SMEs in 5,000 Demand Lower Interest Rates in Nairobi

A University of Nairobi study has revealed that high interest rates significantly suppress the demand for credit among small and medium-sized enterprises (SMEs) in Nairobi County. The research, conducted by Lydiah N. Zachary as part of her master’s thesis, analyzed how fluctuations in lending rates influence the borrowing behavior of entrepreneurs who depend on microfinance institutions (MFIs) for business funding. Findings from the study show that up to **86.9 percent of the variation in credit demand** among SMEs can be explained by changes in interest rates, underscoring how sensitive small businesses are to borrowing costs.
The study, which surveyed 48 SMEs using semi-structured questionnaires, adopted a correlation research design to establish the relationship between interest rates, annual profits, and owner’s equity. Statistical analysis indicated a **strong positive correlation (R = 0.932)** between these factors and demand for credit, meaning that as profits and equity increase, entrepreneurs are more willing to borrow. Conversely, high interest rates were found to discourage credit uptake, particularly among small enterprises operating on tight margins. Data analysis was conducted using the Statistical Package for Social Sciences (SPSS), with results presented through charts, graphs, and tables for clarity.
According to the report, effective interest rates emerged as the most critical determinant of borrowing, followed by profitability and business equity. The study concluded that lending institutions and policymakers must consider lowering or stabilizing interest rates to stimulate credit access for SMEs, which form the backbone of Kenya’s economy. By aligning financial policies with the realities faced by entrepreneurs, the government and MFIs could unlock greater business growth, employment opportunities, and overall economic development in the country. The findings provide vital insights for Kenya’s ongoing efforts to create an inclusive financial environment that supports small enterprises in achieving long-term sustainability.