Credit Can Precipitate Firm Failure: Evidence from Kenyan Manufacturing in the 1990s
Author(s)
Nkurunziza, Janvier D.
Abstract
This paper models firm survival in Kenyan manufacturing with a particular emphasis on the effect of credit on firm resilience. The paper explores how firms coped with the challenging economic environment that prevailed in the 1990s particularly the effect of the dramatic increase in interest rates. The key finding is that the burden of past loans precipitated firm failure in the 1990s but overdrafts did not seem to have had a significant impact on firm failure. Furthermore, older firms appear to have resisted better than younger ones, but there is no evidence that large firms had higher survival rates. These results are robust to different specifications, namely probit models, Cox proportional hazard models and exponential, Gompertz and Weibull parametric hazard models. The main contribution of the paper is to highlight the role of credit in explaining firm failure in a shockprone developing economy. The study shows that the key factors explaining firm survival in developed economies, namely size and age, are not necessarily the most relevant determinants of firm survival in developing economies. Methodologically, this paper is one of the few that have applied hazard analysis to firms in developing economies.
