Trade Credit Uncertainty and Financial Performance of Manufacturing Firms in Kenya

Abstract

The main objective of this study was to find out if uncertainty in trade credit of manufacturing firm in Kenya affects their financial performance. Manufacturing firms in Kenya have not been performing to their expectation. They are expected to contribute to economic growth of the country through GDP increment, market share, attract largest strategic investments in Key processing industry, increase sales both locally and international and employ at least 20% of Kenya Population. It was noted that the manufacturing firms have been facing various challenges both financial and non-financial. Contribution to GDP has staggered at an average of 10%, profit and sales have been declining and some firms have completely moved out of market. Many factors have been cited to be contributing below expectation performance. However, the influence of trade credit uncertainty on financial performance of manufacturing firms in Kenya is not conclusive. Hence, necessitating the current study to examine the influence of trade credit uncertainty on financial performance of manufacturing firms in Kenya. The study anchored its variable on credit risk theory. Indicators of trade credit uncertainty were credit exposure rate and default rate, and proxy of performance were ROS and ROE. The study adopted positivism Philosophy and correlation design. Target population was 856 manufacturing firms registered with KAM. A sample of 90 firms was selected using Stratified random sampling technique for 14 sectors and each sample picked by random sampling. The study covered a period of 12 years starting from 2009 to 2020 all years inclusive. Panel data was collected from audited financial statements and annual reports published using data collection instrument. Pre and post diagnostic tests were carried out on collect data to test assumption of linear regression using E-view 11.8. Tests done were Normality test, Hausman test, Unit root test, Heteroskedastic test, autocorrelation, and multicollinearity test. Results showed that trade credit uncertainty had positive and significant impact on financial performance of manufacturing firms in Kenya. The study recommends having credit policy in place that will help to reduce losses because of high exposure rate.

Keywords: Trade credit uncertainty, credit exposure rate, default rate and Financial Performance.

DOI: 10.7176/RJFA/13-10-08

Publication date:May 31^st 2022