Impact of microfinance services on financial performance of small and micro enterprises in Kenya
The potential of using institutional credit and other financial services for poverty alleviation in Kenya is quite significant. About 18 million or 60 % of the population are poor and mostly out of scope of informal banking services. According to the National Micro and Small Enterprise Baseline survey of 1999, there are close to 1.3 million SMEs employing nearly 2.3 million people or 20% of the country's total employment and contributing 18% of the overall GDP and 25% non - agricultural GDP. Despite this important contribution only 10.4% of the SMEs receive credit and other financial services. The formal banking sector in Kenya over the years has regarded the informal sector risky and not commercially viable. The purpose of the study was to establish the impact of microfinance services on financial performance of SMEs in Kenya. Survey method was employed in this study. The study population consisted of all SMEs in Nairobi. The study adopted systematic random sampling method with an interval of 50 SMEs. The sample size was 47 SMEs. The researcher used primary and secondary data. Primary data was collected through the use of semi-structures and structured questionnaires. Quantitative data was analyzed using descriptive and inferential statistics. The study found that all SMEs borrow investment capital and they use it for the purpose in which they were borrowed, most of them do not have other source of financing other than from micro-finance institutions and they did not have other form of financing before they started receiving financing from microfinance institutions .. Based on the findings, the study concludes that SMEs got savings services, credit services and training services from SMEs. The SMEs mostly borrow investment capital and use the loan(s) for the purpose which they were taken. The study revealed that most of the SMEs do not have other source of financing other than that from micro-finance institutions. The study finally concludes that ROA increased with each consecutive loan showing that microfinance services enhance financial performance of SMEs in Kenya. From the study findings, the study recommends that in order to enhance the impact of microfinance services on financial performance of SMEs in Kenya, the MFIS should train the borrowers on entrepreneurial skills so as to enhance their competence. The MFIs should also consider the performance of the business before allocating money to the business owners.