Effect of Financial Innovations on the Growth of Small and Medium Enterprises

Abstract

Commercial Banks in Kenya have tried to develop financial products tailored for Small and medium enterprises in a bid to grow profitability while reducing financial inaccessibility for this enterprises. This has however not been embraced by many enterprises. This study was carried out to examine the effect of financial innovations on the growth of small and medium enterprises. The study was motivated by challenges faced by SMEs despite their numbers and importance in growth of the economy. The study sought to establish the effect of product innovations, service innovations, new organizational forms as well as new production processes on growth of SMEs.The study adopted a descriptive survey design. The target population for this study was SMEs in Nairobi central business district and major banking institutions in Kenya. The study considered managers of all levels and sales executives who are believed to have adequate knowledge and experience in formulating financial innovations and presenting the ideas to prospective SMEs. This formed a total population of 66 banks and 98608 SMEs. Purposive sampling was used to select 11 banking institutions based on their branch network within Nairobi and other major towns in Kenya. Systematic and random sampling techniques were used to select SMEs to participate in the study. A sample size of 478 SMEs was determined using Krejcie (1970) model and generated by Morgan (1990). Data was gathered using structured questionnaires. Quantitative techniques of data analysis were undertaken to generate descriptive statistics on responses provided. Further, a regression analysis was undertaken to determine the strength of relationships between financial innovations and growth of SMEs. The study findings indicated that banks had financial innovations such as small-scale business loans, small-scale business accounts, mobile banking, e- banking and direct marketing. Business loans, business account and mobile banking were specific innovation tailored towards SMEs. Most SMEs indicated financial innovations such as business SME business accounts, SME credit facilities and direct marketing strategies improved their customer relations and efficiency in their banking operations. SMEs were found to have been faced by challenges that barred them from growth. A regression analysis revealed that service innovations by financial instructions had the highest influence on growth of SMEs. The study recommended intervention on the side of the government in educating and training SMEs on managerial skills, enhancing accessibility to credit facilities, and increase efficiency in the disbursement of loans to SMEs.