FINANCIAL DETERMINANTS AND FINANCIAL SUSTAINABILITY OF SMALL AND MEDIUM-SIZED ENTERPRISES IN NAIROBI CITY COUNTY, KENYA
FINANCIAL DETERMINANTS AND FINANCIAL SUSTAINABILITY OF SMALL AND MEDIUM-SIZED ENTERPRISES IN NAIROBI CITY COUNTY, KENYA
Owino Odhiambo Dancun - Student, Master of Science in Finance, School of Business, Economics, and Tourism, Kenyatta University, Kenya
Anthony Irungu - Lecturer, Department of Accounting and Finance, Kenyatta University, Kenya
Bancy Muchiri - Lecturer, Department of Accounting and Finance, Kenyatta University, Kenya
ABSTRACT
Small and medium-sized enterprises encompass businesses with a workforce size ranging from ten to ninety-nine individuals. These enterprises are pivotal in fostering economic growth and job creation, constituting approximately ninety-eight percent of all businesses in Kenya. However, there is a worrisome trend of limited growth in new SME formations, and many of them face closure within the initial five years due to financial constraints and other factors. The study explored financial factors that affect the sustainability of SMEs in Nairobi City County. The primary goal was to identify the financial determinants and assess the sustainability of SMEs in this specific region. To achieve this, the study focused on examining the effect of access to finance, financial innovation, financial management and financial risk management on SME sustainability. The agency, pecking order, modern portfolio and diffusion of innovation theories guided the study. A descriptive research design was employed, utilizing a sample of 347 SMEs. Secondary data was obtained through templates and primary data was gathered via questionnaires. The collected data was analyzed using inferential and descriptive statistics, including regression econometric modeling. Findings were presented through frequency tables, graphs and percentages. Findings revealed that access to finance is statistically significant in explaining financial sustainability of SMEs (β =0.245, p < 0.05). It was noted that financial innovation is statistically significant in explaining financial sustainability of SMEs (β= 0.317, p <0.05). Findings indicated that working capital management has a statistically significant effect on financial sustainability of SMEs (β =0.129, p<0.05). Based on this study findings, financial risk management has a statistically significant impact on financial sustainability of SMEs (β =0.321, p<0.05). This study concludes that SMEs face substantial hurdles when attempting to access funding from financial institutions. SMEs often encounter difficulty in providing the necessary collateral that financial institutions require as security for loans or credit. The SMEs did not engage in forward contracts and had no diversified portfolio investments. The lack of diversified portfolio investments among SMEs indicates a potential vulnerability to market fluctuations, which might have an adverse effect on their financial sustainability. SMEs did not practice prudent creditor's management and management policies did not enhance financial sustainability. The SMEs did not have robust cash management procedures. SMEs were not able to identify risks that affect its operations and they did not have any risk hedging mechanisms. This study recommends that financial institutions adopt lenient and favorable credit terms specifically tailored for SMEs. SMEs should consistently engage in product innovations to establish a competitive edge in the dynamic market environment. It’s recommended that SMEs adopt prudent creditor's management practices that will cultivate responsible relationships with creditors. SMEs should take a proactive approach to risk management by identifying the risks that directly impact their operations.
