three parts;

theoretical literature, empirical literature and overview of literature. Chapter three

contains the research methodology which has the research design, definition and

measurement of variables, theoretical framework, assumptions of the study and the

empirical. Chapter four provides empirical findings and chapter five gives the

summary, conclusions and policy implications of the research findings.

25
 CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter looks at both theoretical and empirical literature on the effect of credit

services and education on the performance of micro and small enterprises in terms of

annual turnover.

2.2 Theoretical Literature

2.2.1 Classical Theory of Output Growth

A rational entrepreneur is motivated by the objective of profit maximization just like

other big firms operating in any market. The objective of the entrepreneur is therefore to

increase profitability of the enterprise given the available technology, stocks of labor

and other resources available in the enterprise.

Various studies on the subject have measured entrepreneur performance using neo –

classical model of growth with performance used as proxy of economic growth. Since

the producer (business owner) has various inputs; that is capital stock from borrowed

sources and own savings, stocks of labor from himself and other family members, skills

acquired from schools, they are combined to ensure the best outcome for the

entrepreneur (Akingunola, 2011; Ihua, 2009).

There are various ways in which resources can be combined in an organization to

produce output. In this study, capital stock from credit received and skills acquired

26
through schooling and business training were combined to determine their effect on

financial performance of the sampled enterprises.

Using a Cobb-Douglas function to represent the relationship between output and inputs,

it is assumed that the entrepreneur has two resources; capital and labor that are

combined to produce output as shown in equation 2.1.

Y  AK t L1t ……………………………………………………………………2.1

Where: Y is the output produced

K and L are units of labor and capital used in production

α and 1-α are output elasticities with respect to capital and labor inputs respectively

A is a measure of technical progress in the firm.

The capital, labor and stock of skills in the business are financed through own savings

and borrowing from various sources in the economy. In this study, the major sources of

credit considered were banks and other institutions such as women enterprise fund and

youth enterprise fund that were introduced in 2007 to help MSEs easily access start-up

capital. Depending on the relative cost of labor and capital, the entrepreneur allocates

the available resources between the two inputs to achieve the best performance.

It is important for firms to select performance indicators that reflect the true situation of

the business enterprise (Murphy et al., 1996). Although this is the case, there is no

universally accepted standard measure of performance. As a result, business

organizations have had the liberty to determine their own measure of business

27
performance which might not be a true reflection of business performance. In this study,

financial performance of the enterprises was measured in terms of total sales turnover.

2.2.2 Pecking Order Theory

The Pecking order theory was initially proposed by Donaldson in 1961 and later

improved by Stewart et al. (1984). According to this theory, firms prioritize their

sources from Internal Financing to Equity depending on the cost of Financing. Raising

Equity is taken up as a last resort; after all available sources of income have been

exhausted.

This theory has been used in areas of finance to help a firm choose its capital structure.

The pecking order theory simply points at the order in which a company can finance

itself. According to this theory, the first preference for a company source of financing is

internal financing through retained earnings. In the event that this option is inadequate,

the company will opt to borrow from a financial institution and as a last resort, if debt is

not adequate, a company should finance itself through the issuing of new equity.

Pecking order theory has been considered important in that it informs the public on

how the firm is performing. If a company finances itself internally, this is taken to mean

that the company is liquid enough, can meet obligations when they fall due and

therefore not facing the threat of liquidation. If the company chooses to finance itself

through debt acquisition, the assumption is that the company is in a position to meet the

monthly loan repayments. If a company finances itself through issuing new stock, it is

normally a negative signal, as the company thinks its stock is overvalued and it seeks to

make money prior to its share price falling.

28
According to the theory, from the point of view of an outsider investor, equity is strictly

riskier than debt. Both have an adverse selection risk premium but that premium is large

on equity. Therefore, an outside investor will demand a higher rate of return on equity

than on the debt.

From the perspective of those inside the firm, retained earnings are a better source of

funds for the firm than the debt while debt is a better source than equity financing. This

argument therefore points to the fact that a firm will finance all its projects through

retained earnings if possible. The most common motivation for the pecking order is

adverse selection developed by Myers and Majluf (1984). The basic idea behind the

pecking order theory is the idea that the owner or the manager of the firm knows the

true value of the firm’s assets and growth capabilities of the firm. Outside investors

cannot tell the true value even where financial documents are available as there is

certain information known only to the business owners. In a case where the firm decides

to sell equity, then the outside investor must raise speculations and must be interested to

know why the management is willing to do so. In summary, the manager of an

overvalued firm will be happy to sell equity, while the managers of an undervalued firm

will not (Cadsby et al., 1990).

The pecking order theory has been used to explain the performance of many firms and

specifically the capital budgeting decisions facing the firm. Although this theory relates

to big companies and decisions they make when going through financial problems, it

can also be used to describe the behavior of micro and small enterprises.

29
In most cases, owners of micro and small enterprises face shortage of resources needed

to start and operate a business. They rely on personal savings, donations from friends

and relatives and in rare cases loans from banks and other financial institutions. The

owner evaluates these sources and makes a decision based on the perceived risk of each

source. In many instances, own savings and donations from friends are most preferred

as they don’t involve monthly payments which has been identified as the greatest fear of

most business operators.

2.2.3 Human Capital Theory

The influence of highest levels of education possessed by the owner-managers on the

success of their enterprises can best be explained by the human capital theory.

According to this theory, training and education are paramount as they improve on the

efficiency and productivity of the owner-manager by instilling knowledge and skills

which are implemented in running the business operations and as a result raising

productivity of the enterprise (Fairlie & Robb, 2007; Chiliya & Robert, 2012).

Over the past decade, hundreds of studies have been conducted to estimate success of

businesses in terms of Rates of Return to Education (RORE). Most of such studies have

shown that formal, proper and precise academics is vital in determining the success in

performance of businesses owned by different owner/managers in well developed

countries (Cohn & Addison, 1998).

Comparative studies have been conducted in some less developed countries, focusing

on the investment in formal education While some studies (Fairlie and Robb, 2007)

suggest that education or training raises productivity of owner/managers and the success

30
of their enterprises, others provide different explanations on how education is related to

owner/managers’ productivity and, hence, success of their businesses (Psacharopoulos,

1994).

The human capital theory informs the educational qualification variable in the current

study since it explains the importance of training and education in enhancing efficiency

and productivity in an organization. In the case of MSEs, the level of educational

qualification of the managers/owners and employees is critical in their success. MSEs

with highly qualified and skilled managers and employees are expected to be more

profitability compared to those with unqualified and unskilled personnel. Therefore, the

human capital theory helps to advance the educational qualification variable in the

current study.

2.3 Empirical Literature

Kibet and Omwono (2015) conducted a study to figure out the effect of credit on

performance of micro and small enterprises in Uasin Gishu County. The study

employed primary data targeting a population of 5000 entrepreneurs in the county with

a sample size of 45 MSEs. The study found that credit has a positive effect that

accelerates the Micro and Small Enterprises towards achieving their Business

objectives. The study also concluded that financial institutions, especially the micro

finance were concerned with financial inclusion by availing financial services to people

who are economically marginalized and who therefore experience financial exclusion in

that they do not have ready access to mainstream commercial and financial service

providers. However, the study by Kibet and Omwono presented a methodological gap

31
since it used primary data while the current study used secondary data. The use of

different data types may give varying results. Further, Kibet and Omwono study was

confined to MSEs in Uasin Gishu County whereas the current study focused on all

MSEs in the country. This ensured that the results were more comprehensive and

conclusive.

Muiruri (2014) conducted a study to investigate the role of microfinance institutions on

growth of micro and small enterprise (MSE) in Thika municipality, Kenya. The study

used both primary and secondary data on 285 MSEs and sixteen financial institutions.

Data collection was done using questionnaires and interview schedules to the different

respondents. This data then was analyzed using the statistical packages for social

sciences software (SPSS windows version 13.0). The study concluded that there was a

positive contribution of credit on performance of micro and small enterprises.

Nonetheless, Muiruri’s study was limited to MSEs in Thika and did not focus on MSEs

in other parts of the Country.

Chibole (2014) conducted a study to investigate how capital microfinance loans,

liquidity and ownership affect growth of MSEs in Kenya. The study targeted a total of

311 respondents drawn from micro and small enterprises located in Nairobi Central

Business District (NCBD). The study used stratified random sampling and took 20% of

the target population giving a respondent base of 62 respondents. Data for the study was

collected using the questionnaires and analyzed using descriptive and regression

statistics with the aid of Statistical Package for Social Sciences (SPSS). Findings of the

study indicated that capital structure, financial liquidity and ownership structure affect

32
growth of medium enterprises in Kenya. The study recommended that enterprises need

to avoid high microfinance loans which may results in high transaction costs resulting

in a weakened position to pay higher dividends. The main findings here were credit did

not significantly contribute to growth especially due to the high interest payment. The

study by Chibole presented contradicting results from the ones obtained in the study.

While the current study found a significant effect of credit on performance of MSEs,

Chibole’s study did not find significant contribution of credit to MSEs growth.

Mmari (2014) conducted a study to determine the influence of education possessed by

owner/ manager on success of micro and small enterprises in Tanzania. The study

employed primary data with a sample size of 245 owner/managers of small garages in

the area. The data was collected by use of questionnaires then analyzed using tables,

percentages, correlation etc. The findings from the study led to the conclusion that

garage owners with low levels of education registered slow growth. However, the study

presented a contextual gap since it was conducted in Tanzania whereas the current study

is done in Kenya.

A study done by Madole (2013) on the impact of microfinance credit on the

performance of MSEs in Tanzania, shows that credit obtained from NMB Bank in

Morogoro by MSEs have been able to improve businesses in term of; improved

business performance evidenced by increased business yield, employment generation,

increased sales turnover, increased business growth and expansion, increased business

capital and assets as well as poverty alleviation among customers examined. The study

used primary data on a sample of a 100 respondents that was analyzed using statistical

33
package of social science (SPSS). Although some of the small businesses fail to repay

bank loan due to various reasons such as grace period, moral hazard and high interest

rate, the study recommended that financial institutions should increase credit to enhance

annual turnover of micro and small enterprises. One weakness to the above case study is

the use of a single bank customers and generalizing the findings to represent the

situation of a whole region.

Njoroge (2013) conducted a study to determine the effects of education on performance

of entrepreneurs in Githunguri district. The study found that though education was

important in helping owners in some areas such as book keeping, it was not important,

in absence of business training, in helping improve business performance. Njoroge

(2013) study found contradicting results on the effect of education on performance of

small enterprises. While he found no significant relationship, the current study found a

significant relationship between education and performance of MSEs.

Olowe (2013) conducted a study in Nigeria on the impact of credit on performance of

MSEs. The study applied primary data where Simple random sampling technique was

used to select a total of 82 MSE operators. Pearson correlation coefficient and multiple

regression analysis were used to analyze the data. The results from this study showed

that financial services, credit included though had a positive impact on performance, the

coefficients were not statistically significant. The results also revealed that duration of

loan has positive impact on MSEs growth and expansion but was not statistically

significant. However, Olowe study was conducted in Nigeria thus presenting a

contextual gap.

34
Ojwang and Oima (2012) conducted a study to determine the effect of micro financing

on the performance of women-owned MSEs in Kisumu City. Specifically, the study

aimed to determine the effect of microfinance on productivity, profitability and growth

and expansion of women-owned enterprises. The study population comprised 3000

registered women businesses from where a sample of 341 was drawn. Simple random

and purposive sampling approaches were applied in selecting the sample size.

Quantitative data was analyzed by use of both the descriptive and inferential statistics.

The study concluded that micro financing had a positive effect on profitability,

productivity and growth and expansion of women-owned enterprises. The study was

however confined to Kisumu city while the current study focused on MSEs across the

country.

Koech (2011) carried out a study to find out the financial constraints that hinder growth

of MSEs in Kenya. The researcher adapted the case study approach and targeted MSEs

in Kamukunji District. The study used primary data which was obtained by the use of

structured questionnaires. Data was analyzed using percentages and frequency

distribution tables. The factors hindering growth of MSEs were identified as cost and

capital access, capital market, collateral requirements, information access, capital

management and cost of registration. The recommendations of the study were that

financial institutions that offer loans to businesses should reduce or provide a wide

portfolio of acceptable collateral for businesses in order enable easy and quick loan

accessibility. Although the study points out on credit as an important variable in

determining success of micro and small enterprises, it did not answer the critical

question of how credit availability affects performance of micro and small enterprises.

35
This particular area will be addressed by the current study together with how education

in terms of skills affects business performance.

Olu (2009) conducted a study on the impact of microfinance on entrepreneurial

development of small scale enterprises that are craving for growth and development in a

stiffened economy of Nigeria. The study analyzed data using table and graphs.

Entrepreneurship plays a key role in in Economic stimulation through poverty

reduction, creation of employment and ensures optimum use of resources. Conclusions

from this study show that microfinance institutions are paramount in promoting

entrepreneurship development and advancement.

Tang (2005) estimated the relationship between credit availability and performance of

micro and small enterprises. The study investigated how credit from both the demand

side and supply side affected performance of small enterprises in Netherlands. Data

from 71 enterprises was analyzed using both descriptive statistics and regression

analysis. The findings suggest that MSEs can establish a long-term relationship with

their suppliers to gain credits since accounts payable is positively related to the

profitability. However, there was no clear relationship between accounts receivable and

profitability for the period 2005 to 2009.

Kuzilwa (2005) examined the role of credit in generating entrepreneurial activities in

Tanzania. He used qualitative case studies with a sample survey of business that gained

access to credit from a Tanzanian government financial source. The findings reveal that

the output of enterprises increased following the access to the credit. It was further

observed that those enterprises whose owners received business training and advice, in

36
addition to credit, performed better than those who did not receive training which

further pointed out on the vital role of education and training towards improving

performance of a business in terms of annual turnover of micro and small enterprises.

His findings stipulated that there should be an economic environment where micro and

small enterprises can access informal and quasi-informal financial institutions for

financing so as to ensure growth of the business enterprises.

Radipere and Dhliwayo (2014) examined the extent to which demographic factors

influence business performance. This study examined the effect demographic variables:

gender and education of owner have on business performance. Business performance is

measured by income, profit, market share, return on income or investment, number of

employees and product line. A structured research instrument was used to collect data

from 500 SMEs in retail industry through interviewer administrated and self-

administrated survey and 93% of questionnaires were returned. It was found that there

is a significant difference between mean values of business performance and the

demographic variables, gender and education. The results show that there is a

significant difference in performance, among the different educational levels. Those

with higher levels of education, such as diplomas and degrees should be encouraged to

take up entrepreneurship as career options since the businesses they would run will

perform better and this would be good for the economy. However, the study did not

focus on MSEs thus presenting a contextual gap.

Mothibi (2015) study sought to analyze the effects of entrepreneur and firm

characteristics on performance of small and medium enterprises (SMEs) in Pretoria. A

37
structured questionnaire was used to collect data on entrepreneur and firm

characteristics affecting performance of SMEs. The data were sought and analyzed

using SPSS statistical package. Based on the findings derived from multiple regression

analysis using the ordinary least squares regression; managerial competence,

educational qualifications, work experience, location, size of the firm, period the

enterprise has operated and business sector all have significant positive effects on

performance of SMEs. However, the study was done in Pretoria, thus presenting

contextual gap.

Chiliya and Roberts-Lombard (2012) study investigated the impact of level of

experience and education on the profitability of the small grocery shops in the

Mdantsane area, in East London Metropole area in South Africa. The primary objective

was to identify whether experience of the business owner affects the performance of the

businesses. The secondary objectives were to determine whether age of the

owner/manager, level of education, and the age of the business are significant variables

that affect the financial performance of small business operations. Quantitative data was

coded into SPSS for graphs and descriptive statistics. One-way ANOVA analyses were

carried out. The findings indicated that previous work experiences, education levels, age

of the owner and the length of business operation have a significant impact on the

profitability of the business. However, the study was done in London, thus presenting

contextual gap.

Ogubazghi and Muturi (2014) study investigated the influence of owner/manager

characteristics on SMEs’ access to bank loan. A sample of 87 small and medium

38
manufacturing enterprises, SMME, was drawn from Asmara city using proportionate

systematic sampling. A reliable primary data was collected through semi structured and

structured questionnaires which were personally administered by the researcher.

Descriptive and econometric statistical analysis techniques were used to analyze the

data. The study, using logistic regression, found out that age of the owner/manager has

significant effect on SMMEs’ access to bank loan. On the other hand, educational level

of the owner/manager does not have significant effect on access to bank loan. Both the

variables have positive effect on SMMEs’ access to bank loan. However, the study was

done in Eritrea, thus presenting contextual gap.

2.4 Overview of Literature

The review of past studies revealed several research gaps. For example, Kibet and

Omwono (2015) conducted a study to figure out the effect of credit on performance of

micro and small enterprises in Uasin Gishu County and employed primary data

targeting a population of 5000 entrepreneurs in the county with a sample size of 45

MSE’s. However, the study by Kibet and Omwono presented a methodological gap

since it used primary data while the current study used secondary data. The use of

different data types could have resulted to varying results. Madole (2013) examined the

impact of microfinance credit on the performance of MSEs in Tanzania and focused

NMB Bank in Morogoro. One weakness to the above case study is the use of a single

bank customers and generalizing the findings to represent the situation of a whole

region

39
Further, Chibole (2014) conducted a study to investigate how capital microfinance

loans, liquidity and ownership affect growth of MSEs in Kenya and found contradicting

results from the ones obtained in the current study. While the current study found a

significant effect of credit on performance of MSEs, Chibole’s study did not find

significant contribution of credit to MSEs growth. Njoroge (2013) conducted a study to

determine the effects of education on performance of entrepreneurs in Githunguri

district and found contradicting results on the effect of education on performance of

small enterprises. While he found no significant relationship, the current study found a

significant relationship between education and performance of MSE’s.

In addition, Olowe (2013) conducted a study in Nigeria on the impact of credit on

performance of MSE’s. Mothibi (2015) study sought to analyze the effects of

entrepreneur and firm characteristics on performance of small and medium enterprises

(SMEs) in Pretoria. Chiliya and Roberts-Lombard (2012) study investigated the impact

of level of experience and education on the profitability of the small grocery shops in

the Mdantsane area in East London Metropole area in South Africa. These studies

presented a contextual gap since they were conducted in other countries or regions.

Therefore, it is on the basis on the above mentioned research gaps that the current study

attempted to establish the effect of credit and education on performance of MSEs in

Kenya.

40
 CHAPTER THREE

METHODOLOGY

3.1 Introduction

This chapter contains the methodology that was used in analyzing the data on the effect

of credit and education on performance of MSEs in Kenya. It includes the research

design, theoretical framework, model specification, definition and measurement of

variables, study area, data types and sources and data analysis.

3.2 Research Design

The study employed a non- experimental research design and in particular, a cross-

sectional design. The overall objective of the study was to determine the effect of

education and credit on performance of micro and small enterprises. Cross-sectional

design was the most applicable in that the enterprises were categorized according to the

number of employees; micro (1-9) and small (10-49). Performance of the enterprises

was measured in terms of total sales turnover.

3.3 Theoretical Framework.

3.3.1 Output Determination by Level of Education

Based on the human capital theory, the theoretical framework that has been adopted in

the vast majority of empirical studies on the relationship between education and output

is constructed around a simple Cobb-Douglas production function such as shown in

equation 3.1 below;

Y  AK  H 1 ………………………………………………………………… (3.1)

41
Where Y denotes output, A measures total factor productivity, K is the stock of physical

capital, and H is the stock of human capital.

H can also be disaggregated into the average level of human capital per worker (h) and

the amount of labour input (L), so that we can express equation (3.1) as:

Y  AK  (hL)1 ……………………………………………………………… (3.2)

Equation 3.2 can be treated as a 3-factor production process, where labour input is

disembodied from human capital (Mankiw, Romer and weilk, 1992). In the equation

above, elasticity of human capital is not restricted to be the same as that of K and L

although the total elasticity is assumed to be equal to one.

Expressing the variables in equation 3.2 in terms of per unit of labour input and taking

logs, equation (3.2) can be expressed as:

ln Y  ln A   ln K / L  1   ln H / L ……………………………………..… (3.3)

This way of specifying the production function or output shows that education levels

actually affects the level of output produced by the firm through the formal training

acquired by the entrepreneur and the workers involved in the production process.

3.3.2 Output Determination by Credit

Based on the pecking order theory, the theoretical framework that has been adopted in

majority of empirical studies on the relationship between credit and output is developed

around a simple Cobb-Douglas production function such as shown in equation 3.4

below;

42
Y  AK  H 1 ……………………………………………………………….… (3.4)

Where Y denotes output, A measures total factor productivity, K is the stock of physical

capital, and H is the stock of human capital.

K can also be disaggregated into the average level of credit per enterprise (c) and the

amount of capital input (K), so that we can express equation (3.4) as:

Y  A(cK ) ( L)1 ………………………………………………..……………. (3.5)

Equation 3.5 can be treated as a 3-factor production process, where credit capital is

disembodied from physical capital. In the equation above, elasticity of credit capital is

not restricted to be the same as that of K and L although the total elasticity is assumed

to be equal to one.

Expressing the variables in equation 3.5 in terms of per unit of capital input and taking

logs, equation (3.5) can be expressed as:

ln Y  ln A   ln C / K  1   ln L / K ………………………….…………..… (3.6)

This way of specifying the production function or output shows that credit level affects

the level of output produced by the firm since it serves the capital necessary to facilitate

the production process.

3.4 Model Specification

In order to achieve the first objective of the study; effect of credit on performance of

MSEs, the study used an ordinary least square approach as shown in equation 3.7

below.

43
 ………………………………………………………….... (3.7)

Where y is the total output of an enterprise measured in terms of total sales turnover.

Cre represents the amount of credit received by an enterprise

α and β are regression coefficients to be estimated in the equation

ɛ is the error term and it captures all other factors that affect output level but are not

captured in the equation.

To achieve the second objective, the study estimated a normal ordinary least squares

regression model as used by previous studies (e.g. Aliero, 2015; Atandi and Obwoba,

2013; Kibet and Omwono, 2013) to estimate similar relationship on the effect of

education on level of output. The OLS equation that was estimated on the output

produced by the enterprise as a function of the parameters was given as in equation 3.8

………….………………. (3.8)

Where y is total output measured by total sales turnover of an enterprise.

Pri represents those enterprises owned/managed by primary school certificate holders.

Sec represents enterprises owned/managed by secondary school certificate holders.

Tert represents enterprises owned/managed by people with middle-level college

educational attainment.

Uni represents those enterprises owned/managed by university degree holders

ɛ is the error term capturing all other factors that affect output level but are not captured

in the equation.

44
It was justifiable to use different levels of education since different business owners

have different educational qualifications. There are those who have primary level

education, secondary level education, tertiary education and university education. As

such, the business owners are expected to have varying entrepreneurial skills and

therefore their business would perform differently.

Objective three was achieved by jointly regressing both education and credit on total

sales turnover of the sampled enterprises. This is as shown in 3.9 below.

……………………………………………….... (3.9)

Where y is the total output of an enterprise measured in terms of total sales turnover.

Cre represents the amount of credit received by an enterprise

Edu represents the level of educational attainment by the owner/manager of the

enterprise

α and βis are regression coefficients to be estimated in the equation

ɛ is the error term and it captures all other factors that affect output level but are not

captured in the equation.

45
3.5 Definition and Measurement of Variables

Table 3.1: Definition and measurement of variables

Type of Specific Description Measure

variable variable

Dependent Sales turnover The total amount of In Kenyan shillings

revenue generated by a

business during the

calculation period

Independent Credit Provision of money, goods, In Kenya shillings

variables or services with the

expectation of future

payment

Education- Level of formal training of Other(6)

Degree(5)
Dummy an enterprise Diploma(4)
Certificate(3)
Variable owner/manager ACE/KCE/KCSE(2)
CPE/KCPE(1)
None(0)

3.6 Data Type and Sources

The study used secondary data on the 2016 MSEs survey obtained from Kenya National

Bureau of Statistics. This is cross-sectional data from a survey on 50,043 enterprises

mainly capturing business particulars, operators’ qualification needs and employment,

and employees’ training and skills development (KNBS, 2016). Therefore, the study

46
population was 50,043 MSEs in Kenya as recorded by the KNBS (2016). Since the

target population was greater than 10,000, the fisher et al, (2003) formula was

employed to come up with a sample size. The Fisher formula was as follows:

n=z2p(1-p)/d2

Where;

n= sample size

z= the standard normal deviate value for the level of confidence, for instance 95% level

of confidence =1.96.

d= margin of error or level of precision at 0.05 for CI at 95%

p= proportion to be estimated, Israel (2009) recommends that if one doesn’t know the

value of p then you should assume p=0.5

Therefore, sample size is arrived at as follows:

n= (1.962)(0.5)(1-0.5)/(0.05)2

n=384

Therefore, the study sample size was 384 enterprises. The study used simple random

sampling to select the sample size of 384 enterprises from the population.

3.7 Data Analysis and Presentation

In an effort to find out the effect of credit services and educational qualification on

performance of MSEs in Kenya, descriptive and quantitative analysis were carried out.

47
The study employed ordinary least square (OLS) regression technique to find out the

relationship between independent variables and the dependent variable as well as the

degree of this relationship. The analysis of variance (ANOVA) was used to check for

the overall model significance. In particular, the calculated F statistic was compared

with the tabulated F statistic. The T statistic value was used to determine whether the

models were significant or not at 0.05 significance level. To achieve, the calculated t-

value was compared against the t critical.

3.8 Statistical Test

Data was analyzed using STATA software version 14. The individual regression beta

coefficients were checked to see whether they significantly influence performance of

MSEs in Kenya. The study tested for multicollinearity, normality and

Heteroscedasticity test.

3.8.1 Test for Multicollinearity

The study used variance inflation factors (VIF) to test for Multicollinearity. According

to Field (2009) VIF value in excess of 10 is an indication of the presence of

Multicollinearity.

3.8.2 Test for Heteroscedasticity

Test for heteroskedasticity was done using Modified Wald test. The null hypothesis in

the test is that error terms have a constant variance (i.e. should be Homoskedastic). The

error terms are said to be Homoskedastic, if the p value is greater than the conventional

p value 0.05, otherwise the errors terms are said to be heteroskedastic.

48
 CHAPTER FOUR

EMPIRICAL FINDINGS

4.1 Introduction

This chapter presents the empirical analysis and results of the study findings. The

results are presented in form of tables and figures for clarity and comparability.

Descriptive statistics has been incorporated to provide an insight on the specific

variables of interest which in this case include educational qualification, access to credit

services and enterprise performance.

4.2 Diagnostic Tests

4.2.1 Multi-Collinearity Test

The study used variance inflation factors (VIF) to test for Multicollinearity. According

to Field (2009) VIF values in excess of 10 is an indication of the presence of

Multicollinearity. The results in Table 4.1 present variance inflation factor results and

were found to be 3.254 which is less than 10 and thus according to Field (2009), there is

no Multicollinearity.

Table 4.1: Multicollinearity Results using VIF

Variables VIF
Credit Services 2.631
Educational Qualification 3.451
Average VIF 3.041

4.2.2 Heteroscedasticity Test

The Ordinary Least Squares (OLS) assumption states that the residuals should be

Homoscedastic. The Modified Wald test was used in the study where the null

49
hypothesis was that error terms have a constant variance (i.e. should be

Homoscedastic).

The results in the Table 4.2 indicate that the error terms are homoscedastic, given that

the probability value is more than the 0.05.

Table 4.2: Modified Wald Test for Heteroscedasticity

Modified Wald Test for Heteroscedasticity
H0: Constant Variance (Homoscedasticity)
chi2 (79) = 3.68
Prob>chi2 = 0.0549
4.3 Descriptive Statistics

Before performing any analysis, descriptive statistics was undertaken to provide an

insight on the composition of micro and small enterprises, access to credit services,

educational qualifications of owners/operators of the enterprises and performance.

Table 4.3 provides the percentage composition of micro and small enterprises in the

data sheet used.

Table 4.3: Descriptive Statistics

Composition of Micro and Small Enterprises

Frequency Percent

Micro (1-9 employees) 345 89.4

Small (10-49
Valid 39 10.6
employees)

Total 384 100.0

Source: Author’s computation (2017)

50
Micro enterprises form the bulk of sampled enterprises at 89.4 percent while small

enterprises comprise 10.6 percent of the sample. This indicates that majority of the

enterprises are in their infant stage and hence the need to provide them with the

necessary support such as access to credit services to enable them grow to the next

stage.

4.3.1: Access to Credit Services by MSEs

A large number of the enterprises did not apply for credit due to various constraints

such as requirement for collateral by various financial institutions. Figure 4.1 provides

the number of micro and small enterprises that applied for and those that did not apply

for credit.

Figure 4.1: Demand for Credit by MSEs

Source: Author’s computation using KNBS (2016) data

Majority (70.6 percent) of the micro enterprises did not apply for credit while 29.4

percent micro enterprises applied for credit. On the other hand, 65.6 percent of small

enterprises did not apply for credit. Those who applied were only 34.4 percent of the

51
total. Table 4.4 further shows the percentage of enterprises who received credit out of

the total number of those that applied for the same.

Table 4.4: Percentage of Enterprises that Received Credit and Those that Did Not

Frequency Percent

Received credit 12 3.1

Valid Did not receive 372 96.9

Total 384 100.0

Source: Author’s computation (2017)

Out of the total number of enterprises that applied for credit, only 3.1 percent received.

The other 96.9 percent did not receive credit applied for. This therefore shows the

unmet demand for credit by micro and small enterprises in Kenya.

4.3.2 Educational Qualification of Owner/Manager

The level of educational qualification of owners/operators of micro and small

enterprises are provided in figure 4.2.

52
Figure 4.2: Educational qualification of MSE owner/operator

Source: Author’s computation using KNBS (2016) data

It can be shown from figure 4.2 that 39.7 percent of micro enterprise operators have

attained primary qualification (KCPE/CPE) compared to 23.3 percent SME

owner/managers. On the other hand, 30.3 percent of small enterprise operators have

secondary school qualification (KCSE/KCE). Only 1.2 and 9.8 percent of micro and

small enterprise operators respectively are degree holders.

4.4 Empirical Results

Table 4.5: Individual Effect of Education Qualification and Access to Credit

Services on Performance
Statistical Tests Access to Credit Services Educational Qualification
Adjusted R² 0.582 0.514
C 0.634 0.597
β 0.471 0.396
t 4.147* 3.721*
f 17.198* 13.846*

53
n 384 384

The values marked with an asterisk are significant at 5% level of significance. The

adjusted R2 shows the explanatory power of the model for each of the regressors, β is

the beta-coefficient for the individual effect of the independent variables; t is the t-

statistic which shows the significance of each of the independent variables, f is the f-

statistic which also shows the overall significance of the model; n is the number of

observations. The dependent variable which is performance is measured using (sales

turnover) Revenue.

4.4.1 Effect of Credit Services on Performance

The first objective of the study was to establish the effect of credit on financial

performance of MSEs in Kenya. This was achieved using Ordinary Least Squares

technique. The independent variable was represented by Credit Services while the

dependent variable was represented by total revenue accrues by the MSE’s.

Results in Table 4.5 indicate that credit services have a significant effect on

performance of the enterprises at a 0.05 level of significance as supported by a

calculated t-value of 4.147, which is greater than the critical t-value of 1.96. Beta value

of 0.471 implies that credit has a positive effect on an enterprise’s financial

performance. A unit increase in the amount of credit an enterprise receives will increase

its output by 0.471 units. This is in agreement with Kibet and Omwono, 2015; Muiruri,

2014; Mmari, 2014, all who established that credit services have a positive effect on

performance of an enterprise.

54
According to the pecking order theory, an enterprise will opt for debt (credit) in an

attempt to improve its performance in a case where its internal sources of financing are

inadequate. Majority of MSEs owners borrow from friends, close family members and

financial institutions to obtain capital for starting and sustaining their enterprises.

Adjusted R² = .582 means that the model accounts for 58.2 percent of variations in

financial performance of the enterprises while the other 41.8 percent is explained by

other factors that affect performance but are not captured in the model. Overall, the f-

statistic of 17.198 indicates that the model is of good fit for the data.

4.4.2 Effect of Educational Qualifications on Performance

The second objective of the study was to establish the effect of educational qualification

on financial performance of MSEs in Kenya. In this case Ordinary Least Square

technique was also employed with educational qualifications being the independent

variable and Revenue representing the Dependent Variable.

According to findings of this study, educational qualification has a significant effect on

performance of micro and small enterprises at a 0.05 level of significance as supported

by a calculated t-value of 3.721, which is greater than the critical t-value of 1.96. The

beta value of 0.396 is positive meaning that both educational qualification and business

performance of an enterprise move in the same direction. An increase in the manager’s

level of education and training will increase the level of output by 0.396 units.

This is in agreement with the human capital theory which argues that education that is

accompanied with training helps raise productivity of owner/manager through imparted

knowledge and skills and by thus enhances growth and performance of an enterprise.
55
Adjusted R² of 0.514 indicates that the model accounts for 51.4 percent of the variations

in financial performance while the remaining 48.6 percent is explained by other factors

affecting performance not captured in the model. The F-statistic is at 13. 846. This is

significant at 5% level of significance which means that the model is a good fit for the

data.

4.4.3 Joint Effect of Access to Credit and Educational Qualification on

Performance

The third objective of the study was to establish the joint effect of credit and

educational qualification on the performance of MSEs in Kenya.

Table 4.6: Joint Effect of Access to credit services and Education on Performance
of MSEs
Variable Β t-Statistic
Credit Services 0.386 3.292**
Education Qualification 0.274 2.326**
C 0.716
Adjusted R-squared 0.608
F-statistic 18.736
N 384

Table 4.6 provides the joint effect of credit services and educational qualification on

performance. When both credit and education qualification variables are jointly

analyzed, the adjusted R² becomes 0.608, which is greater than when the variables are

analyzed individually. This therefore implies than both credit services and educational

qualification explain 60.8% of the total variations in the performance of MSEs in

Kenya. The remaining 39.2% is explained by other factors that are not part of this study.

56
According to findings both credit services and educational qualification have a

significant effect on performance of micro and small enterprises at a 0.05 level of

significance as supported by calculated t values of 3.292 and 2.326 respectively, which

are greater than the critical t-value of 1.96. The beta value of 0.386 and 0.274 are

positive meaning that credit services, educational qualification and financial

performance of MSEs move in the same direction. An increase in credit by 1 unit will

increase business performance of MSEs by 0.386. Further, an increase in educational

qualification by 1 unit will increase business performance of MSEs by 0.274 units. The

F-statistic is at 18. 736. This is significant at 5% level of significance which means that

the overall model is a good fit for the data.

According to the contingency theory, holding all other factors constant, the joint effect

of two or more variables is often greater than their individual effects. This is testament

of the increased joint significance of education and credit services as compared to their

individual effect on business performance of the sampled enterprises.

57
 CHAPTER FIVE

SUMMARY, CONCLUSIONS AND POLICY IMPLICATIONS

5.1 Introduction

This chapter summarizes the findings of the study in relation to the research objectives,

literature review and main variables of the study. Policy implications, recommendations

and areas for further study are also provided in the chapter.

5.2 Summary of the Study

The overall objective of this study was to determine the effect of education and credit

services on performance of micro and small enterprises in Kenya. Research findings

indicate that 39.7 percent of the owners/operators of unlicensed enterprises had attained

primary school education while 30.3 percent of operators of licensed enterprises had

attained secondary school education. On the other hand, those who applied for credit

(14.2 percent unlicensed micro and 34.4 and 29.4 percent licensed micro and small

enterprises respectively) were less compared to those that did not apply (85.8 percent

unlicensed micro and 70.6 and 65.6 percent licensed micro and small enterprises

respectively).

The first objective of the study was to determine the effect of credit services on business

performance of micro and small enterprises in Kenya. This objective was achieved

using ordinary least squares technique with the independent variable in this case being

access to credit. The dependent variable which was used to measure business

performance of the sampled enterprises was total revenue. Empirical findings indicated

58
that access to credit has a positive and significant effect (β=0.471, t=-4.147, R²=.582)

on performance of sampled MSE’s.

Similar findings had been reported by various researchers such as Kibet and Omwono

(2015), Muiruri (2014). Madole (2013) had also established that credit services lead to

increased business profits and increased sales turnover. However, these findings

differed from those of Chibole (2014) who had indicated that credit services did not

significantly contribute to growth of enterprises.

The second objective was to establish the effect of education of Owners/Mangers on

business performance of micro and small enterprises. This was also achieved using

ordinary least squares technique whereby total revenue of the enterprises was used as

the dependent variable and educational qualification as the independent variable.

Research findings indicated that educational attainment of the owner/manager of an

enterprise has a significant and positive effect on its performance (β=0.396, t=3.721,

R²=.514). These findings concur with recommendations recorded by Mmari (2014)

which stated that enterprises that were owned/managed by people with low education

registered slow growth compared to those run by people who had relatively higher

educational qualification. The findings differed from those by Njoroge (2013) who had

argued that despite the importance of education in helping owners do proper book

keeping, on its own, education was not important in determining performance.

The third objective was to determine the joint effect of educational qualification and

access to credit on performance of the enterprises. Results of the study indicated that the

joint effect of credit and education was greater (adjusted R²=0.608) than the individual

59
effect. Njoroge (2013) had also established that the effect of education becomes

significant when combined with other factors such as training. This is in line with both

the classical theory of output growth and the contingency theory which argue that the

combined variable effect is greater than the effect of each variable individually.

According to the human capital theory, education and training raise productivity of the

owner/manager by imparting knowledge and skills; hence, raising the future success of

an enterprises. This explains why enterprises that were owned/managed by people with

higher academic qualifications and who had attended business training recorded higher

input levels compared to those managed by people with just basic education.

5.3 Conclusions of the Study

From the findings, the study concluded that credit services have a positive and

significant effect on the performance of MSEs in Kenya. This means that MSEs that

have access to credit perform better than those that cannot access credit. Further, the

study concluded that educational qualification has a positive and significant effect on

the performance of MSEs in Kenya. This means that MSEs run by higher learning

educated individuals were more likely to perform compared to those managed by less-

educated individuals. A combination of both credit and owner manager education and

training produced higher turnovers.

5.4 Policy Implications

The economic pillar of Kenya vision 2030 aims at achieving an average economic

growth rate of 10 percent per annum, and sustaining the same until 2030.The micro,

small and medium sized enterprises have been identified to play a key role in

60
propagating economic growth. It is therefore incumbent upon the government to put

proper policies (access to finances and training) in place for growth and development of

this sector.

Adequate business development services such as provision of affordable business loans

and training entrepreneurs on relevant business skills should be advocated for in order

to help improve on performance of micro and small enterprises.

Various governmental institutions that offer business development services such as

Kenya Institute of Business Training, Kenya Industrial Research and Development

Institute, among others, should consider offering their services to micro and small

enterprises since they form the bulk of the entire sector and are underserved. This has

seen majority of the enterprises failing to grow from micro to small, and the large

enterprises.

This study recommends on the following actions by the various stakeholder to micro

and small enterprise sector in Kenya. To begin with, the Central Bank of Kenya should

focus more on lending and credit facilitation programs in order to encourage greater

bank-led financing that can help bridge the unmet demand for credit by MSE’s.

Secondly, micro and small enterprises should be encouraged by lenders to establish

good credit history with various lending institutions to enable them access credit

facilities from financial institutions.

The central bank, in collaboration with commercial banks, should consider coming up

with special lending rates for micro and small enterprises to help them easily access

credit services from main stream banks unlike it is the case at present.
61
To bridge the training Gap, Non-Government Organizations, Like African Enterprise

Challenge Fund, World Vision and Other Business Partners, Like Strathmore Business

School should continue providing training on Record Keeping, Sourcing of Funds,

Marketing, and Human Resource Management.

Government should come up with appropriate incentives to the institutions that provide

support to the MSE’s. These institutions include commercial banks, micro finance

institutions, SACCOs, business development service providers, insurance firms among

others.

5.5 Areas for Further Study

This study was mainly focused on the effect of education and credit on the performance

of micro and small enterprises in Kenya. There are other business support services

offered to micro and small enterprises such as training, consultancy, marketing,

infrastructure and access to information technology all of which may have an effect on

the performance of enterprises. Further research should therefore be undertaken to

determine the effect of each of the services on performance of enterprises.

Secondly, the scope of this study was narrowed to micro and small enterprises. It did

not extend to medium and large enterprises therefore implying that the findings cannot

be used to make general conclusions. Further research should therefore be undertaken to

determine the effect of business support services such as credit, education,

infrastructure, marketing, among other services on performance of large enterprises for

comparability.

62
In this study, performance was measured using total revenue, which is a financial

measure. However, there are also non-financial measures of performance that may

include efficiency of enterprises. Future studies should therefore be undertaken to

determine how business support services affect the efficiency of enterprises.

63
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Appendix I: Secondary Data

Credit Education-Dummy Variable Sales Turnover

1 0 2 0
2 15600 1 39000
3 2730 1 6825
4 1170 0 2925
5 1170 0 2925
6 0 0 -19.11
7 53352 3 133380
8 1014 0 2535
9 3600 0 9000
10 21840 0 54600
11 21840 0 54600
12 0 0
13 11700 0 29250
14 3900 0 9750
15 351000 2 877500
16 0 1
17 8400 3 21000
18 8400 3 21000
19 8400 3 21000
20 0 1
21 1248 0 3120
22 1560 0 3900
23 1560 0 3900
24 19500 1 48750
25 11700 1 29250
26 1950 0 4875
27 1950 0 4875
28 0 0 0
29 235200 1 588000
30 235200 1 588000
31 12000 0 30000
32 12000 0 30000
33 12000 0 30000
34 12000 0 30000
35 12000 0 30000
36 12000 0 30000
71
37 360 0 900
38 360 0 900
39 2520 0 6300
40 554.4 0 1386
41 3024 0 7560
42 36000 1 90000
43 50700 2 126750
44 0 0 -19.11
45 12000 1 30000
46 54000 4 135000
47 54000 4 135000
48 840 0 2100
49 0 2
50 0 2
51 0 2
52 2340 1 5850
53 2340 1 5850
54 9600 2 24000
55 14040 0 35100
56 1170 0 2925
57 936 0 2340
58 84000 1 210000
59 2100 0 5250
60 2896.92 0 7242.3
61 2896.92 0 7242.3
62 54000 1 135000
63 2184 0 5460
64 0 0 -20.58
65 936 1 2340
66 15600 0 39000
67 201.6 2 504
68 17640 2 44100
69 3900 0 9750
70 2964 1 7410
71 7800 0 19500
72 3600 1 9000
73 4680 0 11700
74 7020 0 17550
75 4680 0 11700
72
76 15600 0 39000
77 1693.44 0 4233.6
78 552 0 1380
79 552 0 1380
80 30000 2 75000
81 3120 0 7800
82 1404 1 3510
83 51000 3 127500
84 7488 0 18720
85 14400 0 36000
86 3000 1 7500
87 780 0 1950
88 0 0
89 15480 1 38700
90 15480 1 38700
91 423.36 0 1058.4
92 423.36 0 1058.4
93 0 2 -19.305
94 1716 0 4290
95 1716 0 4290
96 7020 0 17550
97 0 0 0
98 162000 3 405000
99 31200 2 78000
100 31200 2 78000
101 604.8 1 1512
102 0 0 -19.11
103 3744 0 9360
104 0 0 -19.11
105 0 0
106 15600 1 39000
107 900 0 2250
108 3120 0 7800
109 6000 0 15000
110 6000 0 15000
111 2400 1 6000
112 2880 0 7200
113 7020 9 17550
114 201.6 0 504
73
115 2340 1 5850
116 5040 0 12600
117 37440 0 93600
118 7800 0 19500
119 15600 0 39000
120 0 0 -19.305
121 96000 4 240000
122 96000 4 240000
123 1800 0 4500
124 24000 4 60000
125 12000 2 30000
126 54600 1 136500
127 4680 0 11700
128 4200 0 10500
129 7800 0 19500
130 26160 4 65400
131 36000 4 90000
132 36000 4 90000
133 36000 4 90000
134 36000 4 90000
135 7740 0 19350
136 1497.6 1 3744
137 4680 0 11700
138 16380 2 40950
139 16380 2 40950
140 0 1 0
141 37440 1 93600
142 37440 1 93600
143 0 1 -20.58
144 46800 0 117000
145 46800 0 117000
146 18720 0 46800
147 3510 0 8775
148 12000 0 30000
149 17640 0 44100
150 2730 0 6825
151 0 4
152 6600 0 16500
153 7200 0 18000
74
154 1680 0 4200
155 117000 0 292500
156 12000 0 30000
157 9600 0 24000
158 780 1 1950
159 0 0
160 117000 6 292500
161 14400 2 36000
162 6000 0 15000
163 0 0 -20.58
164 3510 1 8775
165 720 0 1800
166 21120 5 52800
167 3120 0 7800
168 720 2 1800
169 720 2 1800
170 4836 0 12090
171 11232 1 28080
172 11232 1 28080
173 0 2 -19.11
174 1310.4 0 3276
175 1950 0 4875
176 1950 0 4875
177 11700 0 29250
178 11700 0 29250
179 19500 1 48750
180 60000 0 150000
181 18000 1 45000
182 655.2 0 1638
183 90000 2 225000
184 0 1 -19.305
185 4320 4 10800
186 23760 5 59400
187 1800 0 4500
188 1080 1 2700
189 1622.88 0 4057.2
190 1200 0 3000
191 84000 2 210000
192 84000 2 210000
75
193 84000 2 210000
194 0 1 0
195 4680 0 11700
196 16380 0 40950
197 16380 0 40950
198 1440 1 3600
199 4800 0 12000
200 0 0 -19.11
201 9360 1 23400
202 390 0 975
203 9072 3 22680
204 9072 3 22680
205 2340 0 5850
206 24000 5 60000
207 7488 0 18720
208 352.8 1 882
209 1200 0 3000
210 0 3 -2.4948
211 360 1 900
212 1560 0 3900
213 1560 0 3900
214 9000 1 22500
215 2016 0 5040
216 0 0 0
217 60000 1 150000
218 786.24 0 1965.6
219 4680 0 11700
220 540 0 1350
221 2640 1 6600
222 2340 0 5850
223 1864.8 4 4662
224 6240 0 15600
225 6240 0 15600
226 4200 2 10500
227 14040 1 35100
228 0 0 -19.11
229 702 1 1755
230 3360 0 8400
231 3000 1 7500
76
232 0 5
233 2340 0 5850
234 18000 0 45000
235 10838.64 0 27096.6
236 10838.64 0 27096.6
237 5070 0 12675
238 4092 2 10230
239 4092 2 10230
240 6000 0 15000
241 11700 1 29250
242 1440 0 3600
243 840 0 2100
244 3510 1 8775
245 15120 0 37800
246 1800 0 4500
247 5850 0 14625
248 201.6 0 504
249 28080 0 70200
250 7020 1 17550
251 8400 1 21000
252 3120 1 7800
253 1440 1 3600
254 15600 1 39000
255 15600 1 39000
256 46800 0 117000
257 1209.6 1 3024
258 1950 0 4875
259 12600 2 31500
260 12600 2 31500
261 0 0
262 7800 0 19500
263 3360 0 8400
264 9360 0 23400
265 302.4 0 756
266 4524 0 11310
267 6240 0 15600
268 3120 0 7800
269 7800 1 19500
270 3510 0 8775
77
271 3510 0 8775
272 18000 3 45000
273 333 1 832.5
274 11700 0 29250
275 0 0 -19.11
276 1800000 4 4500000
277 35724 3 89310
278 3900 0 9750
279 1560 0 3900
280 1560 0 3900
281 60 0 150
282 -7.722 0 -19.305
283 -7.722 0 -19.305
284 3120 0 7800
285 3120 1 7800
286 144000 4 360000
287 11700 0 29250
288 1716 0 4290
289 10080 2 25200
290 10080 2 25200
291 19500 1 48750
292 19500 1 48750
293 0 0 0
294 0 1
295 132600 1 331500
296 806.4 2 2016
297 806.4 2 2016
298 17940 0 44850
299 17940 0 44850
300 835.8 0 2089.5
301 468 0 1170
302 2340 0 5850
303 1560 0 3900
304 1200 0 3000
305 4680 1 11700
306 360000 3 900000
307 360000 3 900000
308 2400 1 6000
309 3600 1 9000
78
310 14400 0 36000
311 42780 3 106950
312 241.92 2 604.8
313 900 0 2250
314 1800 0 4500
315 1800 0 4500
316 1800 1 4500
317 1800 1 4500
318 1170 0 2925
319 132600 0 331500
320 132600 0 331500
321 1080 1 2700
322 2340 0 5850
323 1080 1 2700
324 1800 0 4500
325 2340 0 5850
326 11700 0 29250
327 571.2 4 1428
328 3900 0 9750
329 3744 0 9360
330 3744 0 9360
331 1170 1 2925
332 5460 1 13650
333 4800 0 12000
334 9600 0 24000
335 0 2 -19.11
336 8736 4 21840
337 5460 0 13650
338 5640 0 14100
339 2340 0 5850
340 2880 0 7200
341 2730 0 6825
342 17628 1 44070
343 3600 0 9000
344 1800 1 4500
345 7020 0 17550
346 312 0 780
347 5063.1 1 12657.75
348 9360 1 23400
79
349 576 0 1440
350 1950 0 4875
351 2160 0 5400
352 0 2 -19.11
353 0 1 0
354 0 1 -19.11
355 54000 5 135000
356 2730 0 6825
357 202800 3 507000
358 1404 0 3510
359 3000 0 7500
360 4680 1 11700
361 10800 0 27000
362 0 0 0
363 60000 3 150000
364 18000 0 45000
365 18000 0 45000
366 600 0 1500
367 5400 1 13500
368 0 6 0
369 0 0 -2.4696
370 12000 1 30000
371 0 1 -2.4696
372 11700 0 29250
373 3510 2 8775
374 3900 1 9750
375 22028.16 6 55070.4
376 27840 1 69600
377 1663.2 1 4158
378 16380 0 40950
379 3600 0 9000
380 4368 0 10920
381 4368 0 10920
382 23400 1 58500
383 0 6
384 204000 3 510000

80