Effect of microfinance on financial sustainability of small and medium enterprises in Nairobi East District

Abstract

Microfinance is a powerful tool to alleviate poverty and promote financial sustainability of SMEs. The link between microcredit and financial sustainability of SMEs, though repeatedly emphasized by donors and practitioners in conferences and summits, is a controversial area of empirical research. Previous studies find that for the majority of borrowers income increases are small, and in some cases negative. The purpose of the study was to find out the effect of microfinance on financial sustainability of SMEs in Nairobi East District. This research problem was studied through the use of a causal research design. The researcher studied 1327 SMEs in Nairobi East District. This research study used purposive sampling technique and specifically the judgmental sampling method to select 132 SMEs which is 10% of the target. Primary data was gathered through structured questionnaires. The data was then analyzed using descriptive statistics. A multivariate regression model was applied to determine the relative importance of each of the variables with respect to financial self sustainability. The study found that the integrating gender awareness policies (gender equality and SME‘s human rights), creating ways for non-financial support and services (complementary services) to pay explicit attention to gender. The study further concludes that the SMEs do not have a long history of saving culture. The study also concludes that the enterprises benefit from loans from microfinance institutions, the SMEs seek financial assistance from the MFIs due to interest rate, easy loan repayment and amount offered. The study finally concludes that financial and management counseling influence financial sustainability in the enterprises as well as workshops and seminars. The regression results imply that credit contribute more to the financial sustainability of SMEs followed by savings, while entrepreneurial development contributes the least to financial sustainability of SMEs. The study therefore recommends that the MFIs should be quick to measure the success rate of SMEs by considering factors like high repayment, outreach and financial sustainability, but these may not be success if their activities do not reflect in the growth of SMEs. The financial institutions need to put more effort in financing SMEs, their role need to be felt by the SMEs in terms of growth and development.