Formal and Informal Institutions

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Formal and informal institutions’ lending policies and access to credit by small-scale enterprises in Kenya: An empirical assessment

By

Rosemary Atieno
University of Nairobi

AERC Research Paper 111 African Economic Research Consortium, Nairobi November 2001

© 2001, African Economic Research Consortium.

Published by: The African Economic Research Consortium P.O. Box 62882 Nairobi, Kenya

Printed by:

The Regal Press Kenya, Ltd. P.O. Box 46116 Nairobi, Kenya

ISBN 9966-944-52-4

Contents
List of abbreviations List of tables Acknowledgements Abstract 1. 2. 3. 4. 5. 6. 7. 8. Introduction Problem statement Objectives and hypothesis of the study Literature review Structure and performance of the financial sector in Kenya Methodology Empirical results Conclusions and policy implications 1 3 4 5 13 20 23 37 40

References

List of abbreviations
ACK ANOVA GDP ICDC K-REP Ksh MAGs NBFIs NGOs POSB PRIDE ROSCAs SACCOs SCAs SMEs Anglican Church of Kenya Analysis of variance Gross domestic product Industrial and Commercial Development Corporation Kenya Rural Enterprise Programme Kenya shillings Mutual assistance groups Non-bank financial institutions Non government organisations Post Office Savings Bank Promotion of Rural Initiatives and Development Enterprises Rotating savings and credit associations Savings and credit cooperative societies Savings and credit associations Small and microenterprises

List of tables
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Distribution of main occupation of respondents Selected characteristics of the surveyed entrepreneurs Results of t-test for the differences in means between the amounts applied for and received in both formal and informal credit markets Differences between means: Amount of credit from formal and informal sources Differences between means in credit from informal market segments Distribution of the use of formal sources for initial and operating capital Formal credit sources used by past and current credit participants Distribution of the use of informal sources of finance for initial and operating capital Informal credit sources used by past and current credit participants Differences between means of selected characteristics for credit users and non-users Differences between means of selected characteristics of formal and informal credit users Mean values of selected loan aspects by formal and informal institutions 23 24 26 28 28 30 30 32 32 34 35 36

Acknowledgements
I would like to thank the African Economic Research Consortium (AERC) most sincerely for the financial support for carrying out this study. I would also like to extend my gratitude to the resource persons of group C as well as the AERC workshop participants for their valuable comments and inputs during the various stages of this study. I also thank the two anonymous reviewers for their comments on the final version of this paper. I remain responsible for any errors in the paper.

Abstract
This study assessed the role of institutional lending policies among formal and informal credit institutions in determining the access of small-scale enterprises to credit in Kenya. The results of the study show that the limited use of credit reflects lack of supply, resulting from the rationing behaviour of both formal and informal lending institutions. The study concludes that given the established network of formal credit institutions, improving lending terms and conditions in favour of small-scale enterprises would provide an important avenue for facilitating their access to credit.

Key words: Lending policies, credit access, credit institutions, small and microenterprises

FORMAL AND INFORMAL INSTITUTIONS' LENDING POLICIES

1

1. Introduction

T

he provision of credit has increasingly been regarded as an important tool for raising the incomes of rural populations, mainly by mobilizing resources to more productive uses. As development takes place, one question that arises is the...
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