Effect of Informal Financial Services on Financial Performance of Micro and Small Enterprises in Nairobi County, Kenya

Abstract

Globally, micro and small enterprises play a vital role in social and economic development of a country through the creation of employment and contribution to the growth of GDP (Gross Domestic Product). Financial access, savings mobilization, and financial literacy are critical for the sustainability and growth small businesses. The purpose of this study was to investigate the effect of informal financial services on the financial performance of micro and small enterprises in Nairobi County, Kenya. The study was guided by the following objectives – to find out the effect of table banking credit access on the financial performance of MSEs in Nairobi County, to investigate the effect of table banking financial literacy on the financial performance of MSEs in Nairobi County, and to evaluate the effect of table banking savings mobilization on financial performance of MSEs in Nairobi County. The target population was 177 MSEs in informal markets in Nairobi County. The study used stratified random sampling to select a sample size of 121 respondents. The researcher used structured questionnaires to collect primary data. Data was analyzed via the Statistical Package for Social Sciences (SPSS). The findings of the study were presented using pie-charts and frequency table. The study used descriptive statistics – mean, standard deviation, and mode to explain the characteristics of variables. The study found out that the majority (43.7%) of entrepreneurs were in the retail and wholesale sector. Regarding the cost of credit, respondents agreed (mean 4.18) to great extent that table banking cost of loan was cheaper than that of formal financial institutions. On savings mobilization, respondents consented (mean 4.20) that table banking had allowed them to pool funds and reinvest them in their businesses. On financial literacy, respondents concurred (mean 4.10) that business literate entrepreneurs practiced diversification by assigning their funds to various ventures. Also, financial literacy was found to be the best and significant predictor of financial performance (p=0.000). Furthermore, the respondents agreed (mean 4.15) that there had been an increase in the annual profits of their businesses. The study concluded that table banking groups had favorable loans terms which made MSEs to borrow loan from them. Table banking firms instilled savings discipline amongst members making them to pool adequate funds for reinvestment. To enhance financial performance, members of table banking should seek the services of a financial expert to teach them about the best business practices.