Discouraged borrowers and access to finance: Evidence from Kenyan SMEs

This paper examines the incidence and determinants of credit rationing and borrower discouragement among Kenyan SMEs using firmlevel data from the 2018 World Bank Enterprise Survey. Only about onequarter of firms report no financing obstacles, while the majority face constraints of varying severity. Younger, informally registered, femaleowned, and unaudited firms are significantly more likely to be constrained, consistent with informational opacity and limited collateral. Credit application patterns indicate extensive selfexclusion: roughly threequarters of SMEs do not apply for loans despite plausible financing needs, citing anticipated rejection, high interest rates, collateral requirements, or other perceived deterrents. Among those who apply, approval rates exceed 90 percent, suggesting that effective rationing arises mainly from preapplication barriers rather than lender denial. These findings indicate that frictions-limited transparency, weak disclosure, and elevated borrower risk perceptions-play a central role in suppressing SME participation in the formal credit market. Policies that expand collateral substitutes, strengthen credit information systems, and support financial reporting could alleviate these frictions and broaden access to credit.