The effect of microfinance credit on the financial performance of small and medium enterprises in Kiambu county, Kenya

Abstract

Microfinance credit is a source of financial services for entrepreneurs and small businesses lacking access to banking and related services. Microfinance is “the provision of financial services to low-income poor and very poor self-employed people”. The research was aimed at investigating the effects of micro-finance credit on the financial performance of Small and Medium Enterprises (SMEs) in Kiambu County, Kenya. According to the National Micro and Small Enterprise Baseline survey of 1999, there are close to 1.3 million SMEs employing nearly 2.3 million people or 20% of the country's total employment and contributing 18% of the overall GDP and 25% non - agricultural GDP. The formal banking sector in Kenya over the years has regarded the informal sector risky and not commercially viable. The purpose of the study was to establish the effect of microfinance credit on financial performance of SMEs in Kiambu. This research problem was studied through the use of survey design. Out of the 2,061 SMEs licensed, according to Kiambu County records by February 2013 this study randomly sampled 60 SME‟s. The study found that there is a direct relationship of access to credit and financial performance of the companies. 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. There is need to provide an enabling environment for SME‟s to grow and thrive, therefore there is a need to develop strategies to enhance increased access to microfinance credit by SME‟s from commercial banks and microfinance institutions. It is important for the government to set up policies that will ease microfinance credit to SME‟s.