Effect of Financial Development Initiatives on Growth of Small and Medium Manufacturing Enterprises in Nairobi County

Abstract

Small and medium-scale enterprises play an important role in the process of industrialization and economic growth in both developed and developing economies. However, limited access to finance is noted as a major obstacle to development of SMEs in Africa majorly because of their perceived higher risk that makes the formal financial institutions reluctant to lend to them. This is further reinforced by inadequate financial instruments and lack of developed financial markets. The role of financial market development on economic growth and enterprise development has been studied in several settings with mixed findings. Finance and development nexus studies that attempt to unravel the effects of accessing and utilizing financial services on SMEs has arrived at mixed and conflicting findings. Though a lot has been done to address the recurring phenomenon of lack of access to finance, the problem is notably still pervasive, requiring further investigations on the level of access to finance by SMEs and the cost involved in obtaining such funds where available especially in Nairobi County which is a largely Metropolitan County characterized by development of SMEs in sectors notably: trade and commercial services, manufacturing, financial services and construction. The study focused on 451 SMMEs in the manufacturing sector in Nairobi County with a sample of210 SMMEs and the researcher heavily relied on primary data which was analyzed using SPSS. Data was analyzed using correlation and regression analysis. Charts, frequency distribution tables, and bar charts were used in presenting the findings. The study sought answers to the question; what is the effect of financial development initiatives on the growth of SMMEs in Nairobi County? The study concluded that pooling of savings by firms will promote the relationship with the financial institutions, and this will ensure efficiency when they are seeking for funds needed for investment which in turn brings firms growth such as opening new branches. Based on the findings also the study concluded that the way firms allocate capital in different investment projects also determines growth and requires expertise so as to ensure risk diversification which may lead to high profits thus growth of the firm and finally concluded that access to credit has a strong association with the growth of small and medium manufacturing enterprises. The study established that the pooling of savings plays a vital role in improving the relationship between SMMEs and financial institutions. The KMA should come up with ways in which they can control and encourage pooling of savings by the firms.