Financial determinants, Transactional Leadership style and financial growth among Micro, Small and Medium Enterprises in South-Rift Region, Kenya

Abstract

The micro small and medium enterprises (MSMEs) have been accepted as the engine of economic growth and for promoting equitable development globally. Notwithstanding their important role, MSMEs’ financial growth and development are hindered by difficulty in accessing financial resources. Extant studies have focused more on the direct effect relationship of determinants affecting MSMEs' financial growth, but little research has been conducted on the moderating effect of transactional leadership on financial determinants and financial growth of MSMEs. The general objective of the study was to establish moderating effect of transactional leadership on financial determinants and financial growth of MSMEs in South-Rift Region, Kenya. The specific objectives of the study were: to examine the effect of access to credit, determine the effect of financial literacy and analyze the effect of regulatory compliance costs on the financial growth of MSMEs in South Rift region, Kenya. Additionally, the study examined the moderating effect of transactional leadership on access to credit, financial literacy and regulatory compliance costs on financial growth. The study was grounded on Resource based view theory supported by Transactional Cost Theory and Credit Rationing Theory. The study adopted explanatory research design with a target population of 25,343. The study utilized multi-stage sampling techniques made up of Stratified, Proportionate and Simple random sampling techniques to obtain a sample size of 394 registered MSMEs owners/managers based on Yamane’s formula of sample size determination. Primary data was collected using questionnaires. A pilot study was conducted in Kisii County using 10% of the sample size. The data collected was analyzed using both descriptive and inferential statistics. Descriptive statistics comprised of frequency, mean, standard deviation, and percentages. The inferential analysis was conducted using correlation and hierarchical moderating regression analysis. The findings revealed that access to credit (β = 0.235, ρ<0.05) and regulatory compliance costs (β = 0.009, ρ<0.05) had a significant effect on the financial growth of MSMEs, while financial literacy (β = 0.019, ρ>0.05) had an insignificant effect on financial growth of MSMEs. Further, the study found that transactional leadership had a buffering moderating effect on the relationship between access to credit (β = -0.174, ρ<0.05), financial literacy (β = 0.185, ρ>0.05) and regulatory compliance costs (β = 0.102, ρ<0.05) and MSMEs financial growth. The study concluded that access to credit, and regulatory compliance cost had significant effect on financial growth. It was also concluded that transactional leadership moderates the relationship between financial determinants and financial growth of MSMEs. The findings have several recommendations. First, the study contributes by demonstrating that access to credit and regulatory compliance costs jointly influence the financial growth of MSMEs, a combined effect not previously documented. The study further recommends that MSMEs owners and managers diversify their credit sources to mitigate risks and improve their chances of securing the necessary funding and that policymakers should prioritize improving access to credit and the regulatory framework which are recognized as key enablers for the financial growth of MSMEs.