Linkages, Access to Finance and the Performance of Small-Scale Enterprises in Kenya
Micro- and small-scale enterprises (MSEs) have become important players in the Kenyan economy, but at the same time they continue to face constraints that limit their development. Lack of access to financial services is one of the main constraints, and a number of factors have been identified to explain this problem. These include the segmented and incomplete nature of financial markets, which increases transaction costs associated with financial services. On the supply side, most formal financial institutions consider MSEs uncreditworthy, thus denying them credit. Lack of access to financial resources has been seen as one of the reasons for the slow growth of firms. Literature from the new institutional economics, however, shows that institutional arrangements, like linkages and networks between firms, provide an important avenue through which firms can overcome some of these constraints. Therefore, the question that arises is how can such institutional arrangements contribute to the development of small-scale enterprises? This paper explores whether networks and linkages between the MSEs and financial institutions affect their access to financial services and performance. Using primary data collected from a sample of small-scale enterprises in two urban centres of Kenya, the paper analyses the nature of linkages between MSEs and financial institutions as well as the networks existing among MSEs, and the effect they have on enterprise performance. The results show that small scale enterprises have different, albeit limited, forms of networks among themselves, and linkages with financial institutions. Some of these linkages have advantages, which are reflected in the firms’ performance. The paper concludes that there is need for policy to strengthen the institutional networks among MSEs, to enable these access resources to overcome some of the constraints they face.