Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 8(1):48-61

Journal of Emerging
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2017 Sciences (JETEMS) 8(1):48-61 (ISSN: 2141-7016)
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Effect of Microfinance Credit on SMEs Financial Performance in

Kenya
Flora Amsi1, Philip Ngare2, Petronilla Imo1 and Mercie Gachie1
1
The Catholic University of Eastern Africa
2
University of Nairobi
Corresponding Author: Philip Ngare
---------------------------------------------------------------------------------------------------------------- ----------------------------
Abstract
The Small and Medium Enterprises (SME) sector is important for the growth of the economy in any developing
country. Similarly, microfinance credit facilities are crucial to SMEs financial performance as they facilitate growth
of the SMEs businesses. In our study, we investigate the effect of microfinance credit factors (credit amount, interest
rate, collateral requirement, credit repayment period and entrepreneur orientation) on the SMEs financial
performance in Kenya using a sample size of 210 SMEs. Stratified and simple random sampling technique was
employed. Cronbach‟s alpha was used to estimate reliability and alpha of 0.7 was deduced which showed the
instruments were reliable. Data collected established that majority of respondents had not received any
entrepreneurial training. The effect of interest rate, collateral requirement, and repayment period were found to have
negative effect on SMES financial performance, but there was a positive effect on the entrepreneur orientation and
credit amount. The study also established that microfinance credit factors affect SMEs financial performance with
entrepreneur orientation contributing the most to SMEs financial performance compared to the other factors thus
implying that most of the SMEs entrepreneurs are innovative, take risks by venturing into new business activities
and are proactive. The study recommends that microfinance institutions consider entrepreneur orientation training
while disbursing credit.
_________________________________________________________________________________________
Keywords: microfinance credit, financial performance, regression analysis, entrepreneur orientation.

INTRODUCTION
The practice of microcredit dates back to the early 1700 develop from SMEs and some of them even rely on
and can be traced to the Irish loan fund system which SMEs.
provided small loans to rural poor with no collateral.
Over the years, the concept of microfinance spread to Even though the definitions of „SMEs‟ come in
Latin America, then to Asia and later to Africa. Today, variation, the importance of SMEs in the contemporary
use of the expression micro financing has its roots in the global economy has demonstrated the shift of emphasis
1970s when organizations such as Grameen Bank of towards SMEs in all countries (Olomi, 2009). This is
Bangladesh with the microfinance Pioneer Mohammed justified by both the quantitative and qualitative
Yunus, were starting and shaping the modern industry contributions of SME sections to the well –being of a
of micro financing Mwangi (2011). In the early 1990s nation‟s economy. Their effects can be seen in a number
with the opening up of the political space and of areas, including providing job opportunities for the
disturbances, the need for the credit by individual, workers, distributing income, alleviating poverty,
micro, small and medium enterprises increased and this providing a training ground for the development and
led to the recognition of the microfinance institution in upgrading entrepreneurship skills, and serving as
Kenya. important vehicles for promoting forward and backward
linkages in geographically diverse sectors of the
Small and medium enterprises (SMEs) are considered to economy in many countries (ibid). According to a
be the key engine of the economic development World Bank report (2016) 600 million jobs are needed
(Chittithaworn, Islam & Keawchana, 2011; Ionita, et al, across Africa in the next 15 years to absorb a growing
2009; Deros, Yusof & Salleh, 2006). The relative global workforce. Most formal jobs in emerging
importance of the SME sector varies greatly across markets are with small and medium enterprises (SMEs),
countries, whereby SMEs have been known to make which also create 4 out of 5 new positions and yet more
important economic contributions, whether in developed than 50% of SMEs lack access to finance, which hinders
or developing countries. A number of large enterprises their growth (Ref: World Bank - Informal Enterprises in
Kenya)
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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 8(1):48-61 (ISSN: 2141-7016)

In Kenya, Small and Medium Enterprises (SMEs) is an performance. Similarly, the concept of performance
important sector of the growth of economy like many cannot be adequately measured by a single item since it
other developing countries since it employs about 85% is a multi-dimensional factor (Ahmad & Ghani, 2010).
of the Kenyan workforce. The current constitutional Most studies did not consider Entrepreneur Orientation
framework and the new Micro and small Enterprises as a variable which is key to SMEs financial
Act of 2012 (MSE Act 2012) provide a new window of performance. This study therefore intends to use
opportunity through which the evolution of SMEs can multiple variables including the Entrepreneur
be realized through the devolution framework. orientation to examine their effects on SMEs financial
However, the impact of devolution on SMEs performance.
development depends on the architecture of regulatory
and institutional framework inclined to support SMEs in This study aims to investigate the effect of microfinance
the economy Ong‟olo and Odhiambo (2013). Despite credit factors (credit amount, interest rate, collateral
the importance of (SMEs) in the national economy in requirement, credit repayment period and entrepreneur
general, they face many obstacles that hinder their orientation) on the SMEs financial performance in
development, one of which is evident in the aspect of Kenya. Recent literature focuses on the effect of micro
financial access. finance on performance of SMEs using a single variable
and without recognizing the impact of entrepreneurial
Several empirical studies have documented the orientation on SMEs performance.
existence of a strong positive link between the
functioning of the financial system and economic Statement of the Problem
growth across countries, and that stage of financing Access to microfinance credit is considered to be an
increases the probability of performance measures such important factor in determining the performance of
as investment and employment (Rousseauand Sylla SMEs. Microfinance credit is one of the financial
2003). Several studies conducted in Kenya (e.g. Kibet, services that are expected to promote SMEs financial
Achesa & Gedion, 2015; Rotich, Lagat & Kogei, 2015; performance. Despite the mushrooming of microfinance
Wanambisi, 2013) argue that there is positive institutions that provide microfinance credit in Kenya,
relationship between microfinance services and SMEs majority of SMEs do not perform well. This has been
performance. This includes the favourable initial credit attributed to lack of access to financial services and
amount, favorable interest amount, achievable collateral unfavorable credit facilities such as high interest rates
and, favourable credit repayment period. Furthermore, and short repayment period. Despite the contribution of
the number of the microfinance institutions in the reviewed literature on SMEs performance and
developing countries including Kenya is also increasing. microfinance credit, the literature has indicated that
majority of the studies applied a single measure to
It is generally acknowledged that small businesses can explain the SMEs performance. Similarly, the concept
borrow money from formal financial avenues however of performance cannot be adequately measured by a
there is substantial evidence that SMEs face single item since it is a multi-dimensional factor. Most
increasingly large number of constraints such as less studies did not consider Entrepreneur Orientation as a
access to formal sources of external finance, potentially variable which is key to SMEs financial performance.
explaining the lack of SME contributions to growth This study therefore intends to use multiple variables
(Olomi, 2009). SMEs‟ inability to access bank loan can including the Entrepreneur orientation to examine their
be explained through some well-known reasons such as effects on SMEs financial performance.
the collateral required by the banks, high interest rates,
and lack of relationships with bankers. Limitations of the Study
The study focused on the effect of microfinance credit
Several studies (e.g. Kibet, Achesa & Gedion, 2015; factors (credit amount, interest rate, collateral
Rotich, Lagat & Kogei, 2015; Wanambisi, 2015) requirement, credit repayment period and entrepreneur
focused on the effect of microfinance services on SMEs orientation) on SMEs financial performance. The key
performance; however, they did not consider the effect shortcomings while conducting the study included: time
of entrepreneurial orientation of the SMEs owners or limitation as it was conducted within a period of four
operators. months, delayed responses and inadequate finances. The
target population of the study was limited to 210 SME
Despite the contribution of the reviewed literature on owners within Nairobi county. This study would have
SMEs performance and microfinance credit, the been carried out across the whole country because
literature has indicated that majority of the studies SMEs are spread throughout the country.
applied a single measure to explain the SMEs
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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 8(1):48-61 (ISSN: 2141-7016)

LITERATURE REVIEW Hoedoafia, 2016). The microfinance credit can be

Theoretical Review affordable to SMEs if the interest rate is low. Access to
Resource based view low interest rates has been attributed to a major factor
The Resources Based View (RBV) is considered to be that increases SMEs performance (Mwangi 2011,
the key theory that explains the influence of a resource Kamau and Kalio 2014). Similarly access to low loans
on business performance (Crook et al, 2008). This study increases SMEs risk bearing abilities, improve risk
considered microfinance credit as a financial resource coping strategies and enables consumption smoothing
which may have influence on SMEs financial over time.
performance and therefore RBV is relevant.
Collateral Requirement and SMEs Financial
Studies on environmental influence on organization Performance
survival have well been documented (Aldrich, 1979, Collateral is defined as security for loans that it can
Hannan and Freeman 1977). Research has shown that protect the lander if the borrower default (Indersta &
successful management of internal resources can Mueller 2007). Studies cite that increase in firm‟s
significantly improve venture performance and the collateral relax the credit constraints faced by the firm,
likelihood of survival (Oginni and Adesanyam, 2013). facilitating the firm to borrow more (Wang, 2004). A
However, for company in general and start-ups in well-developed microcredit system can help SMEs to
particular, the resource has to be frequently extended access affordable credit services particularly if the
and renewed. collateral requirement is affordable (Alhassan &
Hoedoafia, 2016).
According to Barney (1991) firm resources can be
classified into three categories: physical capital Credit Repayment Period and SMEs Financial
resources, human capital resources and organizational Performance
resources. An entrepreneur is in needs to possess such A well-developed microcredit system can help SMEs to
resources. Organizational resources include informal access affordable credit services particularly if there are
relations among people within a firm and between the friendly repayment period options to repay the loan
firm and its environment. (Alhassan & Hoedoafia, 2016). Bragg (2010) stated
that “the short time frame reduces the risk of non-
Empirical Review repayment to the bank, which can be reasonably certain
Microfinance credit that the business‟s fortunes will not decline so far within
Microfinance credit can be considered to be one of the such a short time period that it cannot repay the loan,
financial sources of SMEs. It plays a crucial role on while the bank will also be protected from long-term
poverty alleviation due to its contribution in the variations in the interest rate”.
development of SMEs. For instance, SMEs sector in
Kenya is a source of income for over eight million Entrepreneurial Orientation and SMEs Financial
people who present the majority of the Kenyan Performance
workforce (World Bank, 2011). Entrepreneur orientation (EO) refers to the decision-
making styles, practices, processes and behaviours that
Credit Amount and SMEs Financial Performance lead to „entry‟ into new or established markets with
The amount of credit offered by the financial new or existing goods or services (Lumpkin and
institutions may determine the performance of SMEs in Dess 1996; Wiklund and Shepherd 2005). Further EO
terms of sales, liquidity and even the operating costs. has been attributed to consisting of dimensions such as
This is supported by several researchers such as Oleka, innovativeness, risk taking and proactiveness (Frank,
et al (2014 UWFT, 2005; Wanambisi 2013). For Kesseler & Fink 2010). EO has been considered as a
example, Oleka, et al (2014) argue that the loan size critical component of the firm‟s success. A study by
positively influence the growth of SMEs. It was also (Callagan and Venter, 2011) established association
argued that the business that receive adequate amount of between EO and contextual factors with respect to
loan frequently perform better than the ones that do not earnings and continuous satisfaction. A study by
(Wanambisi, 2013) also argues that appropriate loan Augusto, Moeljadi, Fatchur, & Solimun (2014) on effect
sizes for clients, matching SMEs needs influence the of EO on business performance established that EO
business sustainability. have an effect on business performance meaning that
better EO could improve performance of SMEs and that
Interest Rate and SMEs Financial Performance government policy as a moderating variable did not
A well-developed microcredit system can help SMEs to have direct effect on SMEs performance.
access affordable credit services (Alhassan &
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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 8(1):48-61 (ISSN: 2141-7016)

CONCEPTUAL FRAMEWORK entrepreneur orientation) have an effect on SMEs

In this conceptual framework, it is expected that Financial Performance.
Microfinance Credit factors (credit amount, interest rate,
collateral requirement, credit repayment period and

Credit amount

Interest rate

Collateral SME Financial

requirement Performance

Credit repayment

Entrepreneurial
Orientation

Figure 1: Conceptual framework: Effect of microfinance credit on SMEs financial performance

RESEARCH DESIGN AND METHODOLOGY Table 1: Sampling Techniques

Research Design Target SME Estimated Sampling design Sample size
This study employed descriptive survey and cross Sector Population 10%
Trade 940 Stratified/simple
sectional design. The descriptive survey design allows random
94
the use of quantitative research approach, the designs as Services 580 Stratified/simple
58
purported by (Creswell, 2013; Zikmund, Babin, Carr & random
Griffin, 2010) allows the researcher to capture Manufacturing 580 Stratified/simple
58
random
quantitative aspects of the study which provides an Total 2100 210
understanding of a research problem.
Data Collection Instruments and Procedures
Target Population The study used questionnaires to collect relevant
For this study, the target population included registered information. The use of questionnaires offered objective
SME entrepreneurs in trade, services and manufacturing responses since they gather data in standardized way
sectors. The target group was SMEs from Kenyatta (Lapoite, 2013). The questionnaires were designed in
Market, Gikomba Market, Toi Market, and the Likert scale of five (5) points.
Kawangware Market who are traders, manufacturers
and those in-service businesses. Reliability of the Research Instrument
A measuring instrument is said to be reliable if it
Sample and Sampling Procedures provides consistent results (Kothari, 2011). The
According to Gay, Mills and Airasian (2009), the researchers used Cronbanch‟s Alpha coefficient which
minimum sample size depends on the type a research ranges between 0 and 1 (Kipkebut, 2010), to establish
involved. For a survey research, a sample of 10% to the reliability that is to assess the internal consistency of
30% of population is acceptable. This is concurrent with the instrument. The researcher used Cronbach‟s alpha
Lapoite (2013) who had similar observation. For this because it requires only one testing session. Higher
study the researchers selected 210 SMEs from an alpha coefficient values mean there is consistency
estimated target population of 2100 which accounts for among the items in measuring the concept of interest.
10% of the target population. The study targeted traders, As a rule of thumb, acceptable alpha should be at least
service providers and manufacturers in four markets 0.7 or above (Henson, 2001).
namely: Kenyatta Market, Gikomba Market,
Kawangware and Toi Market.

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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 8(1):48-61 (ISSN: 2141-7016)

Table 2: Reliability Statistics summarized using descriptive (frequencies and

percentages) and the findings were presented using
Case Processing Summary frequency tables. The level of significance was
N % measured using multiple regression model and Pearson
Cases Valid 30 100.0 Coefficients correlation and to determine the direction
Excludeda 0 .0 and strength of relationship between dependent variable
Total 30 100.0 and independent variables.
a. Listwise deletion based on all variables in the procedure.
DATA ANALYSIS AND PRESENTATION OF
From the study an alpha of 0.683 (rounded to 0.7) was RESEARCH FINDINGS
established. This shows that the instruments were This section of the research study discusses the findings
reliable. and results of the study based on the collected primary
data and information from questionnaires. The aim of
Data Collection Procedures this study was to find out the effect of microfinance
Two research assistants were trained on how to credit on SMEs financial performance.
administer the questionnaires. A piloting test done on 30
SMEs not included in the final study. The Response Rate
questionnaires were self-administered together with the The study targeted 210 SMEs respondents from Nairobi
help of research assistants. This enabled collection of County. In total there were 210 duly completed
firsthand information. questionnaires: (Kenyatta Market = 56, Gikomba
Market = 86, Toy market = 68). Of the respondents, 94
Data Analysis and Presentations were in trade, 58 in service and another 58 in
In this research, primary data from questionnaires was manufacturing sectors.
used. The primary data played a major role since SMEs
do not have reliable financial data. Quantitative data Demographic Characteristics of the Respondents
from closed ended questions was coded by assigning The demographics of concern by the researcher
numerical values to differentiate the categories. Data included the following; the gender respondents, marital
was then analyzed using statistical package for social status and level of education.
sciences (SPSS). Demographic data obtained was

Table 3: Demographic Characteristics of SMEs respondents

Gender
Frequency Percent
Female 86 41.0
Male 124 59.0
Total 210 100.0
Marital status of people engaged in SMEs
Single 59 28.1
Married 65 31.0
Divorced 35 16.7
Widowed 51 24.3
Total 210 100.0
Level of Education
Primary 35 16.7
Secondary(KCSE) 40 19.0
Vocational training 37 17.6
A level 30 14.3
Certificate/Diploma 29 13.8
Degree/Advanced Diploma 20 9.5
Postgraduate/At least diploma 19 9.0
Total 210 100.0

On gender the study findings indicate that majority of 28.1% were single, 31% married, 16.7% divorced and
the SMEs respondents were male (59%) while 41% of 24.3% widowed. This means there is almost an equal
were female. This shows that there is higher percentage percentage of those who are single and those who are
of male SMEs than female SMEs who were involved in married are involved in SMEs activities. In this study
this study. On the marital status of SME entrepreneurs‟ (19%) were KCSE certificate holders, 17.67% had
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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 8(1):48-61 (ISSN: 2141-7016)

vocational/technical training,16.7% were primary Entrepreneurial Training

certificate holders, 14.3% had „A‟ levels, 13.8% Base on the study, the results indicate that the majority
certificate/ Diploma, 9.5% Degree/ Advanced Diploma 59% had not received any Entrepreneurial training
and the least 9% were postgraduate. There is unequal whereas 41% had received training. This implies
distribution between those who had attained high level, majority of SMEs are untrained and rely on their own
from KCSE and above (66.6%), and those who low skills.
level of education; vocational training and below
(34.2%).

Entrepreneurial Characteristics
Table 4: Enterprise ownership and Business Activities Respondents
Ownership Business activities
Frequency Percent Frequency Percent
Sole proprietor 145 69.0 Trade 94 44.8
Partnership 65 31.0 Services 58 27.6
Total 210 100.0 Manufacturing 58 27.6
Total 210 100.0

The findings indicate that the majority of SMEs 69% A total of 40% had received the first loan 2-3 years ago
are sole proprietors while 31% are in partnership. whereas 31% had received the first loan between 5-9
Those in trade business activities comprise 44.8% years ago. Those who had received a loan over 9 years
services and manufacturing were 27.6% each. The ago comprised 19.5% while those who had received
findings reveal that majority of SMEs activities loans less than a year ago comprised 9.5%.
concentrate on service provision and manufacturing
(55%) and 45% on trading. The respondents were asked to indicate their level of
agreement as to whether the initial credit amount had
Table 5: Acquisition of microfinance credit influence on SMEs financial performance. The results
Has Businesses acquired Has Business more are as indicated in the tables below.
credit from microfinance than one loan?
institution?
Freque Table 7: The Initial Microfinance credit amount
Frequency Percent ncy Percent Statement Strongly Disagree Neutral Agree Strongly
Yes 161 76.7 54 25.7 Disagree Agree
No 49 23.3 125 59.5 The credit 21(10%) 42(20%) 12(5.7%) 93(44.3%) 42(20%)
None of amounts
210 100.0 31 14.8 offered by the
the above
Total 161 76.7 210 100.0 microfinance
institutions are
adequate to
A total of 76.7% responded that the business had implement the
acquired credit from microfinance institutions (MFI) business ideas
whereas 23.8% had not received credit from MFI. In The credit 25(11.9%) 87(41.4%) 1(5%) 63(30%) 34(16.2
amount is not %)
addition, majority of the respondents 59.5% had limited by the
received only one loan while 25.7% had received more collateral
than one credit. value
The credit 26(12.4%) 74(35.2%) 0(0%) 110(52.4 0(0%)
amount is %)
Table 6: Period when first credit was acquired adequate to
When did the business acquired the first loan from microfinance promote
institution business
Frequency Percent growth
Less than a The credit 23(11.0%) 55(26.2%) 0(0%) 109(51.9 23(11.0
20 9.5
year amount given %) %)
2 – 3 years 84 40.0 tallies with the
5 – 9 years 65 31.0 loan
more than 9 application
41 19.5
years submitted to
Total 210 100.0 the
microfinance
institutions

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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 8(1):48-61 (ISSN: 2141-7016)

According to the results 64.3% of respondents agreed of 52.4% agreed that the credit amount is adequate to
that the initial credit amount offered by the promote business growth while 47.6% respondents
microfinance institution is adequate to implement the disagreed. This implies credit amount received by SMEs
business ideas whereas 30% disagreed. The remaining is adequate in promoting business growth. A total of
5.7% were neutral. On the other hand 53.3%% of 62.9% of the respondents agreed that the credit amount
respondents disagreed that the credit amount is not tallies with the loan application submitted to the
limited by the collateral requirement, while 46.2% microfinance institution while 37.2% disagreed.
agreed, and 5% were neutral. This means credit
amount is limited by the collateral requirement. A total

Table 8: Interest Rate on Microfinance credit

Statement Strongly Disagree Neutral Agree Strongly
Disagree Agree
The interest rate on microfinance 15(7.1%) 70(33.3%) 2(1.0%) 109(51.9%) 14 (6.7%)
credit is low

The interest rate is fair and affordable 25(11.9%) 75(35.7%) 0(0%) 110(52.4%) 0(0%)
The interest rate on loan does not 8 (3.8%) 40(19.0%) 2(1.0%) 149 (71.0%) 11(5.2%)
significantly increase the business
financial costs
The interest rate on loan does not 0(0%) 104(49.5%) 2(1.0%) 104(49.5%) 0(0%)
significantly decrease the business
cash flows

The table shows that 58.6% agreed that interest rate on of the SMEs 52.4% agreed that the interest rate is fair
microfinance credit is low while 40.4% respondents and affordable, while 47.6% disagree. This implies that
disagreed and the least 1% were neutral, this means the the interest rate is fair and affordable.
interest rate on microfinance credit is favourable. Most

Table 9: Collateral Requirements

Statement Strongly Disagree Neutral Agree Strongly

Disagree Agree
The collateral value is affordable 16(7.6%) 63(30.0%) 0(0%) 120(57.1%) 11(5.2%)
There is fair evaluation of the collateral value 13(6.2%) 74(35.2%) 4(1.9%) 119(56.7%) 0(0%)
The collateral value is not the key requirement for the business to 21(10.0%) 117(55.7%) 10(4.8%) 62(29.5%) 0(%)
qualify for microfinance credit
The legal requirements to justify the ownership of the collateral 9(4.3%) 53(25.2%) 52(24.8%) 96(45.7%) 0(0%)
are affordable

Respondents 62.3% agree that collateral value is requirement for the business to qualify for microfinance
affordable while 37.6% disagree. A total of 56.7 agree credit. The result indicates 29.5% of the respondents
that there is fair evaluation of collateral while 41.4% disagree that the legal requirement to justify the
disagree and 1.9% were neutral. Most of the ownership of the collateral are affordable, whereas
respondents 65.7% disagree that the collateral value is 47.5% agree and 24.8% of the respondents were neutral.
not a key requirement for the business to qualify for the This implies that the legal requirement to justify the
microfinance credit, whereas 29.5% agree, and the least ownership of the collateral is affordable.
4.8% were neutral. This implies collateral value is a key

Table 10: Credit Repayment period

Statement Strongly Disagree Neutral Agree Strongly
Disagree Agree
The credit repayment period is favorable to the 22 (10.5%) 90(42.9%) 3(1.4%) 88(41.9%) 7(3.3%)
business
The duration of loan repayment is flexible 30(14.3%) 31(14.8%) 9(4.3%) 113(53.8) 27(12.9%)
The time given to repay the loan does not 9(4.3%) 96(45.7%) 0(0%) 85(40.5%) 20(9.5%)
negatively influence the business cash flow
The time given to repay the loan allows the 9(4.3%) 62(29.5%) 2(1.0%) 98(46.7%) 39(18.6%)
business to accumulate the required amount of
cash

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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 8(1):48-61 (ISSN: 2141-7016)

The majority of respondents 53.4% disagree that the flexible. There is an equal response of 50% each of the
credit repayment period is favorable to the business respondents who agree and disagree that the time given
whereas 45.2% agreed and 1.4% were neutral. Majority to repay the loan does not negatively influence the
66.7%of the respondents agree that the duration of loan business cash flow. This implies that the time to repay
repayment is flexible, whereas 29.1% disagree and 4.3% the loan is inconclusive.
were neutral. This implies that repayment period is

Table 11: Entrepreneurial Orientation

Statement Strongly Disagree Neutral Agree Strongly
Disagree Agree
I have been doing the same business the 33(15.7%) 40(19.0%) 0(0%) 105(50.0%) 32(15.2%)
since its establishment
I usually develop new business 0(0%) 11(5.2%) 0(%) 155(73.8%) 44(21.0%)
strategies in order to compete in the
market
I have a vision to invest into new 0(0%) 15(7.1%) 7(3.3%) 132(62.9%) 56(26.7%)
unknown markets
I can invest the business money into the 0(0%) 5(2.4%) 0(0%) 142(67.6%) 63(30.0%)
selling of newly introduced products to
the market
I have plans on how to tap new 0(0%) 5(2.4%) 0(0%) 170(81.0%) 35(16.7%)
business opportunities

Majority 65.2% of the respondents agree that they have least 3.3% were neutral. This implies that majority of
been doing the same business since establishment the SMEs have vision to invest into unknown markets.
whereas 34.7% disagree. This implies that most of
SMEs have been consistent in their businesses. Almost all respondents 97.6% agree that they can invest
the business money into the selling of newly introduced
A total of 94.8% respondents agree that they usually products to the market, while the remaining 2.4%
develop new business strategies in order to compete in disagree. This implies that majority of SMEs are of the
the market, while 5.2% disagree. This means majority opinion that they can diversify their products. Almost
of SMEs usually develop new business strategies in all 97.7% of respondents agree that they have plans on
order to compete in a new market. how to tap new business opportunities while 2.4%
Majority 89.6% agree that they have a vision to invest disagree.
into new unknown markets, while 7.1% disagree and the

Table 12: Business Financial Growth

Statement Strongly Disagree Neutral Agree Strongly
Disagree Agree
Sales have increased 12(5.7%) 22(10.5%) 6(2.9%) 161(76.7%) 9(4.3%)
The number of employees have 0(0%) 53(25.2%) 0(0%) 157(74.8%) 0(0%)
increased

The volume of inventory purchased 10(4.8%) 13(6.2%) 0(0%) 187(89.0%) 0(0%)

from suppliers on cash basis have
increased
The size of business transactions has 0(0%) 99(47.1%) 22(10.5%) 58(27.6%) 31(14.8%)
decreased
The number of customers have 0(0%) 10(4.8%) 0(0%) 180(85.7%) 20(9.5%)
increased

A total of 81% of the respondents agree that Sales have disagree that the size of business transactions has
increased, whereas 16.2% disagree and 2.9% were decreased, while 42.4% agree and 10.5% were neutral.
neutral. Majority 74.8% of the respondents agree that Majority 95.2% agree that the number of customers
the number of employees have increased, whereas have increased, whereas 4.8% disagree.
25.2% disagree.
Hypothesis Testing
According to majority 89% the volume of inventory The study sought to establish the effect of Microfinance
purchased from suppliers on cash basis have increased, Credit Factors (credit amount, interest rate, collateral
while 11% disagree. A total of 47.1% of respondents requirement, credit repayment period and entrepreneur
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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 8(1):48-61 (ISSN: 2141-7016)

orientation) on SMEs Financial Performance. The Table 13: Model Summary on effect of Microfinance
various variables were computed using a multiple factors on SMEs financial performance
regression model and Pearson Coefficients correlation R Adjusted R Std. Error of the
and the results are as discussed in the tables below. Model R Square Square Estimate
1 .719a .518 .506 .34663
Null Hypothesis a. Predictors: (Constant), entrepreneur orientation, credit
amount, credit repayment period, interest rate, collateral
H0: There is no significant effect of Microfinance Credit
factors (credit amount, interest rate, collateral
The table represents results of regression analysis
requirement, credit repayment period and entrepreneur
carried on effect of Microfinance factors on SMEs
orientation) on SMEs Financial Performance.
financial performance. The findings show that the
In order to test this hypothesis regression analysis was
coefficient of determination, R2=0.518, meaning that the
conducted and the results are shown below.
generated model can account for 52% of the observed
values.

Table 14: Regression Coefficients on effect of Microfinance factors on SMEs financial performance
Coefficientsa
Standardized
Unstandardized Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) -.115 .315 -.367 .714
credit amount .095 .028 .168 3.380 .001
interest rate .207 .028 .363 7.270 .000
Collateral requirement .147 .034 .223 4.372 .000
credit repayment period -.056 .031 -.088 -1.799 .073
entrepreneur orientation .591 .075 .402 7.879 .000
a. Dependent Variable: microfinance growth
innovative, risk taking by venturing into new
CA - credit amount businesses/services and proactive.
IR - Interest rate
CR - collateral requirement Table 15: Correlations on effect of Microfinance factors
CRP - Credit repayment period on SMEs financial performance
EO - entrepreneur orientation SME financial
The results indicated the regression equation model as: growth
credit amount Pearson Correlation .243**
SMEs financial performance = -0.115+ 0.168 (CA) + 0.363 (IR) Sig. (2-tailed) .000
+ 0. 223 (CR) - 0.088 (CRP) + 0.402 (EO) N 210
Interest rate Pearson Correlation .482**
From the above equation, the results indicate that credit Sig. (2-tailed) .000
N 210
amount contributes 16.8% of the SME performance; Collateral requirement Pearson Correlation .341**
interest rates 36.3%; collateral requirement 22.3%; Sig. (2-tailed) .000
credit repayment period 8.8% and entrepreneur N 210
orientation 40.2%. Credit repayment Pearson Correlation
-.102
period
Sig. (2-tailed) .140
For credit amount, interest rate, collateral and N 210
entrepreneur orientation had statistical significant effect Entrepreneur Pearson Correlation
.539**
to SMEs financial performance as indicated by the p- orientation
values 0.001, 0.000, 0.000, and 0.000 respectively Sig. (2-tailed) .000
N 210
which are less than alpha 0.05. The credit repayment
period p-value 0.073 is greater than alpha 0.05
It was noted that: There is weak positive correlation
meaning that it has no statistical significant effect on
between Credit amount and SMEs finance
SMEs financial performance. This would imply the
performance since the r = 0.243 and the p-value 0.000 is
credit repayment period negatively affected the SMEs
less than alpha 0.05. This means the credit amount has
financial performance by causing a decrease of 8.8%.
significant statistical effect on SME financial
Of the factors that have significant effect to SMEs
performance.
performance entrepreneur orientation was found to have
the greatest effect meaning the entrepreneurs have been
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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 8(1):48-61 (ISSN: 2141-7016)

There is moderate positive correlation between Interest requirement; credit repayment period; and entrepreneur
rate and SMEs finance performance since the r = 0.482 orientation on SMEs Financial Performance.
(which is approximately 0.5). The p-value is 0.000 is
less than alpha 0.05. This means the Interest rate has A total of 76.7% respondents had acquired credit from
significant statistical effect on SME financial microfinance institutions indicating that most of the
performance. SMEs are being supported by Microfinance Institutions.
According to the results 64.3% of respondents agreed
There is weak positive correlation between collateral that the initial credit amount offered by the
requirement and SMEs finance performance since the r microfinance institution is adequate to implement the
= 0.341. The p-value is 0.000 is less than alpha 0.05. business ideas. A total of 52.4% agreed that the credit
This means the collateral requirement has statistical amount is adequate to promote business growth. This
significant effect on SME financial performance. implies credit amount received by SMEs is adequate in
promoting business growth. The findings revealed weak
There is weak negative correlation between Credit positive correlation between Credit amount and SMEs
repayment period and SMEs finance performance finance performance since the r = 0.243 and the p-value
since the r = -0.102. The p-value is 0.140 is greater than 0.000 is less than alpha 0.05. However, the regression
alpha 0.05. This means the Credit repayment period analysis indicated the credit amount contributes 16.8%
has no statistical significant effect on SME financial of the SME performance which was found to have
performance. This implies the time given to repay the statistical significant effect to SMEs financial
loan negatively influences the business cash flow and is performance. This concurs with Oleka, et al (2014) who
not favourable to the SMEs. argued that the loan size positively influence the growth
of SMEs.
There is moderate positive correlation between
entrepreneur orientation and SMEs finance The findings from correlations revealed there is
performance since the r = 0.539. The p-value is 0.000 is moderate positive correlation between Interest rate and
less than alpha 0.05. This means the entrepreneur SMEs finance performance since the r = 0.482 (which is
orientation has statistical significant effect on SME approximately 0.5). The p-value is 0.000 is less than
financial performance. This implies that most of the alpha 0.05. The results from the regression analysis
entrepreneurs are innovative, take risks by venturing indicate interest rate contributes 36.3% which was
into new business activities and are proactive. found to have statistical significant effect to SMEs
financial performance. Similar views were observed by
DISCUSSION OF FINDINGS Heidhues (2005) who found out that access to credit
The findings based on gender indicate that there was allows SMEs to enhance their performance. However,
almost equal distribution between female and male in from the descriptive analysis our study revealed an
SMEs involvement. Similarly, the findings also reveal equal divide between respondents who agreed and those
that there is almost equal distribution of SME who disagreed that interest rate on loans does not
entrepreneurs‟ in terms of marital status of 28.1% were significantly decrease the business cash flows and
single, 31% married. There is unequal distribution business financial costs which concurs with Accion,
between those who had attained high level, from KCSE (2011) who pointed out that low interest rates lending
and above (66.6%), and those who low level of by microfinance institutions may not be significant in
education; vocational training and below (34.2%). In SMEs financial performance. This means there is
terms of entrepreneur training the majority 59% had not inconclusive findings on the effect of interest rates on
received any entrepreneurial training whereas 41% had SMEs financial performance.
received training. This implies majority of SMEs were
untrained and rely on their own skills which can have a The findings show that 62.3% agree that collateral value
negative impact on SMEs performance. is key requirement for the business to qualify for the
microfinance credit. The study established weak
The findings reveal that majority of SMEs 69% are sole positive correlation between collateral requirement
proprietors while 31% are in partnership most of the and SMEs finance performance since the r = 0.341. The
SME activities concentrate on service provision and p-value is 0.000 is less than alpha 0.05. This means the
manufacturing (55%) and 45% on trading. collateral requirement has statistical significant effect
on SME financial performance. In addition, the results
The microfinance Credit factors comprise: credit from the regression analysis indicate collateral
amount; microfinance credit interest rate; collateral requirement contributes 22.3% which was found to have
statistical significant effect to SMEs financial
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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 8(1):48-61 (ISSN: 2141-7016)

performance. This means the magnitude of the effect whereas 41% had received training. This implies
does not have a great impact on SMEs financial majority of SMEs were untrained and rely on their own
performance. This concurs with Ono & Uesuge (2005) skills which has a negative impact on SMEs
who found that collateral have little impact on SMEs performance. In addition, the findings reveal majority of
financial performance. SMEs 69% are sole proprietors while 31% are in
partnership.
The majority of respondents 53.4% disagree that the
credit repayment period is favorable to the business. The microfinance Credit factors comprise: credit
Time for repayment of loans is inconclusive since there amount; microfinance credit interest rate; collateral
was an equal response of 50% each of the respondents requirement; credit repayment period; and entrepreneur
who agreed and disagreed that the time given to repay orientation on SMEs Financial Performance.
the loan does not negatively influence the business cash
flow. The study established that credit amount received by
SMEs is adequate in promoting business growth and has
There is weak negative correlation between Credit statistical significant effect to SMEs financial
repayment period and SMEs finance performance performance.
since the r = -0.102. The p-value is 0.140 is greater than
alpha 0.05. This means the Credit repayment period A total of 76.7% respondents had acquired credit from
has no statistical significant effect on SME financial microfinance institutions indicating that most of the
performance. From the regression analysis, the credit SMEs are being supported by Microfinance Institutions.
repayment period contributes -0.088 (8.8%) to SMEs According to the results 64.3% of respondents agreed
financial performance. These results indicated that that the initial credit amount offered by the
Credit repayment period had no statistical significant microfinance institution is adequate to implement the
effect on SMEs financial performance since the p-value business ideas. A total of 52.4% agreed that the credit
0.073 is greater than alpha 0.05. This would imply the amount is adequate to promote business growth
credit repayment period negatively affected the SMEs
financial performance by causing a decrease of 8.8%. The findings revealed weak positive correlation between
Credit amount and SMEs finance performance since
A total of 94.8% respondents agree that they usually the r = 0.243 and the p-value 0.000 is less than alpha
develop new business strategies in order to compete in 0.05. However, the regression analysis indicated the
the market. The study established that 89.6% have a credit amount contributes 16.8% of the SME
vision to invest into new unknown markets meaning performance which was found to.
they are ready to take risks and are therefore innovative.
The results from the correlations established moderate Based on interest rates, there was an equal response
positive correlation between entrepreneur orientation between respondents who agreed and those who
and SMEs finance performance, since the r = 0.539 and disagreed that interest rate on loans does not
p-value is 0.000 is less than alpha 0.05. Similarly significantly decrease the business cash flows and
regression analysis results indicate orientation business financial costs. The findings are therefore
entrepreneurship contributes 40.2% of the SMEs inconclusive. However, from correlations there was
financial performance which was found to have moderate positive correlation between Interest rate and
statistical significant effect since the p-value 0.000 is SMEs finance performance since the r = 0.482 (which is
less than alpha 0.05. This implies that most of the SMEs approximately 0.5). The p-value is 0.000 is less than
entrepreneurs are innovative, take risks by venturing alpha 0.05. The results from the regression analysis
into new business activities and are proactive which is indicate interest rate contributes 36.3% which was
also supported by the descriptive statistics. found to have statistical significant effect to SMEs
financial performance.
CONCLUSIONS AND RECOMMENDATIONS
The findings based on gender indicate that there was The study further established that collateral
almost equal distribution between female and male in requirement had statistical significant effect on SME
SMEs involvement. The study also established unequal financial performance. Majority of the respondents
distribution between those who had attained high level, 62.3% agree that collateral value is key requirement for
from KCSE and above (66.6%), and those who low the business to qualify for the microfinance credit. The
level of education; vocational training and below study established weak positive correlation between
(34.2%). In terms of entrepreneur training the majority collateral requirement and SMEs finance performance
59% had not received any entrepreneurial training since the r = 0.341. The p-value is 0.000 is less than
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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 8(1):48-61 (ISSN: 2141-7016)

alpha 0.05. Similarly, the findings from hypothesis test CONCLUSION

using regression indicate collateral requirement The study reveals that microfinance credit factors
contributes 22.3% which was found to have statistical namely: credit amount; interest rate; collateral
significant effect to SMEs financial performance. requirement; and entrepreneur orientation had a positive
effect on SMEs financial performance. However, the
The study established that the credit repayment period credit repayment period factor was established to have
did not have statistical significant effect and had negatively affected the SMEs financial performance.
contributed negatively to SME financial performance. The hypothesis testing showed the regression analysis
This is supported by majority of respondents 53.4% test having p-values of 0.000 each for credit amount,
who disagreed that the credit repayment period is interest rate, collateral requirement, and entrepreneur
favorable to the business. Time for repayment of loans orientation indicating that they significantly influenced
was inconclusive since there was an equal response of SMEs financial performance. The p-value of 0.073 for
50% each of the respondents who agreed and disagreed the credit repayment period showed non-statistical
that the time given to repay the loan does not negatively significant effect on SMEs financial performance.
influence the business cash flow. In addition, the study
established weak negative correlation between Credit The study also concludes that microfinance credit
repayment period and SMEs finance performance factors affect SMEs financial performance with
since the r = -0.102. The p-value is 0.140 is greater than entrepreneur orientation contributing the most (40.2%)
alpha 0.05. This means the Credit repayment period to SMEs financial performance compared to the other
has no statistical significant effect on SME financial factors. This implies that most of the SMEs
performance. From the regression analysis the credit entrepreneurs are innovative, take risks by venturing
repayment period contributes -0.088 (8.8%) to SMEs into new business activities and are proactive.
financial performance. This would imply the credit
repayment period negatively affected the SMEs There were inconclusive findings on whether the time
financial performance by causing a decrease of 8.8%. given to repay the loan influences the business cash
However the p-value 0.073 is greater than alpha 0.05 flow and also on whether interest rates on loans
which indicates that Credit repayment period had no significantly decrease the business cash flows and
statistical significant effect on SMEs financial business financial costs. Further studies would need to
performance. be carried out to establish this as they are important
factors in the financial performance of SMEs.
The study established that entrepreneurial orientation
had positive effect on SMEs financial performance. A RECOMMENDATIONS
total of 94.8% respondents agree that they usually Based on the conclusions, the study recommends the
develop new business strategies in order to compete in following: The microfinance institutions consider
the market. The study findings also established that entrepreneur orientation training while disbursing credit.
89.6% have a vision to invest into new unknown The trainings should target SME entrepreneurs who do
markets meaning they are ready to take risks and are not have entrepreneurial skills and should help the
therefore innovative. The results from the correlations SMEs not only in the process of setting up new
established moderate positive correlation between businesses, but also acquaint them with skills to identify
entrepreneur orientation and SMEs finance new marketing possibilities including familiarizing
performance, since the r = 0.539 and p-value is 0.000 is them on the various statutory requirements such as
less than alpha 0.05. Similarly, regression analysis Income Tax, VAT etc.
results indicate orientation entrepreneurship contributes
40.2% of the SMEs financial performance which was The study focused on the effect of microfinance credit
found to have statistical significant effect since the p- factors (credit amount, interest rate, collateral
value 0.000 is less than alpha 0.05. This implies that requirement, credit repayment period and entrepreneur
most of the SMEs entrepreneurs are innovative, take orientation) on SMEs financial performance. The key
risks by venturing into new business activities and are shortcomings while conducting the study was time
proactive which is also supported by the descriptive limitation, delayed responses and inadequate finances.
statistics. This concurs with Augusto et al, (2014) who The target population of the study was limited to SME
observed that EO improved performance of SMEs. owners within Nairobi county. This study would have
been carried across the whole country because SMEs
are spread throughout the country.

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The study recommended the following areas for further Creswell, J. W., (2013). Qualitative inquiry & research
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missing. Business Performance - A Replication Study.
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