The aim of this study was to determine the effect of credit access on the productivity of
micro and small enterprises in Kenya. The study used data from the 2007 World Bank
Enterprise Survey. Total factor productivity (TFP) was estimated using estimates of a
linear Cobb-Douglas production function obtained by ordinary least square (OLS). TFP
was then used as the measure of firm performance to test for the effect of credit access
and other firm and entrepreneur characteristics. Estimates of the production function
revealed that firms were operating under increasing returns to scale while distribution of
TFP showed that firms had very low productivity. The model to test for effect of credit
was estimated using OLS and again using instrumental variable to control for potential
endogeneity. A test for endogeneity however showed that the credit variable was not
endogenous hence OLS results were taken as the main results of the study. The results
showed that access to credit has a negative but insignificant effect on firm productivity
which implies that access to credit has no important role in improving firm performance.
The impact of both formal and informal credit was also negative and insignificant.
Enterprises located in Mombasa and Kisumu and those that had a female as principal
owner were found to have low productivity.
The results of this study imply that the current emphasis by the government to enhance
credit access as a strategy of improving performance within the MSE sector may not
yield the desired results. This study has contributed to existing literature by providing
further evidence on the link between access to credit and firm performance using
productivity as the measure of firm performance. This study also provides empirical
evidence on link between source of credit and firm productivity