Fintech financing and financial performance of Micro, Small and Medium Enterprises in Nairobi, Kenya

Abstract

Micro, Small and Medium Enterprises (MSMEs) have increasingly been regarded as the drivers of socioeconomic growth specifically among emerging economies through job creation and sustained economic development. Despite their critical role, financial performance of MSMEs remain a concern. It is estimated that nearly half of MSMEs shut down within five years of operation. Similarly, half a million of MSMEs terminate their operations on annual basis (Kenya National Bureau of Statistics, 2023). While fintech is broad, this study narrows to effect of fintech financing with focus to mobile money, peer-to-peer lending, and crowdfunding on MSME financial performance. Furthermore, it integrates financial literacy as a moderating variable, an aspect that has received limited empirical attention within the Kenyan MSME context despite growing evidence of its importance in enhancing fintech outcomes. Therefore, this study examines the effect of fintech on financial performance of MSMEs operating in Nairobi City. It specifically examined the influence of mobile money, peer-to-peer lending and crowdfunding on MSMEs’ financial performance in Nairobi City and how financial literacy weaken or strengthen this relationship. In terms of theoretical underpinning, this research was anchored by financial intermediation theory and technological acceptance models. The study was anchored on positivism research philosophy. The study employed cross sectional research design. The study only targeted licensed MSMEs in Nairobi and exclude unlicensed ones. There are a total of 224,593 licensed MSMEs in Nairobi City. The unit of observation were the MSME owners/operators. The study sample size was 400 MSMEs calculated by employing Yamane formula. Stratified random sampling was used to select 400 MSME owners/operators across six regions within Nairobi. Data was analyzed by the use of descriptive and inferential statistics. The descriptive statistics involved mean and standard deviation while inferential entailed correlation and Ordinal regression. The study established that the regression coefficient of crowd fund has a positive and significant effect on financial performance within the context of MSMEs. The regression result indicated that peer to peer lending has positive and significant effect on financial performance of MSMEs. Mobile money services yielded a positive and significant effect on financial performance of MSMEs. The study also established that financial literacy significantly and positively moderate the nexus between Fintech and financial performance of MSMEs. The study concluded that mobile money services, peer to peer lending and crowd fund technology are significant predictors of financial performance. Moreover, the relationship between financial technology and financial performance is strengthened by financial literacy. The study recommends training and mentorship as the capacity building strategy of players within the sector so that they are imparted with necessary skills and knowledge required to operate fintech tools and overall knowledge of financial management. Strengthening regulatory framework to enhance trust among the players.

Key words: Fintech, mobile money, P2P lending, crowdfunding, financial performance, MSMEs, Kenya