The impact of micro-finance credit on the financial performance of SMEs in Kenya

Abstract

Micro-finance refers to small scale financial services such as cash loans, money transfers, direct deposits, savings, and insurance made accessible primarily to the poor. Micro enterprises can be defined as those enterprises employing up to 10 workers (including the owner) and small enterprises as those employing more than 10 up to 15 workers. The research was aimed at investigating the impact of micro-finance credit on the financial performance of SMEs in Kenya. The study was carried out in Nairobi region targeting SMEs in service industry, manufacturing sector, trade and food processing industries. The research found out that as SMEs grow they require funds to finance growth in fixed asset and increase working capital. SMEs therefore require long-term credit in ever increasing amounts so that they can purchase raw materials, supplies and carry out activities that they need to facilitate the production process. From the study findings it was concluded that, access of credit by SMEs from MFIs greatly influences their performance. The conclusion is supported by the results from the various descriptive statistics. The descriptive statistics on net profit indicate that the net profit after access of credit from MFIs was more than the net profit before access of credit. This is attributed to the increased working capital of the SMEs and expansion of business operations. These findings have implications for management of MFIs to ensure that policies are instituted to facilitate easy access of loans by SMEs from MFIs. Management of MFIs should therefore, among other things come up with policies which can help those with no collaterals but good ideas to access credit from MFIs, encourage personal service delivery, provide financial advisory services to individual proprietors when advancing credit to them, lower lending rates while improving service delivery and train people on risk management and financial management. The Government should also regulate MFIs to ensure that the SMEs are not exploited by MFIs.