Effect Of Monetary Interventions On Access To Credit Among Small And Medium Enterprises In Kisumu County, Kenya: The Role Of Financial Innovations

Abstract

Monetary interventions are activities by the Central Banks to control quantity of money and credit supply. However, access to credit by Small and Medium Enterprises (SMEs) has been pinpointed as the most critical hindrance to their growth. SMEs form about 90% of businesses worldwide and provide most of the jobs in the developing economies. Nonetheless, they enjoy less access to external credit and face higher transaction costs and risk premiums. About 70% of them do not access external credit while 15% more are underfinanced. Assessment of the impact of interest rate caps, cash reserve ratios, open market operations, and moral suasion, respectively, on credit availability, as well as an examination of the moderating function of monetary innovations in the connection between these factors and credit availability were the specific goals. The theories of monetary theory, loanable funds, and liquidity preference provided guidance for the research. The study used a descriptive survey-based approach and was motivated by positivist philosophy. 1472 small and medium-sized businesses in Kisumu County, Kenya, that were registered with the Ministry of Commerce and Industry made up the target population. An accurate representation based on Taro Yamane's formula was obtained at a 95% confidence level. A sample of 420 small and medium-sized business owners and financial executives were given a closed-ended questionnaire. The instrument's internal consistency was validated by a Cronbach's alpha of 0.801, and expert opinion was used to evaluate its face as well as content validity, yielding a scalar validity of content index of greater than 0.9. The basis for the inductive evaluation based on regression and correlation studies came from diagnostic tests as well as descriptive analysis. The findings indicated that the following factors had statistically significant influence on small and medium-sized businesses' ability to obtain credit: interest rate caps, cash reserve ratios, open market activities, and moral persuasion. Furthermore, the link between interest rate caps, cash reserve ratios, open market operations, moral persuasion, and SMEs' access to credit was statistically moderated by financial innovations. These findings have important ramifications for central banking and microfinance theory, practise, and policy in Kenya and elsewhere. This is due to the results' explanation of how financial innovations contribute to monetary policy's increased efficacy. The results, in particular, offered empirical support for the importance of financial innovations' moderating influence in interventions aimed at monetary interventions. The study came to the conclusion that financial innovations mitigated the direct and hierarchical impacts of monetary interventions, which were necessary for SMEs to get loans. According to the study, policymakers should focus on enhancing the procedure and function of financial developments in the connection between the selling and buying of governmental securities along with selective control over credit access by SMEs. They should also use sector-specific interventions rather than general ones to guarantee increased access to credit.