Effect of Credit Financing on Financial Performance of Small and Medium Enterprises in Nairobi Central Business District, Kenya

Abstract

The purpose of the study was to establish the effect of credit financing on financial performance of SMEs in Nairobi Central Business District, Kenya. The specific objectives of the study were to: establish the effect of access to credit on financial performance of SMEs, to determine the effect of vested interest on SMEs, assess the effect of credit history on SMEs and distinguish the effect of credit worthiness on SMEs in Nairobi Central Business District Kenya. The study was anchored on Credit Rationing Theory, Information Asymmetry Theory and Financial Intermediation Theory. The study used stratified random design. The target population of this study comprised of 1,842 registered Small and Medium Enterprises licensed in Nairobi Central Business District. The study used a sample size of 184 SMEs. The study adopted primary data collection by interviewing the top owners or top managers, from the Small and Medium Enterprises by making use of structured questionnaire. Collected data was analysed through descriptive and inferential statistics with the aid of SPSS software. The analysis findings were presented on tables, charts and bars. The study findings revealed that access to credit had a positive and significant effect on the financial performance (? =.123, p=.031<.05), vested interest had a positive but insignificant effect on the financial performance of SMEs (? =.056, p=.391>.05), credit history had a positive and significant effect on the financial performance of SMEs (? =.416, p=.000<.05) and finally the findings revealed that credit worthiness had a positive and significant effect on the financial performance of SMEs (? =.405, p=.000<.05). The study concluded that access to credit is the lifeblood of small and medium-sized enterprises (SMEs) as they evolve into profitable and sustainable businesses over the years. It was thus recommended that managers of SMEs operating in Nairobi City County CBD should strive to improve their ability to access credit, improve their vested interest, credit history and improve their credit worthiness. Keywords: Access to Credit, Financial Performance, Vested Interest, Credit History, Credit Worthiness, SMEs, Nairobi Central Business District