Effect Of Microfinance Institution Financial Practices On Performance Of Small And Medium Enterprises In Kajiado County, Kenya

Abstract

Despite the critical role SMEs play in the economy, their growth and success is always dogged by myriad of challenges due to their limited ability to access expansion finances and bridging the working capital deficits. However, MFIs comes in handy by playing a key role in financial intermediation in so far as growth and Success of the SMEs is concerned considering that to a large extent, they lack collaterals and other borrowing requirements imposed by commercial bank. Alive to that fact, the study thence seeks to establish the nexus between microfinance institutions practices and the performance of small and medium enterprises in Kenya. In doing so, the study adopts a case study of Kajiado County specifically to examine the effect of microfinance lending practices, microfinance savings practices, microfinance insurance practices and microfinance loan recovery practices on financial performance of small and medium enterprises. This study adopted descriptive research due to its ability to explore and offer detailed explanation on the study’s unit of analysis, which in this case is the SMEs in Kajiado County. The study target population was 2851 SMEs registered in Kajiado County. However, the study sample was the 372 SMEs registered in Kajiado Township within Kajiado County. Given the small size of the target population, the study employed census. The study utilized secondary data collected using structured questionnaires administered to the SME owners. STATA was used for data analysis in which analyses included computation of measures of central tendency, as well as the measures of dispersion. In addition to the descriptive statistics, correlation analysis of the study variables was used to examine the relationship among the variables. To determine the specific effect of microfinance financial practices on the SME performance, we relied on a linear empirical model using a multivariate Ordinary Least Squares method. In addition, several diagnostic tests namely: heteroscedasticity, multicollinearity, and autocorrelation tests were conducted. The study found that microfinance lending practices to the SMEs has a negative and significant effect on the SME’s profitability with one unit increase in micro credit likely to lead to 0.106 units decline in SME profitability holding other factors constant. Further, microfinance savings practices was found to have a negative and significant effect on the SME’s profitability with one unit increase in micro saving likely to lead to 0.421 units decline in SME profitability holding other factors constant. In addition, microfinance insurance practices was found to have a negative but insignificant effect on the SME’s profitability with one unit increase in micro insurance likely to lead to 0.015 units decline in SME profitability holding other factors constant. Lastly, microfinance loan recovery practices were found to have a negative effect on the SME’s profitability with a single unit increase in outstanding loan likely to increases SME profitability by 0.008 holding other factors constant. The diagnostic tests results concluded the absence of heteroscedasticity, multicollinearity and autocorrelation problems.