Essays on the demand and supply of small business finance

This PhD dissertation is a collection of four essays focusing on the demand and supply of small business finance in Kenya. The studies are the result of primary research conducted over three years with both demand-side players, more specifically micro and small-scale entrepreneurs operating in a low-income area in Nairobi. And the main suppliers of small businesses finance in Kenya - commercial banks - which provided data on the size, characteristics and evolution of their SME finance portfolio between 2009 and 2013. Since commercial banks are not the only players in the provision of finance to small firms, the dissertation studies the entire financial landscape of both formal and informal financial providers, including institutions such as microfinance institutions, savings groups and moneylenders among others. The dissertation is divided in two parts: the first half of the dissertation analyses the determinants, effects and challenges of access to formal and informal finance by small enterprises in Nairobi (Essays 1 and 2). These two essays use primary data collected through a survey questionnaire with 344 micro and small enterprises in a low income neighbourhood in Nairobi. The analysis describes the financial landscapes in which businesses operate and the effects of access to credit on firm performance (e.g. investments, profitability and employment growth.). The second half of the dissertation analyses the supply-side, more specifically the relation between formal financial sector development and economic growth (Essay 3) and the characteristics and development of bank financing to SMEs (small and medium enterprises) in Kenya (Essay 4). Essay 3 relies on secondary time-series data taken from the World Bank databases, whereas Essay 4 uses original survey data administered to commercial banks in Kenya in two survey rounds in 2012 and 2014. Each essay in this dissertation is a standalone study with its own literature survey, research questions, data and methodological approach. The main findings of the demand-side chapters is that informality has significant effects on access (or exclusion) to bank finance, but is less relevant when we investigate informal financial instruments such as self-help groups and family/friend loans. Essay 2 of the dissertation shows that different types of loans have different effects on the performance of businesses, and that loans from commercial banks seem to incentivize investments and employment creation more than other types of loans. The supply-side chapters on the other hand show that there is a long-term association between financial sector development in Kenya and economic growth, and that there is a reciprocal relation of causality over the long-run. Finally, Essay 4 shows that bank financing to SMEs has grown steadily over the last few years and that banks are increasingly exposed to small businesses in their lending portfolio. However, the financial products to SMEs tend to be unsophisticated and concentrated in few sectors.