Financing Cost Effect on Financial Performance of Micro and Small Enterprises in Starehe, Nairobi City County, Kenya

Abstract

 Micro and Small Enterprise immensely contribute to economic development around the world, in Africa and also in Kenya. Micro and Small Enterprises play a significant role in creation of employment, income generation and are seedbed for medium and large enterprises. Micro and Small Enterprises face many challenges limiting their financial performance and survival as measured by return on assets and growth in sales, including lack of markets, competition, lack of skilled manpower, and poor management practices. In Kenya, Micro and Small Enterprises failure rate is 67%. In Nairobi City County Micro and Small Enterprises financial economic performance measured by growth in sales declined from 95.7% in 2011 to 87.2% in 2017. This study investigated the effect of financing costs on financial performance of Micro and Small enterprises in Starehe, Nairobi City County, Kenya. The study was anchored on Trade-off theory, Pecking-Order theory and financial constraint theory to give direction and support to this paper. The study adopted positivism research philosophy and a descriptive survey design. The study used stratified random sampling to select 384 Micro and Small Enterprises determined from a target population of 21,869 Licensed by Nairobi City County. Primary data (cross sectional) were used in the paper, and was collected by administering a questionnaire with closed end-ended questions, with a rating scale of 1-5. Confirmatory Factor Analysis was used to ascertain the validity of the measurement model before commencing Structural Equation Modeling to test the hypotheses under study through Amos software. Data was analyzed using descriptive statistics (mean, frequency distribution standard deviation) and inferential statistics (Multivariate analysis-Structural Equation Modeling). Diagnostic tests included Keizer-meyer-olkin test, Berletts test of sperecity, Normality test and Multi-collinearity test. Data results were presented inform of tables, graphs, charts and percentages. The study found that there was a positive and significant relationship between financing costs and financial performance of Micro and Small Enterprises. The study recommended that the government through its financial agencies work out a framework to reduce costs to Micro and Small Enterprises. Secondly, the study recommended that the government should reduce the bureaucracy involved in business start-ups. Thirdly, the government should enhance entrepreneurship skills to Micro and Small Enterprise owners and managers.