The Effect of Lending by Micro-finance Institutions on the Financial Performance of Small and Medium Enterprises in Nairobi County, Kenya
Abstract
The provision of financial services, especially credit and saving facilities plays an
important role in the development of the economy. With the efforts of microfinance
institutions taking their services within the reach of poor and small medium
enterprises that have not benefited from the conventional formal financial system,
growth and expansion of SMEs has been observed.
The main objective of this study was to investigate the effect of lending by
microfinance institutions on the financial performance of small and medium
enterprises in Nairobi County, Kenya. The study adopted a descriptive survey
research design and the target population for the study was 120 SMEs that have
operated for five years and above. The target population was stratified into
homogeneous categories as wholesalers, retailers, restaurants, cosmetics and service
delivery. A sample of 120 SMEs was drawn proportionately and randomly from the
strata. Data was collected via a semi-structured questionnaire whose validity and
reliability was established in the pilot test. Quantitative data analysis was undertaken
to generate both descriptive and inferential statistics, this was done using statistical
package for social sciences (SPSS). Presentation of data was done in frequency tables
and figures and the interpretation made based on the research objective.
The study found that the main source of capital for the SMEs was from microfinance
institutions, from personal savings and partnership. The study further revealed that the
amount of loans borrowed by the SMEs from MFIs is significantly and positively
related to the financial performance of the small and medium enterprises. The study
findings show that not all SMEs operating within Nairobi County are able to access
loans facilities from the available MFIs, this is due to the following challenges
stringent repayment terms, long time taken processing the loan, and difficulty raising
the collateral hence opting for cheaper sources of capital. It is on this basis that the
SMEs which have operated for more than five years were considered for this study
because they are able to meet all these collaterals. MFI loans can be said to lead to the
improvement in productivity among the beneficiary SMEs as well as profitability and
the high number of entrepreneurs starting up new ventures. There exists a positive
relationship between Return on Assets and accessibility of credit in MFI and also a
enterprise has been in operation.
The study recommends that access to finance should be identified as a freedom to
growth of SMEs, training is crucial for productivity and quality as well as it
influences the effectiveness, efficiency and motivation of the employees. The study
recommends that strong evidence that access to financial services and the resultant
transfer of financial resources to poor women, over time, lead to women becoming
more confident and assertive. The study also recommends good management of SMEs
as one of the factors affecting their growth and development. Further the amount of
loans given by MFIs to SMEs should be increased to enable the SMEs grow to bigger
companies.
Publisher
University of Nairobi