The Effect of Micro Finance Loans on the Financial Performance of Small Medium Enterprises in Nairobi County

Abstract

To examine the effect of micro finance loans on the financial performance of small medium enterprises in Nairobi County. The study was descriptive in nature. The population for this study was the SMEs operating in Nairobi County. The target population was grouped based on 17 constituencies in Nairobi County: Westlands, Dagoretti North, Dagoreti South, Langata, Kibra, Roysambu, Kasarani, Ruaraka, Embakasi South, Embakasi North, Embakasi Central, Embakasi East, Embakasi West, Makadara, Kamukunji, Starehe and Mathare. According to Public Procurement Oversight, there were an estimated 5,596 SMEs operating in Nairobi County of which 526 SMEs belonged to persons with disabilities, 939 SMEs belonged to women, 18 were general SMEs while the largest chunk of 4538 SMEs belonged to the youths. According to the table the sample population should be 357. A stratified random sampling technique was used in this study. Random sampling employed to pick SMEs for the sample. This study used a questionnaire in data collection. The study provided two types of data analysis; namely descriptive analysis and inferential analysis. The analysis entails gathering of data from different sources, their review and analysis to form a deduction. This study used linear regression analysis model and so this study will use the analytical software in data analysis. Among the software that was used was Statistical Package for the Social Science version 21.0 (SPSS) and advanced excel for analysis. The linear regression model was applicable since it allowed simultaneous investigation of the correlations among different variables. The study established that the type of business which most of the SME in Nairobi County engage in is retailers. The study also found that microfinance loan influence financial performance in SME’s in Nairobi County to a very great extent. The data findings analyzed also shows that taking all other independent variables at zero, a unit increase in Microfinance loans will lead to a 0.852 increase in financial performance of the SME; a unit increase in age of the SME will lead to a 0.643 of the SME increase in financial performance, while a unit increase in credit accessibility will lead to a 0.473 increase in financial performance of the SME. At 5% level of significance and 95% level of confidence, the study found out that Microfinance loans, age of the SME, and credit accessibility were all significant in financial performance of the SME. The study concludes that the type of business which most of the SME in Nairobi County engage in is retailers. The study also concludes that microfinance loan influence financial performance in SME’s in Nairobi County to a very great extent. Based on the key findings, the study made the following recommendations. Microfinance Institutions should enhance training of their clients on the entrepreneurial skills so as to enhance their skills as a large proportion of the respondents were found to be certificate holders of high school graduates hence they lacked the necessary business management skills. The study established that high interest rates and repayment period inhibit some of the SME’s in Nairobi County from accessing microfinance loans to a very great extent. The study also recommends the MFIs carry out sensitization campaigns on the need to save among the traders