Bank lending to small and medium-sized enterprise (SMEs) has changed dramatically. The innovation and sensitivity of external market shock led to changes in the supply of short and long term financing to SMEs borrowers; hence more SMEs are adopting to fintech us a source of financing.
SMEs play an important role in the development of a country. Their role of employment creation, production and distribution of income is important. In Kenya, the economic survey (2006) reveals that SMEs contributes 50 percent of new jobs that were created in 2005. Past researches show that the nation’s GDP gets 18 percent being a contribution from SMEs. The increase in the number of digital lenders (Bala, M-Shwari and Branch) without having a long process of applying for the finances is a positive and a negative at the same time, i.e. Kenya national bureau of statistics, (2007) indicate that three out of five businesses fail within the first few months of operation. The failure is attributed to wrong investment and lack of knowledge for the business.
The role of financing is particularly important in supporting small firms. “SMEs tend to be more financially constrained than large firms, and the lack of access to finance is an important obstacle to their growth. In particular, SMEs find it difficult to obtain external financing from banks and capital markets given their size and characteristic opaqueness. Digital lending has transformed and replaced the use of paperwork from banks to access credit. This helps to offset the bias of the banking system on who gets to receive a business loan based on their credit score as much as the interest rates tend to be higher and have a short repayment period. Most of the platforms enable a client to keep growing the credit scores hence have a high borrowing rate customers can enjoy increases credit growth each time they take a loan and repay on time.
Hall and fang (2004) established that lending to a small business enterprise is generally risky than larger firms. Thus most financial institution requires collateral in different forms to reduce defaults rate, hence become a big obstacle to the entrepreneur, especially startups. Hence the preference of digital lending option, which is minimum without many processes conducted to access capital for their businesses as much as some us they are expensive in terms of repayment percentage.
1.2 Statement of the problem
According to FSD Kenya (2016), the study published shows how SMEs have been able to access finances by borrowing different digital application platforms available. Through the increase of digital application platforms, there has been an emergence increase in the percentage of defaults due to the easy availability of capital. The study showcases that out of 10.6 million borrowers listed, 2.7 million are negative meaning they have defaulted from payment, which means their creditworthiness reduces since they listed and chances to borrow from other lenders become slim.
According to a study done by CGAP (2018), most of the defaults are customers who take up loans they don’t require without thinking of the to repay it and even when using it to add stock they become lenient to their customers on repayment since they have available stock and are given an allowance to top up their loans which in the long run becomes a downfall to them.
A small business is limited in size and revenue, depending on the industry it operates in. They do not succeed in their early months of inception, mainly due to lack of capital. They avoid borrowing from banks due to the high-interest rates charged, short repayment periods or lack of assets required as collateral. A small business’s meagre earnings deter alternative sources of finance, such as formal venture capitalists and other high-risk investors. Capital availability is crucial for small business startup, survival, and growth. Capital provides ongoing service to the business to create wealth. Capital is combined with labour, the work of individuals who exchange their time and skills for money, to create growth in firms. By investing in capital and preceding current consumption, a business or individual can direct those efforts into future prosperity (Akbar, 2010). Firms usually require capital accessibility assistance to launch their ventures, be it a formal bank loan or money from a savings account. Most of the upcoming businesses in third world countries have little access to funds, since they are concentrated in poor rural and urban communities with few chances to borrow money. Lack of access to external funds by the upcoming entrepreneurs is usually due to their inability to provide tangible financial security.
Related studies done in Kenya include;
A recent study by Microsave Consulting (2019), highlights the general benefits of digital credit to Kenyans since the inception of innovative products such as M-Shwari and KCB-M-Pesa. The study refers to digital credit as a good substitute for the traditional form of lending through financial institutions such as banks. The study also looks into the future implications of digital credit in Kenya.
Aboyo and Aloko (2017), in their study, look into the effects of micro-credit on SMEs in Kisumu town. The study offers recommendations to the digital credit providers and regulators to enhance publicity on their product to reduce complexities experienced by potential customers in accessing the services.
However, despite all the significant efforts made by various researchers, none of the studies discussed the assessment of digital lending firms on the growth of small medium-sized enterprises. Due to this gap, the research seeks to investigate the assessment of digital lending firms on the growth of small medium-sized enterprises with a specific focus on the Marurui area, Nairobi County.
1.3 Purpose of the Study
The purpose of the study was to assess the pro and cons that innovation of digital lending has on small-medium enterprise a case study of Marurui Area.
1.4 Research Questions
1.4.1 To examine the factor of credit information sharing on digital lending firms?
1.4.2 To establish the nature of business on digital lending?
1.4.3 To determine the effect of lending requirement on the access of credit?
1.5 Importance of the study
The significance of the study is to show the importance of lending to entrepreneur to be able to grow their entities and the impact it has on those around them and the economy. It will aid in pointing out some of the challenges and problem and also suggest a lasting recommendation. The study can be used in policymaking to create favourable condition when borrowing using the applications. It’s important to evaluate the currents situation of the entrepreneurs.
1.5.1 Pro and Cons of digital lending
Digital lending promise to boost the GDP by providing convenient access to diverse ranges of financial products for each individual. It can lead to greater economic stability and increase financial inclusion. Its becomes positive to the government by the provision of a platform for aggregated expenditure which generates high tax revenue caused by increased transaction done a daily base. It’s of benefits to the businesses because they can increase their working capital whenever the need arises which is of benefit to their economic status and growth but also can lead them into more debts if the money is not planned for well.
1.5.2 Challenges faced
The ease of access has led to an increase in defaults who take up the loans without having a clear plan of payment and lack of training on how to increase their businesses with the money they have access to. According to CRB, a report was released stated 70 per cent of the mobile defaulters are likely to borrow and default again. The research will recommend training by the fintech companies to the individuals who are taking loans for the first time to reduce defaults rates.
1.5.3 Preference over a bank loan
Technology will continue to be the forefront of the digital lending cause of the easy and flexibility it offers to first time borrowers with little or no credit history. The study will try and find out if the business owners are more inclined to digital banking than are on taking up bank loans. Credit is considered to be an important factor in increasing the development of SMEs. It’s though credit augments increase income levels, increase income hence reduce poverty. Through the credit given, SMEs can overcome liquidity constraints and undertake investments like improving farm technology which led to increased production, which is a big gain to the farmer. A preference is observed because of the easy access and fewer paperwork requirements.
1.6 Scope of the Study
The target population will be the owners of the small medium-size enterprise, particularly those who have used a digital platform to access loans. A sample size of 299 small-medium enterprises will be sampled around the Marurui area. The study will be done in four months, where data will be collected and analyzed.
1.7 Definitions of terms
SME- Small medium-size enterprise
CRB – Credit Referencing Bureau
Fintech – refers to technology related to the financial service sectors
GDP- Gross Domestic Product
CIS – Credit Information System
IMES– Informal Microenterprise Sector
Chapter Summary
Chapter one presents the background information of the study, problem statement, the purpose of the study and the research questions addressed in the research project. Also, scope and definition of terms used.
Chapter two present literature review. It discusses the existing research literature on the innovation of digital lending on small medium-size enterprise, the challenges faced, is digital lending a preferred source of capital compared to banks and what gains do small-medium enterprise get from the loans.
Chapter three will present the research methodology used in the study. Its details the research design, population, data collection method, research procedures and how data collected will be analyzed.
Chapter four will present the results and findings of the study.
Chapter five will present the discussion, conclusion and recommendation for action and further research.