Microfinance Services and Financial Performance of Small and Medium Enterprises in Meru Town, Kenya

Abstract

Small and Medium Enterprises (SMEs) is a significant sector in the economy of Kenya as well as many other developing economies. The sector provides employment to approximately 85% of the country’s workforce (about 7.5 million Kenyans). Insufficient business capital, underdeveloped savings strategies and poor financial knowledge are major constraints hindering financial performance of SMEs in Meru Town. This study was necessitated to determine the effect of microfinance services on financial performance of Small and Medium Enterprises in Meru Town. The following were specific objectives study: to investigate the effect of credit, savings plans and entrepreneur training services respectively on financial performance of SMEs in Meru Town. The study was embedded on three theories namely; theory of Financial Intermediation, Financial Growth Nexus theory and Agency theory. The target population consisted of 310 SMEs that operated within Meru Town. The study adopted purposive sampling to select the respondents and picked a single respondent from each of the sampled SMEs. 93 respondents from the population was taken as a sample size for the study. Collection of Data was done using a questionnaire. Responses in the questionnaires were tabulated, coded and analyzed using descriptive analysis by use of SPSS program version 21. Central tendencies and dispersion were measured using mean and standard deviations respectively. Multiple regression analysis was employed to analyze data. The relationship between the independent variables (microfinance services) and the dependent variable, (financial performance) was tested using multi-linear regression analysis. The ANOVA results documented a p-value of 0.038 indicated that the overall model was a good fit. The computed value was greater than the critical value which demonstrated that microfinance services; credit facilities, savings plans, and entrepreneur training collectively explained financial performance of SMEs in Meru town. The services {Credit facilities (p=0.039), Savings plans (p=0.032) and entrepreneur training (p=0.025)} exhibited significant effect on the financial performance of SMEs. For this reason, therefore, the profitability of SMEs is greatly influenced by such services. In addition, the study established a strong positive relationship (r=0.513) between microfinance services and financial performance of the SMEs. Variations due to changes on the movement of MFIs services under study were found to have influence on the SMEs’ financial performance in Meru town. Respondents strongly agreed that access to funds played a major role in the increase of entrepreneurs who started new ventures. Most SMEs considered to have a savings plan with MFIs owing to easy accessibility of their funds as well as array of microfinance products. The study revealed a need for entrepreneur trainings and that the respondents expressed willingness to undertake entrepreneur training. The study established that credit, saving plans as well as entrepreneur training offered by the MFIs had considerable effect to the financial performance of the SMEs hence rejected the null hypothesis. The study identified a need to increase entrepreneur training in order to improve on the financial performance of SMEs. The study further identified a considerable need to optimize the saving plans and make savings appeal to customers so as to foster and also attract more savings from enterprises.