FORMAL CREDIT FINANCING AND FINANCIAL PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES IN NANYUKI TOWN, KENYA
Emily Gakatha Ndemi - Department of Accounting and Finance, Kenyatta University, Kenya
Dr. John Mungai - Department of Accounting and Finance, Kenyatta University, Kenya
ABSTRACT
The current study sought to investigate the effects of formal financing on financial performance of small and medium enterprises in Nanyuki Town, Kenya. The study was conducted in Nanyuki Town which has a fine mix of thriving SMEs that are the drivers of economic life in the town. The target population was made up of the SMEs and their owners in the town. The study targeted 765 SMEs in Nanyuki town. The sample was selected using stratified and simple random sampling technique. A sample of eighty-eight respondents was selected. Information was collected using questionnaires deployed utilizing drop-and-pick-later technique. Data was analyzed utilizing both inferential and descriptive statistics aided by SPSS software version 21. Correlation analysis as well as multiple linear regression were employed to determine effectively the effect and nature of associations between the variables. The study established poor liquidity condition for the SMEs with both the current ratio and quick ratios standing 1.47:1 and 0.55: 1 respectively which are below the globally accepted standards of 2:1 for current ratio and 1:1 for quick ratio. The profitability of the SMEs was also relatively low with the return on assets standing at an average of 6.67%. The Pearson correlation analysis results indicated a positive association between formal financing option and financial profitability of SMEs. The study recommended that stakeholders and especially the government devise measures to assist SMEs boost their ability to access alternative funds from formal institutions and other alternatives such as government affirmative funds. The government should consider incentives to formal financial players who establish special facilities targeting SMEs and enhance efficiency of affirmative funds targeting SMEs.
