Influence of Financial Advisory Services on Access to Credit by Micro Enterprises in the Formal Sector in Kenya

Abstract

Access to credit from financial institutions for the purpose of financing state-regulated micro-enterprises in Kenya has been largely based on personal judgement, resulting in a lack of available credit from banks and other financial institutions due to the high rate of credit default. This has severely restricted the prospects of entrepreneurs funding their enterprises. In order to address this issue, this study was conducted to investigate the influence of financial advisory services on access to credit by micro enterprises in the formal sector in Kenya. The independent variables examined included financial market awareness, financial planning services, credit risk education and credit counseling services. The dependent variable of the study was access to credit, while the moderating variable was borrowing behavior. The study was guided by various theories, including rational expectation theory, agency theory, behavioral theory, collective risk theory, and theory of reason action to hypothesize the interconnection between the chosen variables. To accurately capture the insights of the research, a correlational research design was employed, with the study population being 50,043 micro-enterprises licensed by the 47 county governments within the universe of 1,215,184 Kenyan regulated enterprise. A sample size of 384 micro enterprises was determined using the Cochran formula and a probability sampling technique was employed to obtain the sample from the population. Data from the 47 counties within the 8 former administrative regions of Kenya was collected proportionately. Primary data was gathered and analyzed using structured questionnaires. The measures of dispersion were used to compute means, frequencies, and standard deviation from grouped data obtained from the overall Likert scale while inductive statistics such as logistic regression, were applied to investigate the relationship between the study variables using advanced SPSS computer software version 23. The results of the logistic regression analysis indicated that financial market awareness, financial planning services, credit risk education, and credit counseling services had a significant and positive influence on access to credit. The analysis also suggested that borrowing behavior had a significant effect on financial advisory services and access to credit. The findings suggested an important role of financial advisory services in facilitating access to credit for micro-enterprises in the formal sector. However, the low levels of financial market awareness, financial planning services, credit risk education and credit counseling services have hindered access to credit for financing the regulated micro-enterprises, thereby affecting the overall performance of the MSMEs sector. The study advises that the Government develops strategies for active engagements to promote financial market awareness, financial planning services, credit risk education, and credit counseling services to enhance access to credit. Further, licensing of more certified financial planners and inclusion of a credit counselling certification program with certified counselors in the capital markets will be beneficial. The enhancement of the MSEA’s mandate to include technical assistance and incentives to credit counseling and financial planning firms’ professionals as well as support to the micro-enterprises to offer competitive interest rates and reduce lending limitations like lengthy paperwork and high collateral requirements will be positive for access to credit. Further studies are needed to comprehend the role of gender and digital financial services in access to credit and the potential impact of the current regulatory environment on financial access and the effectiveness of government policies in increasing access to credit