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Effects On Credit Accessibility Of Smes From Microfinance Economics Essay

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In global context, womens empowerment can be interpreted as a process in which women challenge the existing norms and culture in order to effectively improve their well-being. This is especially interesting, given the importance of the access to financial services – especially microfinance – in Sida’s key strategy document “Perspectives on Poverty” (2002) and Sida’s policy Promoting Gender Equality in Development Work (2006) Rhyne E and M Otero (2006).

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Among the factors that affect entrepreneurship development in a country is lack of credit. Women entrepreneurs lack adequate physical capital such as credit and savings for business which force them into quest for micro-financial assistance (Ibru, 2009; Kuzilwa, 2005). This is due to unemployment (Akanji, 2006), low household and business income (Lawal, Omonona, Ajani & Oni, 2009), lack of asset collateral required by conventional banks (Brata, 2004; Lawal et al., 2009) and high interest rates (Mohd & Hassan, 2008), their inability to save, size of the firm, age of the firm and type of industry.

For instance, lack of asset collateral necessitated the need for group formation which provided insurance for loan as well as aid in loan monitoring and enforcement (Olomola, 2002). Therefore, since they do not have physical capital as collaterals demanded by conventional banks, they could use social capital demanded by micro-finance institutions (IFC, 2007). Again, in microfinance, interest rates are higher than the conventional banks so as to cover overhead costs such as personnel costs (Otero, 1999). However, such interest rates are charged on weekly returns; as such it becomes lower (Olomola, 2002), and beneficial to women entrepreneurs (Tazul, 2007). Women entrepreneurs had low business performance than their male counterparts, for example in UK and USA (Carter & Shaw, 2006).

Acquisition of resources could also lead to opportunity for entrepreneurial activity. Appropriate use of acquired resources through good business strategy and organizational design could lead to business performance (Brana, 2008; Koontz & Weihrich, 2006; Salman, 2009; Shane, 2003). Again, financial management theorists believe that funds could only be sourced to finance a predetermined project, business or contract). As such, micro-finance could only lead to business performance when there is the tendency to engage in new business or business expansion (Antoncic, 2006; Shane, 2003).

Women are not encouraged to go to banks for financing because they lack credit history. Their limited control over land affects their ability to secure finance because they are unable to provide collateral. This means that any growth objectives they have are impeded (International Labour Organization and African Development Bank, 2004). Access to finance is a serious constraint for women entrepreneurs. It is estimated that despite constituting 43% of SMEs, only 5 percent of Tanzanian women are access banking facilities. Only 0.53% of female-headed households have access to credit (Amanda Ellis, Mark Blackden et al., 2007a). Only 6% of female business owners have any type of banking relationship, compared to 11% of male business owners. The most common type of banking service used by males and females is a savings account (ibid).

A survey on micro credit initiatives targeted at women has pointed out that women have superior credit repayment records and lending to women has a more positive effect on household welfare compared to men (Stotsky, 2006). Although donor-funded micro-finance programmes exist, contrary to popular impression, women-owned SMEs are not major recipients. For example, women’s share of micro-finance clients is 38% in Ethiopia, where women are estimated to own two-thirds of informal and micro enterprises (International Labour Organization and African Development Bank, 2004).

There are several important reasons for the dramatic increase in credit targeted at female entrepreneurs in developing countries. The first is the increasing proportion of women in both developed and developing countries involved in entrepreneurial activity. In Canada, for example, the number of female entrepreneurs tripled between 1986 and 2004 (Cohen, 2006), such that today women account for one in three entrepreneurs in the Canadian economy. Tokman (2009) describes the increasing “feminization” of the selfemployed informal sector in Latin American countries in recent decades.

Berger (2009) notes that while data collection on women’s selfemployment is notoriously poor in developing countries, women own or operate roughly onethird of all informal sector businesses. This number has increased dramatically in recent decades. Reasons for the feminization of informal sector include the limited absorptive capacity and difficulty of entry into the formal sector for women, macroeconomic dislocation and adjustment (especially during the 1980s), and changes in household gender norms. All of these factors have led to a growing percentage of households worldwide that are supported solely by women (Berger, 2009; Clark, 2010).

A second explanation for the rising proportion of female borrowers in credit programs is that, along with issues of economic growth, the NGOdominated microenterprise credit industry has often specifically sought to address issues of women’s empowerment in developing countries. Much recent research has shown that access to credit generates a form of economic empowerment which can greatly enhance a woman’s selfesteem and status within the family (Goetz and Gupta, 2005). Separate empirical studies by Hashemi et al.(2006) and Amin et al. (2008) have explored the relationship between women’s empowerment and participation in microcredit programs. Using empowerment indices such as a women’s independent decisionmaking ability within the household, freedom from restrictions on daily activity, and increased authority and household decisionmaking, the studies find that women in Bangladesh with access to credit score higher than women without credit access, even after controlling for selfselection effects.

In addition, many NGOs and other development institutions prefer to direct credit toward women since studies show that when credit is given to women, it has a greater impact on household welfare than credit directed toward male borrowers. Jiggins (2009), for example, portrays the female enterprise as an institution whose primary purpose is to ensure subsistence consumption for members of the household, in contrast to male enterprises, in which returns are often higher, but more risky.

McKee (2009) and Downing (2010) note the strong relationship that typically exists between a woman’s entrepreneurial income and family welfare, revealing that women have a particular propensity to redirect earnings from a microenterprise to household and children’s needs. Pitt and Khandker (2008) show, in a sample of poor households in Bangladesh, that household consumption expenditure increased 18 taka for every 100 additional taka borrowed by women while the increase was only 11 taka for every 100 taka borrowed by men. They also find that credit for women had a positive effect on both girls and boys schooling.

An important question, however, is whether this increase in household welfare comes at the expense of economic growth. If so, then targeting credit at women in developing countries may embody a tradeoff of longterm economic growth for poverty alleviation, and more immediate improvements in welfare. McKee (2009) argues that “… micro-entrepreneurs are often seeking modest improvements in the stability and level of their earnings, and do not necessarily give high priority to business expansion through reinvestment of profits at the expensive consumption. Women in particular, may prefer to allocate earnings to improve housing or their children’s education.”

1.1 Statement of the Problem

Small and Medium Enterprises (SMEs) have been known to contribute greatly in economic growth of both developed and developing countries. The share of SMEs in employment tends to be higher in developing countries, which are typically more focused on small-scale production. As such, policy provisions remain fundamental in propelling these enterprises towards self-sustenance and realization of their full potentials in contributing towards economic growth.

Previous studies have shown that most women are deprived of access to credit from traditional banks due to high credit risks, level of awareness, social cultural & legal norms, formal and informal institutions lending policies, corrupt practices by officials and poor infrastructure of where they operate their business and live among other factors. Institutions such as MFIs, SACCOs and other micro lenders have come up with innovative ways like group-lending methodology of providing capital to the poor as compared with the traditional banks collateral -based model.

Despite the availability of these loans, they are rarely accessible due to some factors such as interest rates, minimum savings required to acquire a loan, collateral needed prior to the period of borrowing the loan. Given the fact that there are vast opportunities in Nairobi (being the capital city) women still form small informal groups where they pool savings together in order to benefit from group security which is a requirement from micro finance institutions like Faulu Kenya, Women Finance Trust among others to qualify for credit. This study will therefore endeavor to examine the factors affecting Credit accessibility by women entrepreneurs in Nairobi.

Research hypothesis

H01 loan characteristics and capital are significant obstacles on Credit Accessibility of SMEs from Microfinance Institutions in Nairobi.

H02Social cultural factors are significant obstacles on Credit Accessibility of SMEs from Microfinance Institutions in Nairobi

H03 Education level has no significant effects on Credit accessibility of SMEs from Microfinance Institutions in Nairobi.

Research Questions

The study will try and answer the following questions:

What are the obstacles affecting credit accessibility by small and medium Size women entrepreneurs in economic development?

What policies and recommendations can be adopted to increase credit accessibility by small size women entrepreneurs

Significance of the Study

This study will give the all money lenders an independent evaluation of the general determinants of credit accessibility thus the impact of their services on economic development .The study would therefore sensitize the money lenders to avoid mission drift through maintaining or developing products that target the needs of the women in order to retain them.

Since most women tend to prefer to borrow their funds from MFIs, the results of this study would be important to the MFIs that are currently in the process of transformation into regulated deposit taking MFIs in Kenya in terms of addressing the gaps exhibited by the non-deposit taking MFIs .This would enable them to expand their market share by coming up with high – positive- impact products and services while increasing their outreach and financial sustainability.

The women operating SMEs in Nairobi will be great beneficiaries of this study as their grievances as far as credit accessibility is concerned will be addressed. This study will represent their grievances to money lending institutions and thus work towards improving their current situation hence improving credit accessibility.

The study will serve the interests of investors in Kenya who would like to know how the factors that affect the women entrepreneurs in accessing credit especially while making the investment decisions. Last but not least, the project would form a basis for further research by scholars interested in furthering the body of knowledge on microfinance in Kenya

The findings from the study will be of high importance to the government as it will enable the govern monitor economic growth among the women who happen to be the majority in Kenya. It would therefore Guide the Government in formulating adequate and supportive legal, policy and regulatory frameworks that enhance growth and development. This would further result into maximum impact on poverty reduction and economic growth and development.

The Conceptual Framework

The conceptual framework is very important in any research study being carried out. The conceptual framework shows the relationship between the dependent and independent variables .The independent variables are the various factors that influence the dependent variables. Credit accessibility is the dependent variable whereas loan characteristics, capital and social cultural factors are the independent variables.

Loan charactaristics

Credit accesibility

Social cultural factors


Education level

Independent Variables Dependent Variable

Research Design

The study will involve survey design and fact-finding enquiry of different kinds. According to Mugenda and Mugenda, (2008), this is the overall plan of conducting the study in order to answer the research questions and achieve the objective of the study. The study research design will be a descriptive one since it will provide data from the population on the universe being studied; the researcher will have no control over the research variables. The descriptive research design will be appropriate in this type of research because the objective will be to provide a systematic description that will be as factual and accurate as possible. Mugenda and Mugenda, further describes Descriptive research design as concerned in describing the characteristics of a particular individual or group and involves collecting information through interviews and administering questionnaires.

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The main purpose of using descriptive research is because it is accurate indicator of what the researcher intends to measure, and reports the way things are. (Mugenda and Mugenda, 2003). Descriptive design has advantage that it reduces bias, saves time. It also collects and describes relevant data for study and exposes existing relationship between independent variables. It allows researcher to study the proportion of the target population and use sampling measures. Kothari, (2002)

Target Population

The target population will be women led SME’s in Nairobi and particularly those in NCCK. By population means all elements in a researcher area of investigation (Mugenda and Mugenda 2007), the researcher will target mainly the women entrepreneurs. This means that the total population will be 90 women entrepreneurs in various types of businesses as indicated in table below.

The target population of the study

Type of business

Target Population

Retail shops


Hair salons/barber shops











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