Effect of Digital Banking on Financial Performance of micro and Small Enterprises in Nairobi County,

Abstract

Financial performance of MSEs is critical to the performance of the economy since MSEs are some of the best supporters of the government through employment. In recent years’ banks have developed innovative products and offered a wide range of services in an effort to improve their performance, which is the ultimate goal of banks. Digital banking has several benefits to financial services users such as the micro and small enterprises and the digital banking providers. The general objective of the study is to establish the effect of digital banking on the financial performance of micro and small enterprises in Nairobi County, Kenya. The specific objectives of the study are to determine effect of digital payments on financial performance of micro and small enterprises in Nairobi County, to establish influence of digital credit on financial performance of micro and small enterprises in Nairobi County, and to establish influence of digital savings on financial performance of micro and small enterprises in Nairobi County, Kenya. The study was guided by the theory of financial innovations, the technology acceptance model theory, and the diffusion of Innovation Theory. This study employed explanatory research design. The target population is comprised of retail traders/managers in the micro and small enterprises in Nairobi County. For purposes of this study, the population was MSEs, which conduct their business in Nairobi County. From the target population of 10,079 retail traders, Fishers et al (2007) formula was used to pick a sample of 384 retail traders as the sample of the study. The study utilized a semi-structured questionnaire to collect data from the respondents. Data was analyzed aided by descriptive statistics, including variability and central tendency measures of frequencies. Findings of the diagnostic tests revealed that there was no multi collinearity among the independent variables (VIF=1.281), and the results of the normality test showed that the variables were normally distributed. The findings of the study were that there was a positive and significant relationship between digital payments and financial performance (β1=0.682, p=0.000<0.05), there was also a positive and significant relationship between digital credits and financial performance of micro and small enterprises (β2=0.266, p=0.003<0.05). There was also a positive and significant relationship with financial performance of micro and small enterprises in Nairobi County (β3=0.488, p=0.007<0.05). The study concluded that digital payments, digital savings and digital credits had a positive and significant effect on performance of micro and small enterprises in Nairobi County. The study recommends that more needs to be done in terms of applications security due to the risk of cyber attacks and fraud. Institutions should invest more on research to ensure that their applications used by customers are safe to prevent cyber-attacks and fraud. The study also recommends that MSE’s need to maintain a good record of credit and improve on their saving to access more credit through the digital credit applications.