Abstract:
This thesis explores the critical role of Small and Medium Enterprises (SMEs) in Kenya's
economic development and the major financing challenges they face. Despite their
contributions to job creation and income generation, SMEs struggle to access funding from
formal financial institutions due to strict collateral demands, high interest rates, information
asymmetry, and weak credit histories. Using a mixed-methods approach—combining surveys
and interviews with SME owners and bank officials—the study identifies regulatory,
institutional, and borrower-related barriers to financial access.
The findings highlight a persistent financing gap that mainly affects startups and youth-led
businesses, threatening SME sustainability and growth. The research also analyzes banks'
credit risk frameworks, revealing a misalignment between formal lending criteria and the
practical realities of SMEs, especially those operating informally. Additionally, the thesis
evaluates existing policy measures and financial innovations—such as credit guarantees,
digital lending, and financial literacy programs—but finds their impact limited. It concludes
with recommendations for policy reform, stronger bank-SME collaboration, and the
development of alternative financing solutions to close the credit gap and promote inclusive
economic development.
