The relationship between financial structure and performance of micro and small enterprises in Nairobi, Kenya.

Abstract

Interest in the role of small and medium-sized enterprises (MSEs) in the development process continues to be in the forefront of policy debates in developing countries and considerable attention has been paid in the last decade to the problem of poverty reduction in these countries (World Bank, 1997). The study used a sample drawn from the 1999 baseline survey of micro and small scale enterprises in Kenya to analyze the relationship between the financing behavior of these enterprises and their performance within the framework of sources of funds for MSEs and performance indicators. The study provides a descriptive detail of financial structure of what can be said to possibly be the "typical" financial structure of micro and small firms in Kenya. A range of variables, which influence the performance of MSEs have been be explored. Some of the variables considered include, the type of trade, age of the business, profit (as viewed by the business owners), sales growth, asset structure and size (measured by the number of employees). The study found that MSEs financed by internal funds perform better than those with debt in their financial structure. Secondly, whenever the firms have utilized debt, shortterm debt has been preferred to long-term debt. All in all, the study finds that a relationship exists between financial structure of MSEs and their performance.