Digital finance, financial management, and performance of small and medium-sized enterprises in Nairobi county, Kenya

Abstract

Small and Medium-Sized Enterprises (SMEs) contribute approximately 40 percent of Kenya’s Gross Domestic Product (GDP) and employ over 80 percent of the workforce. Despite their crucial role, many SMEs continue to face limited access to finance, weak financial management, and inconsistent tax compliance. This study examined the effect of digital finance on the financial performance of SMEs in Nairobi County, Kenya, with financial management practices assessed as a mediating variable. The study focused on four dimensions of digital finance: digital payment systems, digital lending services, digital financial record-keeping, and digital taxation and compliance, and their impact on profitability, liquidity, growth, and operational efficiency. A descriptive cross-sectional design was adopted, targeting 400 SMEs across various sectors, from which 371 valid responses were analysed using SPSS Version 29. Descriptive and inferential analyses, including correlation and multiple regression, were employed to determine both direct and mediated effects. The findings indicated that digital payment systems had a strong positive correlation with financial performance (r = 0.712, p < 0.001), while digital lending (r = 0.648, p < 0.01), digital record-keeping (r = 0.681, p < 0.01), and digital taxation (r = 0.623, p < 0.01) also showed significant relationships. Regression results revealed that digital finance collectively explained 63.4% of the variance in financial performance (R² = 0.634, F (4,366) = 74.82, p < 0.001). SMEs adopting integrated digital systems recorded a 22% reduction in transaction costs, a 17% increase in sales turnover, and a 20% improvement in decision-making efficiency. Financial management practices significantly mediated this relationship (β = 0.287, p < 0.01), amplifying the benefits of digital adoption. The study concludes that the integration of digital financial technologies with effective financial management practices enhances SME profitability, liquidity, and sustainability. It recommends strengthening digital literacy, promoting affordable fintech access, and reinforcing supportive policy frameworks to accelerate Kenya’s transition to a technology-driven SME economy.