Effect of Financial Inclusion on the performance of Small And Medium Enterprises in Nairobi Central Business District

Abstract

Kenya is a developing country, and Small and Medium Enterprises (SMEs) is an essential sub-sector of the economy like many other developing countries since they create employment opportunities, reduce poverty levels, and facilitate technological innovations and entrepreneurship. In Kenya, SMEs have the potential for growth and development. The objective of ensuring financial inclusion is driven by the financial sector that provides channels for mobilizing savings, financial literacy, access to credit, modes of payment, and risk mitigation solutions, directly influencing SMEs' performance. Financial inclusion ensures easy access to financial services by enabling vulnerable sections of society to contribute to economic development. However, due to the nature of business and the mode of financing required by the SMEs, different financial institutions respond differently to supporting SMEs to obtain financial inclusion services. This leaves a significant research gap on the binding effect of financial inclusion on the performance of SMEs. This study sought to determine the effect of financial inclusion on the performance of SMEs in Nairobi County. Specifically, to establish the effect of financial access on the performance of small and medium enterprises in Nairobi County. To determine the effect of financial usage on the performance of small and medium enterprises in Nairobi County. To establish the effect of financial barriers on the performance of small and medium enterprises in Nairobi County. The study was anchored on Financial Inclusion Theory, Growth Finance Theory and Financial Intermediation Theory. The best research design for this study was an explanatory research design. The population of this study was 30,000 SMEs in Nairobi County Central Business District and using a formula, the sample size was 77 SMEs. The questionnaire was used to collect primary data, and secondary data was used for literature from academic journals. The analysis included both descriptive and inferential statistics. The study findings revealed that financial access, financial usage, and financial barriers significantly impact SME performance, supported by beta values. Financial access exhibited a beta value (β1) of 0.315 (p < 0.05), indicating a positive association between financial access and SME performance. Similarly, financial usage demonstrated a beta coefficient (β2) of 0.277 (p < 0.05), suggesting a positive relationship between financial usage and performance. Interestingly, financial barriers displayed a beta coefficient (β3) of -0.330 (p < 0.05), indicating a negative influence on SME performance. These results affirm that financial access, usage, and barriers play pivotal roles in influencing performance outcomes for SMEs.The R-squared value of 0.461 indicates that financial access, usage, and barriers together explain 46.1% of the variance in SME performance, highlighting the robustness of the model in capturing the relationship. The study contributes new knowledge by demonstrating the nuanced impact of financial access, usage, and barriers on SME performance in Nairobi County. Additionally, it provides empirical evidence of the significance of these factors in the context of an emerging economy, contributing to the existing body of knowledge. In terms of theories, the study aligns with Financial Inclusion Theory, Growth Finance Theory, and Financial Intermediation Theories. It reinforces the importance of financial access, usage, and barriers in the performance of SMEs, providing empirical validation to theoretical constructs. Based on these findings, the study recommends the formulation of targeted policies by the government to address financial access, usage, and barriers. Financial institutions are encouraged to design specialized financial products, enhance financial literacy, and facilitate better access to services for SMEs. Future research should explore variables such as mobile transactions, long-term effects of financial inclusion, and gender-related aspects to offer deeper insights into influencing SME performance and inform effective policy strategies