The effect of financial literacy on financial performance of small and micro enterprises in Kibera slums, Nairobi County

Abstract

Financial literacy has been identified as a one of the key competencies required for the establishing, management and thriving of SMEs. However, the exact effect they have on the financial performance of SMEs hasn’t been fully established by the available literature thus the need for further research in this area. This study sought to establish the influence of financial literacy on the financial performance of SMEs in Kibera Slums, Nairobi County. A descriptive survey design was adopted in conducting the study. The study population entailed the SMEs in Kibera slum of which a representative sample was selected through simple random sampling technique. The main study instrument was a questionnaire which comprised of both open ended and close ended questions each addressing the study's objectives. The data collected was analyzed using SPSS and the significance of the results tested using inferential statistics such analysis of the variance, Z-tests, T-test and F-tests. The study found that financial literacy levels remained low among the SME owners. The study further found out that financial literacy and size of the firm to had significant positive influence on the financial performance while the influence of the amount of capital invested had insignificant influence. The results of the multiple regressions revealed that there is a significant strong positive relationship between financial literacy, capital invested, size and financial performance of SMEs. From the results, the study concluded that high levels of financial literacy, capital invested and size of the SMEs led to higher financial performance. The study recommends that the County government to invest in instilling financial literacy knowledge to SMEs owners and the SMEs owners also to ensure that they be financially literate so as to improve the financial performance of the SMEs. Future research was recommended to be done using longitudinal study designs in order to provide a better assessment of how the study variables change over time.