The Effect of Microfinance Services on Growth of Small and Micro Enterprises in Nairobi Informal Settlements

Abstract

Small and micro enterprises impact greatly on the country's economy as they not only provide employment but also provide a source of revenue for individuals especially in the Nairobi informal settlements which have the highest number SMEs. Though the SMEs may be easily started, what highly determines their existence and profitability is their growth of which lack of finance has been identified to be the major constraint. This is attributed to the fact that most of the SMEs lack the securities required in order to access credit from banks and other financial institutions. The emergence of microfinance provided reprieve for SMEs by providing them with credit and other services. This study sought to determine the effect of microfinance services on growth of SMEs in Nairobi's informal settlements. The study adopted a descriptive research design. The study population was all small and micro enterprises in Nairobi's informal settlements. A sample of 100 SMEs was selected using a simple random sampling technique. This number was considered appropriate due to time and cost constraints. The study used primary data which was collected using questionnaires. Descriptive analysis was employed to analyse data. Multiple regressions were used to analyse the quantitative data which were analysed using the Statistical Package for Social Sciences (SPSS). The study found that microfinance services (credit finance, training and savings) have positive effect on growth of SMEs in Nairobi’s informal settlements. However, credit finance alone has negative effect negative effect on growth of SMEs. The study concluded that there exists a strong positive relationship between microfinance services combined and growth of the firms. Microfinance services account for over 60% of the changes in growth of the firm. This is irrespective of the fact that credit finance alone has negative effect on growth of the firm. The study recommended that microfinance institutions to enhance their outreach and reach as many SMEs which would go a long way in promoting SMEs growth and to reduce the interest charged on loans advanced to the SMEs.