ACCESS TO CREDIT, FIRM SIZE AND FINANCIAL PERFORMANCE OF MANUFACTURING SMALL AND MEDIUM ENTERPRISES IN EMBAKASI CONSTITUENCY, NAIROBI COUNTY

Abstract

This study examined the effect of interest rates, collateral requirements, and credit availability on the financial performance of manufacturing SMEs in Embakasi Constituency, Nairobi County, and tested firm size as a moderator of these relationships. The study was anchored in Pecking Order Theory, the Resource-Based View, Trade-Off Theory, and Credit Rationing Theory. An explanatory cross-sectional design was used. The target population comprised 792 manufacturing SMEs, from which 265 firms were selected through proportionate stratified random sampling. Of the 265 questionnaires distributed, 231 were returned, representing an 87.2% response rate; after the missing-data screen, 230 cases were used in the main statistical analyses. Data were collected using a structured five-point Likert-scale questionnaire and analysed using reliability tests, factor analysis, Pearson correlations, multiple regression, and hierarchical moderated regression. Interest rate had a negative and significant effect on financial performance, collateral requirements had a negative and significant effect, and credit availability had a positive and significant effect. Firm size significantly moderated the interest-rate, collateral, and credit-availability relationships. The findings show that credit conditions are not uniform across SMEs: smaller firms are more vulnerable to costly and collateral-intensive lending but obtain larger marginal benefits when access improves. The study recommends size-sensitive lending, more flexible collateral arrangements, strengthened credit information, and complementary financial-management support for manufacturing SMEs.