Mobile telephony, social networks and credit access: Evidence from MSMEs in Kenya

Abstract

Access to credit by micro, small and medium enterprises is key for growth and employment. However, it is hindered by information asymmetry. We investigated the effect of mobile telephony and social networks (group networks) on the probability of access to credit by Micro, Small and Medium enterprises in Kenya. Our analysis employed cross-sectional data, the 2016 FinAccess Household Survey infographics sheet. The analysis assumed a limited dependent variable modelling. Our analysis revealed that micro-, small- and medium-sized enterprises with owners who currently have mobile banking, mobile money and group participation, respectively, have 8.8, 6.05 and 1.97 percentage points higher chance of receiving formal credit. In terms of informal credit, the analysis revealed that below five groups participation in an extra group by the MSME owner increases the probability of accessing informal credit by 6.26 percentage points. As policy measures, our analysis implies that owners of MSMEs should participate in groups and take up mobile money and banking to further their MSMEs chances of accessing formal and informal credit. In addition, the findings imply that money lenders should create strategies to tap MSMEs reputation created by groups and mobile telephony.

Keywords:

• Micro small and medium enterprises
• mobile telephony and social networks

AMS subject classifications:

• L14

Public Interest Statement

MSMEs are important to economies through their job creation and contribution to growth but are credit constrained. We test whether MSMEs owner?s participation in either Mpesa, Airtel money, Orange money, mobile banking, merry go rounds, chamas, investment clubs and clans/welfare groups matter in enhancing their MSMEs access to credit? Using survey data on 2,248 MSMEs owners surveyed by FSD-Kenya in 2015 we show that MSMEs owned by participants stand more chances of accessing credit than those owned by non-participants. Our findings imply that economies with credit constrained MSMEs, high mobile penetration and communities organized in groups could use MSMEs owner’s participation in mobile telephony and groups to ease the credit constraints.

Notes

¹ Both permanent and casual.

² Excluding the owner.

³ Does away with macroeconomic cycles.

⁴ Necessary to deal with categories that do not occur. Also, too many levels in a dummy variable pull down the performance of the model.

⁵ Bank, SACCO, MFI, Mshwari, KCB M-PESA, government institution, hire purchase, bank overdraft and credit card.

⁶ Employer, ASCA, Chama, friends, family, neighbours, shopkeeper, shylocks, local shop/supplier and buyer of harvest.

⁷ The decision of formal sources to extend credit is assumed to be separate to that of informal sources.

⁸ This is consistent with the FSD bank financing of SMEs in Kenya 2015 report that showed that proportion of access to formal finance increases with the size of SMEs.

⁹ It also confirms the problem of the missing middle in terms of size and financing.

¹⁰ This is important since the study assumes that most enterprises if not all cannot be differentiated form the owners.

¹¹ McFadden’s Pseudo $R^2$ estimates need not be high. Lee (2013) considers Pseudo $R^2$ between 20 and 40 percent perfect fit.

¹² The point is calculated using $\frac{-(\text{coefficient of the linear term})}{(2\times \text{coefficient of the squared term})}$ the solution is the same whether marginal effects or the coefficients in the Probit regression are used. see https://www3.nd.edu/~rwilliam/stats2/l61.pdf.

¹³ Number of groups have a non-linear relationship with access to informal credit. The linear component shows the relationship between access to credit and number of groups while the non-linear component is helpful in calculating the turning point. see https://www3.nd.edu/~rwilliam/stats2/l61.pdf.

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Idi Jackson Mdoe

Idi Jackson Mdoe is a lecturer of economics and finance at the department of Applied Economics, Kenyatta University Nairobi, Kenya. The author’s research fields are competition among banks, role of innovation and information technology in driving competition and access to finance, regulation and public policy. Currently, the author is a member of the next generation of researchers (NGR), a component of the United Nations University Institute for the Advanced Study of Sustainability’s (UNU-IAS) Education for Sustainable Development in Africa (ESDA) undertaking.

George Kariuki Kinyanjui

George Kariuki Kinyanjui is a PhD candidate at the University of Cape Town, South Africa. He is an African Economics Research Consortium scholar and a member of the Economics Society of South Africa. His main research fields are the Economics of institutions, behavioural economics, experimental impact evaluation health economics and the economics of micro enterprises. His current research revolves around investigating the impact of emotions on rational altruism.