THE EFFECTS OF SELECTED FACTORS ON THE CHOICE OF CAPITAL STRUCTURE OF SMALL AND MEDIUM ENTERPRISES (SMES) IN KIAMBU COUNTY, KENYA

ABSTRACT 
This study was on the effect of selected factors influencing the capital structure of Small and Medium Size Enterprises (SMEs) in Kiambu County, Kenya. SMEs play a pivotal role towards the achievement of the broad goals outlined in vision 2030 and are critical drivers towards making Kenya an industrialized country with high quality of life for its citizens. The study observes that despite their significance past statistics indicate that three out of five SMEs fail within the first few months of operation and 80 per cent those that continue fail before the fifth year. The objectives of the study were to determine the effect of firm size, information availability, purpose of finance, cost of finance, and collateral requirement on the capital structure of SMEs in Kiambu County. The study findings will assist Government planners in understanding how to come up with policies that will help the SMEs sector in raising affordable capital; financiers will benefit from the findings by developing a better understanding of the factors that influence the capital structure of SMEs; and contribute to knowledge about financing decisions of SMEs. The study was guided by pecking order theory, and the life cycle approach. This study utilized explanatory research design. The study used proportionate sampling by utilizing a sample of 268 respondents. The data were collected from interview schedules using questionnaires and analyzed using descriptive and inferential statistics (Pearson‟s correlation and regression). The study findings indicated that the size of the business, availability of information, purpose of the finance, cost of capital, and collateral security influenced the capital structure of the firms to great extent and to greatest extent respectively. The research sought to test the hypotheses in order to fulfill the objectives of the study by using logistic regression. All of the null hypotheses were rejected on the basis that the significance of the t-statistic was 0.000 which was less than the p-value 0.05 set for the study. Therefore, all the selected factors had an effect on the choice of capital structure for SMEs in Kiambu County. The study recommended that the Government should introduce targeted legislation that ensures universal access to information by SMEs. In addition, the Government should negotiate favourable interest rates and flexible repayment period to encourage SMEs to borrow from financial institutions.

CHAPTER ONE 
INTRODUCTION 
Background of the study 
In both developing and developed countries, Small medium enterprises (SME) play important roles in the process of industrialization and economic growth (Akhabonje & Namusonge, 2016). The significance of Small and Medium-size Enterprises (SMEs) in economic development has been recognized worldwide. Abor (2008) and Floyd and McManus (2005) reinforce this recognition in the observation that most developing countries, have an absence of many large firms thus implying that the SME sector is the main engine of growth. 

The Small and Medium Enterprise (SME) sector is the backbone of the European economy, accounting for over 66% of the exports, employing over 70% of the available workforce and generating 56.2% of its private sector turnover (Duarte & Martins, 2016). The extent of this sector's economic consequence is highlighted by the fact that 99.8% of the 17.9 million enterprises in the European Union are SMEs (Duarte & Martins, 2016). Research has shown that capital structure is a significant factor contributing to the growth of small firms (Brown, et al., 2008). At the end of 2015, United Kingdom (UK) Small and Medium Enterprises (SMEs) had about £50.9 billion worth of inventory on their balance sheet (ABFA, 2015). This amount indicates that investment in inventory is substantial for UK SMEs. 

Small, micro and medium-sized enterprises (SMEs) play a very significant role in the economy of any country, both developing and developed nations as well as to the individuals. SMEs provide employment and improve the living standards of individuals-both the employers and employees. They are a major source of entrepreneurial skills and innovations. Entrepreneurship is progressively recognized as a vital driver of economic growth, creativity, productivity as well as career, which is generally recognized as being an essential area of economic dynamism. Transforming thoughts directly into economic opportunities could be the definitive difficulty regarding entrepreneurship. Heritage ensures that economic improvement is being considerably advanced by real people who are entrepreneurial as well as revolutionary, able to make use of opportunities as well as ready to consider pitfalls (Hisrich, 2005). Consequently, the role of entrepreneurship and an entrepreneurial culture in economic and social development has often been undervalued. 

Small and Medium Enterprises (SMEs) are very important for employment creation and are important sources of economic growth (Tambunan, 2005). It is therefore not a surprise that Small and Medium Enterprises (SMEs) receive ample attention in Iraq. Early review indicates that Iraq small and medium enterprises (SMEs) account for more than 99 per cent of total companies in the country. The evidence suggests that small and medium enterprises (SMEs) play a vital role in the nation‟s economy and wellbeing. The largest concentration of Small and Medium Enterprises (SMEs), in terms of numbers, can be found in the textile and apparel sector, followed by food and beverages, metals and metal products, and wood and wood products (Harash, et al., 2014). 

The promotion of small and medium enterprises (SMEs) is regarded as an important issue in many countries, including Iraq (Harash, et al., 2014), because it plays considerable responsibility in providing further employment and conversion of economy. It is also implicit that sectors conquered by Small and Medium Enterprises (SMEs) are better able to develop dynamic economies of scale (Jasra, et al., 2011). The roles of Small and Medium Enterprises (SMEs) in the creation of productive employment are concerned with its position in the center of the range of sizes and resources intensities in a rising economy. Developing economies have started to focus on the crucial role that small and medium enterprises (SMEs) can play in their development (Maad, 2008). Due to the importance of Small and Medium Enterprises (SMEs) in relation to the economic development in a country, studies linked to this field are extremely important to enable researchers and stakeholders to improve their knowledge and expertise in the management of small and medium enterprises (SMEs) (Harash, et al., 2014). 

In today's increasingly globalized economy, Small and Medium Enterprises (SMEs) are usually feeder industries for larger industries and they are crucial for economic growth and development (Kongolo, 2010). Small and Medium Enterprises (SMEs) are now considered to be the major source of dynamism, innovation and flexibility in emerging and developing countries, as well also the economies of most nations. They contribute substantially to economic development and employment generation (Koh, et al., 2007). Small and Medium Enterprises (SMEs) form as a potential economic back-bone of many regions and make a large contribution to employment than large companies (Chin, et al., 2012) 

Majority of SMEs in developed countries have been found to be heavily dependent on bank finance (Benneworth, 2004). The differences in institutional arrangements and financial markets between developed and developing countries actually merit the need to look at the issue of SMEs financing from the perspective of developing economies, especially within the context of sub-Saharan Africa. Small and Medium Enterprises (SMEs) have an important role to play in the development of the country. A strong SME sector contributes highly to the economy, contributing to the gross domestic product, by reducing the level of unemployment, reduction in poverty levels and promotion of entrepreneurship activity. 

In South Africa (SA), the growth of SMEs and prevalence of SMEs is significantly low. Strong Small and Medium Enterprises (SMEs) sector contributes highly to the country‟s economy, contributing to the Gross Domestic Product (GDP) by reducing the level of unemployment, reduction in poverty levels and promotion of entrepreneurship activity. The role of SMEs in the development of the country is significant (Bayati & Taghavi, 2007). SMEs in South Africa (SA) and across the globe still encounter many challenges, despite their importance and significance of SMEs and their contribution to economic growth which hinder business growth. It is obvious that hurdles in the business success are far more than it was previously. The environments, as well as some factors, are very complex and dynamic. 

SMEs have the ability to make a meaningful reduction in the high level of unemployment and contribute to the GDP of the local economy in SA. Besides assisting in curbing the high level of unemployment, SMEs can be used as a means of transforming the country, by redistributing the productive assets, amongst the previously disadvantaged. The failure rate of SMEs is high throughout the world with the situation being no different to South Africa (Fang, Yuli & Hongzhi, 2009). 

In Ghana, the most commonly used definition of SMEs is the number of employees of the enterprise. In applying this definition, however, there is some controversy in respect of the arbitrariness and cut off points used by the various official records (Dalitso & Quartey, 2000). The Ghana Statistical Service (GSS) defines small businesses as enterprises that employ less than 10 persons while those that employ more than 10 people are classified as Medium and Large-Sized Enterprises. Alternately, the National Board for Small Scale Industries (NBSSI) in Ghana utilized both the „fixed asset and number of employees‟ criteria to define SMEs. According to the NBSSI, enterprises with not more than 9 workers, has plant and machinery (excluding land, buildings and vehicles) and not exceeding 10 million Cedis (US$ 9506, using 1994 exchange rate) are considered as Small Scale Enterprises. 

Mutandwa and Kanuma (2015) states that small and medium enterprises (SMEs) are often identified as one of the most important strategies for enhancing the livelihoods of people in Rwanda. Apart from increasing per capita income and output, SMEs create employment opportunities, enhance regional economic balance through industrial dispersal and generally promote effective resource utilization considered critical in engineering economic development. 

In Kenya, Kithae, Gakure and Munyao (2012) explain that SMEs play a pivotal role towards the achievement of the broad goals outlined in vision 2030 and are critical drivers towards making Kenya an industrialized country with high quality of life for its citizen. Mulwa (2014) states that the small and medium size enterprises present the most dynamic economic foundation for growth, income and employment creation .In Kenya 18% of the GDP and 80% of the workforce population are employed in SMEs, sector according to Kithae (2012). SMEs are seen to provide apparently goods and services at a reasonable price, employment and incomes to a large number of individuals (Kauffmann, 2006). Several research, have been conducted to establish the relationship between economic growth and business development (Harris and Gibson, 2006). 

Micro, small and medium sized enterprises are credited to offering about 75% of the general employment and contributing about 18% of GDP in the Kenyan economy. These enterprises cut across all sectors of economy including general trade (wholesale and retail), services, farm activities and manufacturing (Atieno, 2009). 

SMEs based on the characteristics of the business, such as size, level of operations, type of industry, assets employed, and number of employees, turnover, market, management or control of the business or several others (Wanjohi & Mugure, 2008). In the Kenyan context, SMEs play a key role in growth of the economy. The Kenya situation is no different from the rest of the world in as far as the recognition and support of the small business is concerned. However, the emphasis on the sector, which has been recognized as informal, and "Jua Kali" did not take place until after 1972 following the ILO report on the World Employment program (Sessional Paper No. 2, 1992). The report laid a lot of emphasis on the possibilities of the informal and small business sector creating employment and generating income for the majority of the Kenyan people. 

As a result of this recognition, the small business sector was given considerable attention in the subsequent Governments plans. The importance of the sector is particularly apparent in its ability to provide reasonably priced goods, services, income and employment to a number of people (Mullei & Bokea, 1999). It is for this reason that there has been a growing interest and concern by the government and development agencies for the improved growth of SMEs. It has become common knowledge among scholars that the importance of the role played by SMEs cannot be over emphasised (International Labour Organization, 2002). 

The 1999 GOK baseline survey indicated that there were 1.3 million small enterprises (SMEs) employing 2.3 million people and generating as much as 18% of Kenya‟s Gross Domestic Product (GDP) (Cincotta, 2014). The contribution of SMEs is more than double that of the large manufacturing sector, which stands at 7% of the GDP (Government of Kenya [GoK], 1999). Overall, SMEs create 75% of all new jobs. Estimates based on the 2003 baseline survey showing that, in the year 2002, the SME sector employed about 5,086,400people, up from 4,624,400 in 2001. This was an increase of 462,000 persons and consisted of 74.2% of total national employment (Mokua, 2011). 

The long-term growth and competitiveness of SMEs are compromised by poor choice of financing, among other systematic and institutional problems in developing countries. Poor choice financing has been identified as one of the major challenge confronting the SMEs sector in Kenya (Olekamma, 2016). Due to the wrong choice of financing most of the SMEs in Kenya end up closing their businesses in the first year of operation major reason being failure to repay back their loans or underfunding of their operations. 

Small and Medium Enterprises in Kenya may exhibit lack of knowledge on financial resources available in the market leading them to choose expensive sources of finance which they are unable to service. It is important to remember that the SMEs hold the key to rapid technological development and full employment (Mokua, 2011). These enterprises offer a means whereby new employment opportunities can be created in rural areas. The small enterprises would not only provide a livelihood but would also create employment for others, thereby easing up social tensions like insecurity growing in an atmosphere where so many are deprived, a scenario to be found in the underprivileged areas of the developing world.

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Item Type: Kenyan Postgraduate Material  |  Attribute: 85 pages  |  Chapters: 1-5
Format: MS Word  |  Price: KSh900  |  Delivery: Within 30Mins.
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