Effects of Credit Lending Terms on Investments by Small and Medium Enterprises in Chuka Town, Tharaka Nithi County, Kenya

Globally, domestic private investment largely drives economic growth. A country’s investment rate is a key determinant of its overall economic development. Small-scale investments are widely recognized as significant drivers of socio-economic transformation in economies, particularly in developing nations. According to Kenya’s Economic Survey of 2024, small and medium enterprises heavily rely on bank loans and often face challenges in securing adequate financing. This study sought to assess the effects of credit lending terms on investments by Small and Medium Enterprises in Chuka Town, Tharaka Nithi County, Kenya. Specifically, the study investigated the effects of lending interest rate on investment by SMEs in Chuka Town as well as how penalty charges affect investment by SME’s. In addition, the study also sought to determine the effects of repayment period on investment by SMEs in Chuka Town. Finally, the study sought to determine the effects of borrowing limits on investment by SMEs in Chuka Town. The target population for this study comprised 750 small and medium enterprises located in Chuka Town and licensed by the County Government of Tharaka Nithi from which a sample of 150 small and medium enterprises was selected. The study utilized a correlation research design, which aimed to investigate the relationship between credit lending terms (independent variable) and investment (dependent variable). Data analysis was carried out using regression analysis by utilizing SPSS software version 26. The study findings showed a statistically significant negative relationship between lending interest rates and investments by SMEs. The results, with a coefficient of -0.729 and a p-value of 0.001 demonstrated that investments are heavily discouraged at higher interest rates. The analysis also revealed a slightly significant negative relationship between repayment periods and SME investment with a coefficient of -0.545 and p value of 0.06 suggesting that shorter or more rigid repayment periods are likely to reduce investments. The study concludes that inadequate access to readily available and flexible credit stifles the growth and investment capacity of SMEs in the study area. It recommends the formulation and implementation of policies that would make credit more accessible to SMEs through lower interest rates, more flexible repayment schedules, increased lending ceilings, and enhanced financial education programs. It also recommends subsidized lending, credit guarantees, and implementation of additional risk evaluation frameworks by financial institutions such as credit scoring models as opposed to only collateral when lending to SME’s.