Financing preferences of micro, small and medium enterprises in Kenya: A discrete choice experiment
Date
2020
Authors
Kimani, Stephanie Muthoni
Journal Title
Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
MSMEs are universally acknowledged as key drivers of economic growth, due to their significant
contribution to production, employment and innovation (Keskin, Senturk, Sungur & Kiris, 2010).
However, despite their contribution to economic development, studies found that small firms faced
more financial constraints as compared to large finns (Beck, 2007). As a result, governments and
international bodies such as the World Bank prioritized implementation of policies and initiatives
to boost SME growth. On the other hand, private banks and other fmancial service providers seized
the opportunity to realize profits by expanding their services to the informal sector. Despite these
efforts, evidence exist that MSMEs prefer to use informal sources of finance to meet their financial
needs and obligations. It is not clear whether this is as a result of preferences or financing
constraints. This study adopts the use of both revealed preferences from the 2016 MSME survey
by KNBS (Kenya National Bureau of Statistics) as well as discrete choice experiment to elicit
financing preferences of MSMEs in Kenya. A choice experiment is administered to a sample of
small-scale enterprises in Nairobi to assess how they value a range of financial products. DCE data
collected is analyzed using McFadden's conditional logit model with unknown parameters
estimated using maximum likelihood procedure. The results from the choice experiment are
consistent with revealed preference data collected from the MSME 2016 survey. Conclusively, the
study finds that interest rates are the most important attributes followed by form of collateral and
speed of accessibility. Moreover, the most preferred source of financing was found to be Mobile
banking, SACCOs followed by Commercial Banks. Lastly, the study supports that the Discrete
Choice Experiment is effective in studying the financing preferences of small businesses in Kenya
due to the convergence of stated and revealed preferences.
Description
Submitted in partial fulfillment of the requirements for the Degree of Bachelor of Business Science Financial Economics