Collateral requirements for financing of small and medium enterprises (smes) in Kakamega municipality, Kenya

Small and Medium Enterprises (SMEs) have played a significant role world over in the economic development of various countries. In many emerging markets, the Small and Medium Enterprises (SMEs) sector is one of the principal driving forces for economic and job creation. As a continuation of study of financing of SMEs in Kakamega Municipalilty, we report on the type of collateral requirements for accessing financing by SMEs from financial Institutions (which include business assets/documents, personal assets/documents requested for collateral). 60 SME Owner/Manager were interviewed in Kakamega Municipality. The study utilised descriptive research design which included surveys and fact- finding enquiries of different kinds and data collection using questionnaires. The sampling frame of 1311 was stratified into 6 criteria and systematic random sampling of 60 samples were selected from all the strata using the same sampling proportion (0.045). The analysis of data was done using both quantitative and qualitative methods to report the findings. Functions used for analysis in this study were frequencies, charts and cross tabulations. Qualitative analysis used a central tendency measure which was able to calculate mean scores on a likert scale. Qualitative phase helped to fill in the gaps and provided additional information on measures to enhance SMEs financing. In the study of collateral requirements, it was found that both business and personal assets/documents were the requirement in order to obtain loan from commercial banks. The results revealed that 91.7 percent of the sampled population cited personal assets/documents and business assets/documents each were requested. A total of 71.7 percent cited that both personal and private assets/documents were necessary collateral for one to access formal financing. Other requirements identified were land title deed, two guarantors with an account with the financial institution and pay slip for salaried employment. A total of 91.3 percent indicated that business registration certificate and business bank accounts details were required of them and 65.2 percent cited that pin certificate of business was requested for by the financing institutions. Personal assets/documents requirements as security exhibited 52.2 percent who were asked for title deed documents and personal bank account. The type of documents requested as part of loan application process by commercial banks or micro-finance institutions (MFIs) in Kakamega Municipality revealed that 65.2 percent requested for business financial statements details reports and 56.5 percent requested for formal application to be filled. These findings indicate that keeping of financial statements in Kakamega Municipality highly determines their eligibility for formal financing. Business challenges that faced SMEs in Kakamega Municipality were identified as insecurity, high taxes, unstable and unpredictable economic trends, weekly repayment for group loan, low purchasing power due to economic status of surrounding community, migration of clients, political uncertainty, flow of funds in schools affected (for bookshops), requests for goodwill, monitoring of workers difficult (for furniture shops) and lack of enough capital.