Bridging the financial gap in MSME financing in Kenya

Micro, small and medium enterprises (MSMEs) are critical drivers towards the growth of the economy and contribute largely towards poverty eradication and employment. In Kenya, the MSME sector contributes to 40% of GDP, and employs approximately 14.9 million. Yet, this sector continues to experience difficulties in accessing credit from financial institutions. MSMEs' find it difficult to access credit from banks while banks find it difficult to lend to MSMEs due to lack of visibility. Additionally, reliance on informal credit sources in unsustainable. MSME borrowers are often trapped in vicious cycles of indebtedness and predatory lenders hampering firms' long-term performance. As a result, this study seeks to examine the key constraints hindering MSMEs' access to formal financing and their contribution to the financing gap. Similarly, to evaluate policy interventions that can enhance credit availability and bridge the MSME financing gap. The study adopted a logit regression estimation model, with the average marginal effects used to interpret the findings. The results indicate that lenders perceive MSME borrowers as risky and use credit measures like collateral to mitigate these risks. Factors like lack of collateral, guarantors, negative CRB listing exclude MSMEs from access to credit. Therefore, there is need for policies aimed at supporting banks in extending credit to MSMEs' as well as building capacity among the MSMEs in Kenya for their growth and sustainability