The Effect of Lending by Micro-finance Institutions on the Financial Performance of Small and Medium Enterprises in Nairobi County, Kenya

Abstract

The provision of financial services, especially credit and saving facilities plays an important role in the development of the economy. With the efforts of microfinance institutions taking their services within the reach of poor and small medium enterprises that have not benefited from the conventional formal financial system, growth and expansion of SMEs has been observed. The main objective of this study was to investigate the effect of lending by microfinance institutions on the financial performance of small and medium enterprises in Nairobi County, Kenya. The study adopted a descriptive survey research design and the target population for the study was 120 SMEs that have operated for five years and above. The target population was stratified into homogeneous categories as wholesalers, retailers, restaurants, cosmetics and service delivery. A sample of 120 SMEs was drawn proportionately and randomly from the strata. Data was collected via a semi-structured questionnaire whose validity and reliability was established in the pilot test. Quantitative data analysis was undertaken to generate both descriptive and inferential statistics, this was done using statistical package for social sciences (SPSS). Presentation of data was done in frequency tables and figures and the interpretation made based on the research objective. The study found that the main source of capital for the SMEs was from microfinance institutions, from personal savings and partnership. The study further revealed that the amount of loans borrowed by the SMEs from MFIs is significantly and positively related to the financial performance of the small and medium enterprises. The study findings show that not all SMEs operating within Nairobi County are able to access loans facilities from the available MFIs, this is due to the following challenges stringent repayment terms, long time taken processing the loan, and difficulty raising the collateral hence opting for cheaper sources of capital. It is on this basis that the SMEs which have operated for more than five years were considered for this study because they are able to meet all these collaterals. MFI loans can be said to lead to the improvement in productivity among the beneficiary SMEs as well as profitability and the high number of entrepreneurs starting up new ventures. There exists a positive relationship between Return on Assets and accessibility of credit in MFI and also a enterprise has been in operation. The study recommends that access to finance should be identified as a freedom to growth of SMEs, training is crucial for productivity and quality as well as it influences the effectiveness, efficiency and motivation of the employees. The study recommends that strong evidence that access to financial services and the resultant transfer of financial resources to poor women, over time, lead to women becoming more confident and assertive. The study also recommends good management of SMEs as one of the factors affecting their growth and development. Further the amount of loans given by MFIs to SMEs should be increased to enable the SMEs grow to bigger companies.