The effect of bank financing on the financial performance of small and medium-sized enterprises in Nairobi county

Abstract

Bank financing refers to the provision of credit facilities by financial institutions for business activities, making purchases or investing. Financial performance refers to the degree to which financial objectives of a firm are being or has been accomplished. According to Agnew (2003) access to finance is essential to the survival and performance of any business enterprise. According to Wanjohi and Mugure (2008) lack of adequate access to credit is the leading factor stifling the growth of small and medium enterprises in Kenya. The study sought to determine the effect of bank financing on the financial performance of SMEs in Nairobi County, Kenya. This research was conducted through a descriptive research design. The descriptive research design was considered appropriate as it enables description of the characteristics of certain groups, estimation of the proportion of people who have certain characteristics and making of predictions. This study used quantitative, secondary data. The secondary data sources were obtained from the KPMG Top 100 SMEs survey in Kenya over a period of 5 years (2009-2013). The data was collected based on the information about the variables. Quantitative data was analyzed by descriptive analysis while qualitative data through content analysis. The study provides information to policy makers, scholars, academicians and investors on the effect of bank financing on the financial performance of SMEs. From the findings, the study established that bank financing and SMEs‟ size positively affected the SMEs‟ financial performance while SMEs‟ tangibility had an inverse relationship with the SMEs‟ financial performance. The study concludes that there exists a significant positive relationship between bank financing and the financial performance of SMEs based in Nairobi County, Kenya. The study recommends that the CBK should continuously reform the terms of bank financing to increase SMEs‟ access to access credit from the financial institutions. The study also recommends the management of the SMEs should intensify SMEs‟ size so as to enhance their financial performance. The study findings informs the banking policy guiding the implementation of SME financing by various financial institutions as it proves that SMEs rely on bank financing to increase their financial performance.