The Effect of Financial Innovation on Credit Access by Small and Medium Enterprises in Nairobi County, Kenya

Abstract

Financial innovations provide various objectives and therefore include issues like credit generation and availability, transaction cost reductions, risk sharing and transfers, risk pricing and liquidity management. Financial innovation occurs in the emergence of lending platforms that mediate information flows from traditional banking systems to unbanked borrowers and also assist in credit risk-sharing analyses. The study goal was to assess the impact of financial innovation on SMEs' access to loans in Nairobi County, Kenya. The research was influenced by the Theory of Innovation Diffusion (DOI), the cost theory of transactions and the theory of exchange. The study used a descriptive design for research. The research population comprised of 21,100 Small and Medium-sized Enterprises (SMEs) situated primarily in the core business area in Nairobi County, Kenya. The research used a probability sampling method, basic random sampling and a scientific derivative formulation of the Yamane (1967). The outcome comprised of 393 SMEs operating in Nairobi County, Kenya's major business center. A combination of primary and secondary data sources was used. The main data gathering was the use of a closed-end questionnaire as a data collecting method. A crosssectional study was the present study. The research used both descriptive and inferential statistics including correlation and multiple linear regression analyses. The results of the research showed that product innovation in Kenya's financial service providers is highly shown. Further results have shown that process innovation is also highly shown by financial service providers in Kenya. Further studies have shown that SMEs in Nairobi County always have access to loans from their various financial services providers. Further studies showed that none of the characteristics of financial innovation or of company age and size were substantially linked with access to credit. Further research results showed that the model of financial innovation, company age and company size explains at least to some degree access to credit and that the model doesn't predict access to credit substantially. The final results of the research showed that product innovation, process innovation, small and medium-sized enterprises and small and medium enterprises had no significant links with access to finance. Policy suggestions are made to government officials and policy-makers, in particular regulators, the Central Bank of Kenya (CBK) and the Sacco Corporations Regulatory Authority (SASRA) and to the Treasury, not to concentrate largely on financial innovation while seeking to enhance access to loans. The results of the current research also suggest that financial sector professionals and consultants should not concentrate exclusively on financial innovation when developing strategies to grow their loan books.