Moderating effect of loan terms on relationship between financial literacy and digital loan repayment performance among small and medium enterprise in Nairobi County, Kenya

Abstract

Most Kenyan citizens take advantage of the availability of mobile money transaction to access loan. However the problem of non-repayment is rising day by day. Thus, the general objective of the study was to assess the effect of financial literacy, loan terms and digital loan repayment performance among SMEs in Nairobi County, Kenya. The study specific objectives were to determine the effect of budgeting literacy on loan repayment performance among SMEs, establish the effect of debt management literacy on loan repayment performance among SMEs, Assess the effect of borrowing literacy on digital loan repayment performance among SMEs and determine the moderating effect of loan terms on relationship between financial literacy and loan repayment performance among SMEs. The study was informed by Theory of social Learning, Financial Literacy Theory and Planned Behavior informed the study. The study employed an explanatory research design. This study targeted owners/managers of 620 registered SMEs within CBD in Nairobi County. Systematic and simple random sampling was used to select 243 SMEs to constitute the sample. The main research instrument that were used in this study were questionnaires; Descriptive statistics such as frequency distribution, percentages, means and standard deviations and inferential statistics were used to analyze data. Data analysis was facilitated by use of SPSS (Statistical Package for Social Science) Computer package. The findings indicated that budgeting literacy (β =0.220, p<0.05), debt management literacy (β =0.250, p<0.05), and borrowing literacy (β =0.419, p<0.05), positively and significantly influenced digital loan repayment performance. Specifically, SME owners with budgeting literacy are less likely to default on their loan compared to those with limited budgeting literacy. Also, debt management literacy is key in facilitating SMEs ability to repay their loans. Besides, SME owners are capable of effectively calculating risks before asking for a loan thereby reducing their likelihood of defaulting on the loan. Further, loan terms positively and significantly moderated the relationship between financial literacy, budgeting literacy (β =.208, p<0.05), debt management literacy (β =.405, p<0.05) and borrowing literacy (β =.341, p<0.05) and digital loan repayment performance (R2Δ =.015). The study recommended for SME owners to have knowledge in the preparation of annual operating incomes and expenses, activity-based budgeting and periodical budget. As well, SME owners need to be on the forefront in ensuring that their employees are trained on debt management and the importance of book keeping. Finally, before borrowing a loan, SME owners should ensure that they calculate the risk and hire experts to advice on how to borrow and capitalize from the borrowed funds.