Digital credit, financial literacy and financial stability of micro, small and medium enterprises in Kenya’s retail sector

Abstract

The emergence of digital lending platforms has revolutionized credit accessibility for Micro, Small, and Medium Enterprises (MSMEs), particularly in developing economies like Kenya. While these platforms have enhanced financial inclusion by offering convenient and collateral-free credit, concerns have been raised about their implications on the long-term financial stability of MSMEs. This study sought to examine the effect of digital credit on the financial stability of MSMEs in Kenya’s retail sector, with Nairobi and Machakos counties as the focus areas. The study investigated three core dimensions of digital lending, credit accessibility, credit terms, and borrowing behaviour, while considering financial literacy as a moderating variable. The study was underpinned by Financial Intermediation Theory, Behavioral Economics Theory, Debt Spiral Theory, and the Resource-Based View Theory. It adopted a cross-sectional research design and targets a population of 133,000 registered MSMEs in Nairobi and Machakos Counties. A sample of 398 MSME respondents were selected using stratified random sampling, ensuring equitable representation across urban and peri-urban zones and various retail sub-sectors. Primary data was collected through semi-structured questionnaires, which captured both quantitative and qualitative responses. The study applied descriptive statistics for data summarization, and multiple regression analysis to test the direct effects of the independent variables on financial stability. In addition, moderated regression analysis was conducted to determine the influence of financial literacy on the relationship between digital lending and MSME financial stability. It recommends planned borrowing strategies for MSMEs, flexible and transparent lending terms from providers, and policies that integrate financial literacy training with responsible lending practices. The findings offered critical insights for policymakers, financial institutions, and MSME owners, helping to inform more responsible digital lending practices, improve borrower financial literacy, and foster sustainable business growth. Furthermore, the study contributed to the expanding academic discourse on digital finance and enterprise resilience in emerging markets.