Effects Of Interest Rate Capping On Financial Performance Of Agribusiness Small And Micro Enterprises In Nyeri Central Sub County Kenya

Abstract

This study investigated the effects of interest rate capping, firm size and financial performance of small and micro enterprises in agribusiness nyeri central sub county Kenya. The study sought to establish the effect of increase collateral requirement, increase of credit processing period and additional customer information requirements after interest rate capping on the financial performance of Agribusiness SMEs in the Nyeri Central Sub County. The study also sought to establish the effect of size of Agribusiness as a moderating variable on the financial performance of Agribusiness SMEs. The theories used in the study are; the pecking order theory, the theory of financial intermediation and the dynamic trade off theory. The target population of this study was 950 licensed SMEs while the sample size was 274 licensed SMEs operating in the Nyeri Central Sub County. A pilot study was conducted to enhance the validity and reliability of the data collection instrument. Cronbach alpha coefficient of 0.7 was used to ascertain test the reliability of the data collection instrument. Inferential statistics was also carried out to establish the nature of the relationship that exists between variables. Data was interpreted with the help of 0.05 significance P-values. Model fitness R2, ANOVA statistics and regression coefficient were generated. Prior to running a regression model, multicollinearity test and normality test were conducted. Data that was analyzed was obtained from 237 respondents out of the targeted 274 achieving 86.5% response rate. Frequencies and percentages were generated from the data and presented using frequency distribution tables while bivariate and multiple regression analysis were conducted to establish relationship of each parameter of the independent variables in the study. The results indicated that increase in credit processing period due to interest rate capping had a negative and statistically significant effect on financial performance of Agribusiness SMEs. Collateral requirement due to interest rate capping had a negative and statistically insignificant effect on financial performance of Agribusiness SMEs but a statistically significant effect after introducing size of Agribusiness as moderating variable. Additional customer information requirement due to interest rate capping had a positive and statistically significant effect on financial performance of Agribusiness SMEs. The study concluded that interest rate capping affects the amount of financing SMEs receives due to increased requirements which in turn affect the SMEs financial performance. The study concluded that the size of Agribusiness as a moderating variable had an impact on financial performance of Agribusiness SMEs. The study recommends that Agribusiness SMEs should expand their operations as the size of their business is a factor that enhances access to credit and collateral considerations. In addition, Agribusiness SMEs should maintain all the records and books of accounts required and prepare final accounts as this may enhance financial performance. Further, government should play its role of enabling SMEs to access finance from financial institutions by intervening or providing alternative options. Future research could focus on the benefits of interest rate capping on financial performance of SMEs.