The Role of Financial Innovations in the Relationship between Open Market Operations and Access to Credit by Small and Medium Enterprises in Kisumu County, Kenya

Abstract

Purpose: This study investigated the role of financial innovations in the relationship between open market operations and access to credit by small and medium enterprises in Kisumu County. The specific objectives were to assess the effect of open market operations on access to credit by small and medium enterprises and to investigate the role of financial innovations in the relationship between open market operations and access to credit by small and medium enterprises in Kisumu County. The study was guided by Milton Friedman's Monetarism Theory. Methodology: The study adopted a descriptive research design with a target population of 1,472 SME owners/finance officers in Kisumu County. A sample of 420 was obtained, and a closed-ended questionnaire was used to collect primary data. Data was analyzed using descriptive, correlation and regression analyses. Results: Results showed that open market operations had a statistically significant effect on SMEs' access to credit in Kisumu County. Further, financial innovations statistically and significantly moderated the effect on the relationship between open market operations and access to credit by small and medium enterprises. The study concluded that SMEs' access to credit depended on the direct and indirect effects of open market operations and also that financial innovations moderated these effects. Contribution to theory, practice and policy: The implication is that open market operations should be used to gradually and in a predictive manner increase the quantity of money until an equilibrium rate of interest is attained. SMEs will also be able to access credit if the supply is adequate and the interest rate is at the desired level for the clients. The results of the independent variable of this study showed that even though OMO had a significant effect on access to credit, its contribution was minimal. This may imply that the instruments used in the open market operations may not be accessible by small traders due to the minimum amount required for investment. The players of the financial markets could, therefore, think of innovative ways to customize products for the small traders in the open market operations to ensure optimum access to credit by SMEs. This study found that financial innovations increased the effect of open market operations on SMEs' access to credit by increasing the variation of access to credit. The use of financial innovations should, therefore, be encouraged as a bridge that would enhance SMEs' access to credit. This is a major contribution to knowledge, as no study has established this fact. Policies that would ensure implementation and control of the open market operations should be formulated. Mechanisms for firm checks should be crafted to ensure efficient and effective implementation of the same. These policies should be reviewed regularly to ensure they are current and offer proper guidance. Their implementation could ensure optimum utilization of the investment channels, hence ensuring the growth and stability of the economy.