How Do Small Firms in Developing Countries Raise Capital?

This paper utilizes a unique comprehensive dataset, drawn from the 1999 baseline survey of some 2000 micro and small-scale enterprises (MSEs) in Kenya. The authors:

• Analyse the financing behaviour of these enterprises within the framework of a heterodox model of debt-equity and gearing decisions;
• Study determinants of the success rate of loan applications.

Results from the research highlights three major findings:

• MSEs in Kenya obtain debt from a wide variety of sources such as family, friends, co-operative banks, ROSCAs and NGOs;
• Debt-equity and gearing decisions by MSEs and their success rates in loan applications can be understood by relatively simple models which include a mixture of conventional and heterodox variables;
• Measures of the tangibility of the owner's assets, education and training have a significant positive impact on the probability of borrowing and of the gearing level.