The Effects of Lending Interest Rates on Performance of SMES in Kenya

Abstract

Small and Medium Enterprises (SMEs) play a vital role in the country’s economic growth through the creation of employment. They also contribute largely to the Gross Domestic Product (GDP) since 98% of businesses in the country are SMEs. Thus, following Kenya’s Vision 2030 there has been a need to protect these enterprises. However, SMEs in Kenya have been faced with numerous challenges which are not limited to affordability of financing options. These enterprises mostly rely on financial institutions for funding, which at times offer unfavorable conditions for bank loans making it hard to access the loans. These challenges hitherto, have caused the failure of these SMEs, because, without capital, operations are minimal. Empirical research has shown that interest rates attached to loans are a major factor SMEs consider when getting loans. High lending rates discourage borrowing since repayment of such loans may take up all of the business proceeds which limits the performance of these enterprises. The study sought to analyze the effect of lending interest rates on the performance of SMEs in Kenya. The study adopted a descriptive research design with a simple linear regression model. The population of the study comprised of small business owners and financial institutions managers in Nairobi Central Business District (CBD). Nairobi CBD is Kenya’s epicenter for business. The study revealed a direct relationship between interest rates and the performance of SMEs. The study recommended the need to restructure bank interest rates to be more ‘consumer-friendly.’ This would encourage SMEs to take up loans that will enable them finance investments and thus improve their performance. Moreover, this would pave the way for job creation which would eliminate the problem of massive unemployment in the country and bring the country closer to realizing Kenya Vision 2030.

Keywords: Interest Rate, Financial Institutions, Performance, Small and Medium Enterprises, Lending Rate

DOI: 10.7176/EJBM/13-8-15

Publication date: April 30^th 2021