Faculty of Commerce, Administration and Law

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    Small and medium scale manufacturing enterprises in Kenya:a perspective on alternative sources of financing
    (University of Zululand, 2005) Migiro, Stephen, Oseko; Wallis, Malcolm
    Small and medium-scale enterprises (SMEs) form the majority of the enterprises in the Kenyan economy. They employ a large share of the labour force. The sector is perceived as an alternative employer. Recent studies show that SMEs are at least as important as large firms in the creation of gross and net new jobs. Notwithstanding their importance, most SMEs are unable to exploit the increased market opportunities due to a number of constraints. This is because of either low productivity, incapacity to face competition from imports or in export markets, constraints to adapt new technologies and or a lack of finance. Financing of the sectors' activities is always cited as one of the problems facing the sector. The literature review on SME's access to bank finance indicates that most SME operators have limited access to bank finance. SME access to the formal financial sector is constrained by high risks and transaction costs associated with commercial lending. To develop them and maintain their contribution, initiatives are required to enable them grow and flourish. The aim of this study was to provide a perspective on use of alternative finance by SMEs in Kenya. The study focused on three manufacturing sub-sectors, namely: Textile and Garment, Furniture and Wood products and Metal and Metal products. To achieve this aim, the study sought to identify factors influencing the financing structure of SMEs such as enterprise demographic factors, investigate alternative methods or models of SME financing; identify factors which limit SMEs access to credit from the formal financial market, main sources of SMEs finance, and suggest and recommend measures to improve SMEs finance in Kenya. The study employed survey research design methodology in which combinations of research methods were used. These included questionnaire survey, observation; face to-face interviews and literature review. Various enterprise finance theories making up the meta-theoretical framework used in the study and empirical studies of small enterprises' capital structure are discussed as aprelude to the empirical study. Empirical data was collected from 380 respondents to answer research questions and to test various hypotheses concerning the determinants of capital structure of the enterprises in the study. The aspects of capital structure covered in the analyses were alternative sources of finance [long-term and short-term and the demographic characteristics of the SME operators and their enterprises. Quantitative data from the survey was analyzed with the application of micro fit software and descriptive statistics. Content analysis was applied to qualitative data from open-ended questions and structured interview schedule on key informants. The findings indicates that the SME manufacturing activity is male dominated; majority of the manufacturing SME operators fell in the 30-49 age categories; had secondary education; do not to have any formal training in business management; have not changed accounts from one bank to the other; and majority of the enterprises in the survey are sole proprietorships. Further, empirical results indicate that interest rate and collateral requirement are the major factors influencing choice of finance. The overall results show that personal savings is used as the main source of enterprise financing. Specifically, there was general agreement amongst the operators that bank finance is least used and that alternative finance is least used and poorly understood or not understood at all. In addition, there was a very insignificant level of computer literacy among the SME operators in the study. The study notes that SME financing in Kenya; and in particular the use of alternative finance needs to be addressed. It is recommended that a Small Business policy division be established by the government of Kenya, responsible for promoting small business policy; establishment of a business portal to not only harmonise, but also facilitate provision of online support services to the maximum number of financial and other services; establishment of a central data bank on national business activities including those of small and medium-scale enterprises. The system to maintain comprehensive and objective data sets relating to the financing of SMEs, particularly on demand for and supply of financing; promote inter-firm linkages and provide information on availability of alternative sources of finance. The study further suggests a hybrid structure of SME financing between the micro-finance institutions (MFIs) and the formal financial institutions. The model suggests an introduction of micro and small business finance windows in commercial banks, developing linkages between micro financial institutions and commercial banks. In addition, the study proposes the establishment of a national SMEs development bank that will act as a revolving fund to boost the development of SMEs. The proposed bank to be linked to municipal/city council SMEs revolving funds. This will ensure that there is an all-round concerted effort at stimulating and monitoring SME activities. The strategy will help allocate limited national resources to target industrial activities that will jump-start the industrial process, using both local and foreign resources. It is further recommended that longitudinal studies be considered to meet data needs in the SME sector. Such studies will help identify real financing gaps among other gaps in the sector for the application of intervention measures. In conclusion, the study makes a distinct contribution to the theory and practice of financial management, specifically alternative financing in the small and medium-size organizations, not only in Kenya but for other countries in Africa as well. The study also presents a basis for educational, developmental and training parameters, which enlightened institutions can implement in formal training programmes. Finally, organisations that facilitate the financing of small and medium-size businesses are encouraged to maintain comprehensive and objective data sets relating specifically to the financing of SME's.
University of Zululand