SU+ @ Strathmore University Library        Electronic Theses and Dissertations     This work is availed for free and open access by Strathmore University Library.   It has been accepted for digital distribution by an authorized administrator of SU+ @Strathmore University. For more information, please contact library@strathmore.edu     2020   Effects of financial literacy on the growth of micro enterprises funded by Uwezo fund in Nairobi County, Kenya Muriithi, J. Wanjiru Strathmore Business School   Strathmore University            Recommended Citation  Muriithi J. W. (2020). Effects of financial literacy on the growth of micro enterprises funded by Uwezo fund in  Nairobi County, Kenya [Thesis, Strathmore University]. http://hdl.handle.net/11071/12129  Follow this and additional works at: http://hdl.handle.net/11071/12129                EFFECTS OF FINANCIAL LITERACY ON THE GROWTH OF MICRO ENTERPRISES FUNDED BY UWEZO FUND IN NAIROBI COUNTY, KENYA JANE MURIITHI 87960 A RESEARCH DISSERTATION SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF MASTER IN BUSINESS ADMINISTRATION AT STRATHMORE UNIVERSITY OCTOBER, 2020 ii DECLARATION I declare that this work has not been previously submitted and approved for the award of a degree by this or any other University. To the best of my knowledge and belief, the thesis contains no material previously published or written by another person except where due reference is made in the dissertation itself. Signature ………… Date…October 13, 2020……………………………. Jane Muriithi 87960 Approval This project has been reviewed and approved for examination purposes. Sign…………………………………. Date…………………………………. Dr. Joseph Onyango Senior Lecturer, Strathmore University Business School iii ABSTRACT The need for financial literacy by micro enterprises has been emphasized by different scholars. Financial literacy is the mastery of a set of knowledge, attitudes and behaviors. The purpose of the study was to establish the effects of financial literacy on the growth of micro enterprises funded by Uwezo Fund in Nairobi County, Kenya. Specifically, the study sought to establish the effects of debt management literacy, budgeting skills literacy, bookkeeping literacy and banking services literacy on the growth of micro enterprises funded by Uwezo Fund in Nairobi County.This study used descriptive research design. The target population for this study was 1859 micro enterprise in Nairobi County that received a financing facility from Uwezo Fund, from where a sample of 329 respondents was selected. The study collected primary data using questionnaires. Quantitative data collected was analyzed by the use of descriptive statistics and presented through percentages, means, standard deviations and frequencies. The information was displayed by use of bar charts, graphs and pie charts and in prose-form. The study adopted multiple regression models was used to establish the strength and direction of the relationship between the independent variables. The study established that debt financing literacy had a positive significant influence on growth of micro enterprises funded by Uwezo Fund in Nairobi County; budgeting skills literacy had a positive and significant influence on growth of micro enterprises funded by Uwezo Fund in Nairobi County; bookkeeping literacy had a positive and significant influence on the growth of micro enterprises funded by Uwezo Fund in Nairobi County and banking service literacy had a positive significant influence on growth of micro enterprises funded by Uwezo Fund in Nairobi County. Therefore, increasing banking service literacy by a single unit will result to an increase in growth of micro enterprises. The study recommends UWEZO fund to educate its beneficiaries before extending loans to them; this will ensure their financial management is enhances. To enhance efficiency in budgeting, the study recommends micro enterprises to embrace updated software that keeps a detailed trail of destructions affecting the operations of the business in case of funds shortfall or late facilitation. In regard to the suggestions for the further studies, the study therefore suggests that a replication of the research study in other counties to facilitate comparison and generalization of the research findings. Additionally, this study suggests that a research should be conducted on challenges encountered when accessing Uwezo Fund and their effects on growth of micro enterprises. Finally, this study further suggests a replication of the research study in other enterprises funded by other organizations such as Youth Enterprise Development Fund (YEDF). iv TABLE OF CONTENT DECLARATION................................................................................................................ii ABSTRACT .......................................................................................................................iii TABLE OF CONTENT....................................................................................................iv LIST OF TABLES ...........................................................................................................vii LIST OF FIGURES ........................................................................................................viii OPERATIONAL DEFINITION OF TERMS ................................................................ix ABBREVIATIONS /ACRONYMS .................................................................................xi CHAPTER ONE ................................................................................................................1 INTRODUCTION..............................................................................................................1 1.1 Background of the Study............................................................................................1 1.2 Statement of the Problem ...........................................................................................9 1.3 Objective of the Study ..............................................................................................10 1.4 Research Questions ..................................................................................................11 1.5 Scope of the Study....................................................................................................11 1.6 Significance of the Study .........................................................................................12 CHAPTER TWO .............................................................................................................13 LITERATURE REVIEW ...............................................................................................13 2.1 Introduction ..............................................................................................................13 2.2 Theoretical Framework ............................................................................................13 2.3 Empirical Review .....................................................................................................16 2.4 Summary of the Research Gaps ...............................................................................28 2.5 Operationalization of Variables ...............................................................................28 2.6 Conceptual Framework ............................................................................................29 CHAPTER THREE .........................................................................................................31 v RESEARCH METHODOLOGY ...................................................................................31 3.1 Introduction ..............................................................................................................31 3.2 Research Design .......................................................................................................31 3.3 Target Population .....................................................................................................32 3.4 Sample and Sampling Techniques ...........................................................................33 3.5 Data Collection Instruments.....................................................................................34 3.6 Data Collection Procedure .......................................................................................35 3.7 Pilot Testing .............................................................................................................35 3.8 Data Analysis and Presentation................................................................................37 3.9 Ethical Considerations..............................................................................................38 CHAPTER FOUR............................................................................................................40 DATA ANALYSIS, PRESENTATION AND INTERPRETATION ..........................40 4.1 Introduction ..............................................................................................................40 4.2 Response Rate ..........................................................................................................40 4.3 Reliability Analysis ..................................................................................................40 4.4 Demographic Information ........................................................................................41 4.5 Descriptive Statistics ................................................................................................43 4.6 Factor Analysis.........................................................................................................50 4.7 Inferential Statistics ..................................................................................................54 CHAPTER FIVE .............................................................................................................61 SUMMARY, CONCLUSION AND RECOMMENDATIONS....................................61 5.1 Introduction ..............................................................................................................61 5.2 Summary of the Findings .........................................................................................61 5.3 Conclusions ..............................................................................................................64 5.4 Recommendations ....................................................................................................66 vi 5.5 Limitations of the Study ...........................................................................................67 5.6 Suggestions for Further Studies ...............................................................................67 REFERENCES.................................................................................................................68 APPENDICES ..................................................................................................................78 Appendix I: Questionnaire .............................................................................................78 Appendix II: Data Collection Sheet ...............................................................................81 Appendix III: Letter from NACOSTI ............................................................................82 vii LIST OF TABLES Table 3.1: Target Population..............................................................................................32 Table 3.2: Sample Size.......................................................................................................34 Table 4.1: Response Rate...................................................................................................40 Table 4.2: Reliability Analysis ..........................................................................................40 Table 4.3: Age of Respondents * Gender of the respondent Cross-tabulation ..................41 Table 4.4: Debt Management Literacy on the Growth of Micro Enterprises ....................44 Table 4.5: Budgeting Skills Literacy on the Growth of Micro Enterprises .......................45 Table 4.6: Bookkeeping Literacy on the Growth of Micro Enterprises ............................47 Table 4.7: Banking Services Literacy on the Growth of Micro Enterprises ......................48 Table 4.8: Growth of Micro Enterprises Funded By Uwezo Fund ....................................49 Table 4.9: Total Variance Explained .................................................................................50 Table 4. 10: Component Matrix .........................................................................................52 Table 4.11: Correlations.....................................................................................................54 Table 4.12: Model Summary .............................................................................................56 Table 4.13: ANOVA ..........................................................................................................56 Table 4.14: Coefficients .....................................................................................................57 viii LIST OF FIGURES Figure 2.1: Conceptual Framework ...................................................................................29 Figure 4.1: Respondents Level of Education .....................................................................43 ix OPERATIONAL DEFINITION OF TERMS Banking services literacy In this study the term banking services literacy refers understanding on how different banking segments operate across customers, sales and distribution, products and services, people, process and technology (Lusardi & Mitchell, 2017). Bookkeeping Literacy: It manifests as the ability to read and make sense of financial reports such as balance sheets and income statements (Kimmel, 2013).In this study it is understood as the ability to clearly understand and communicate financial situations and events. Budgeting Skills Literacy: It is the utilization of planning to ensure that you live within your means, and don’t spend more than you can afford (Van Weele, 2016). In this study it is defined as the ability by MFIs to plan and ensure their spending is within their limits. Debt Management Literacy: It is the possession of skills that helps an individual to repay borrowed money or handle their debt better (Idowu, 2010). In this study it refers to the ability of MFIs owners to manage their debtors. Financial Literacy: It is the possession of the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their money (Miller, Godfrey, Levesque & Stark, 2019). In this study it refers to the ability of MFI x owners to make informed decisions regarding money management. Uwezo Fund It is a flagship programme for vision 2030 aimed at enabling women, youth and persons with disability access finances to promote businesses and enterprises at the constituency level, thereby enhancing economic growth towards the realization of the same and the Millennium Development Goals No.1 (eradicate extreme poverty and hunger) and 3 (promote gender equality and empower women) (Uwezo fund, 2020). xi ABBREVIATIONS /ACRONYMS FSD Fin Access Household Survey GDP Gross Domestic Product GoK Government of Kenya KNBS Kenya National Bureau of Statistics MSEs Micro and Small Enterprises R&D Research and Development SME’s Small and Medium-Sized Enterprises SPSS Statistical Package for the Social Sciences UN United Nations 1 CHAPTER ONE INTRODUCTION 1.1 Background of the Study Growth forms one of the fundamental business goals and represents a stage where the business attains the level at which it expands and pursues additional options to generate more revenue (ADB, 2018). Growth can be represented as a function of the business lifecycle, industry growth trends, and the owner’s desire for equity value creation. It is paramount that entrepreneurs cultivate an environment that fosters a growth climate for their enterprises as this often translates to superior business performance (World Bank, 2016). Growth plays a significant role to long-term survival of a firm. In addition, it builds the capacity of a business to acquire new assets, attract new business lines and enhance the sources of funds for new investments. Lastly, growth also helps in driving business performance and profit. Globally, economies continue to rely on microenterprise to play a key role in triggering and sustaining economic growth and equitable development. Micro enterprise are facilitators for broad-based growth in competition, entrepreneurship and offer economy- wide benefits such as innovation and aggregate productivity growth (Tarfasa, Ferede, Kebede & Behailu, 2016). Microenterprises contribute largely to output, employment in both developed and developing countries and contribute greatly to the revitalization of the global economy and of individual national economies (Paul, 2009). Despites the importance of microenterprise to the countries, their failures rate is high across Africa. In South Africa, Anon (2010) stated that microenterprise failure rate is as high as 63% in the first two years of trading; it also stated that the reasons therefore included poor management and a lack of structure and infrastructure. However, the lack of financial 2 literacy seemed to be the biggest reason (Ibid). Moreover, Atkinson & Messy, (2012) reported that financial literacy has become essential in the running of any enterprise and operations of organizations in the complex and dynamic environment today. In Kenya, microenterprises are acknowledged as significant contributors towards economic growth and are estimated to contribute 20% and 72% to the GDP and employment respectively (GoK, 2015). They also provide fertile ground for grooming medium sized and large enterprises that are vital for economic development. Like the rest of the world Kenyan entrepreneurs are faced with numerous challenges in running their microenterprises. The Kenya National Bureau of Statistics (2017) estimates that majority of microenterprises do not survive the first five years since establishment and three out of five new businesses fail within the first few months of operation. Ijaza, Mwangi and Ngetich, (2014) asserted that the introduction of Uwezo fund has greatly eased access to microcredit for the rural poor since finding start up finance for an enterprise is the biggest hurdle that many entrepreneurs go through. Unlike other development funds that filter from the central government through larger and more layers of administrative organs and bureaucracies, funds under Uwezo Fund go directly to local levels to enhance livelihoods through expanding access and promotion of youth and women businesses and gainful self-employment at the constituencies. The minimal interest rates charged on the loan of 0% to a maximum of 1% is also business friendly and enables access to sustainable financial services. It is mandatory for those accessing Uwezo fund to undergo financial literacy training before being given the funds. This is aimed at helping individuals to become self-sufficient so that they can achieve financial stability. 3 The Kenya Private Sector Alliance 2017 report indicates that microenterprises are facing a mountain of challenges and are struggling to register growth. Karambu (2017) opined that most Kenyan microenterprises have a sluggish growth rate and three out of five microenterprises will fail in their first years of operation. The Kenya National Bureau of Statistics (2017) asserts that approximately 500,000 microenterprises in Kenya close doors every year. Further the KNBS report observes that approximately 2.2 million microenterprises collapsed between the year 2012 and 2016. It is against this background that the study sought to establish the effects of financial literacy on the growth of micro enterprises funded by Uwezo Fund in Nairobi County, Kenya. 1.1.1 Financial Literacy Financial literacy is the possession of the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their money. This concept focuses on the ability to manage personal finance matters in an efficient manner, and it includes the knowledge of making appropriate decisions about personal finance such as investing, insurance, real estate, paying for college, budgeting, retirement and tax planning (Fatoki, 2014). Additionally, Wallitsch (2014) opined that financial literacy also involves the proficiency of financial principles and concepts such as financial planning, compound interest, managing debt, profitable savings techniques and the time value of money. It also involves debt management, budgeting skills, bookkeeping and banking services. Debt management is an approach that is adopted to guide an individual or business organization to manage its debt. A budget is a financial document that states the expected contribution from the activities of an organization in terms of expected cash or revenues and expenditures over a certain period of time (Jims, 2014). 4 Lusimbo and Muturi (2016) cite that book keeping is an important accounting process that involves recording of all business transactions for sustaining and expanding a business. Enterprises require records to be used by managers as guides for routine action, d ecision making, and formulation of policies and maintaining relationships with stakeholders. Further, Ageyi, (2014) noted that banking knowledge enable businesses to manage their money, have access to credit, and deposit their money in a secure manner.The lack of financial literacy or financial illiteracy may lead to making poor financial choices that can have negative consequences on the financial well- being of an individual. The need for financial literacy by micro enterprises has been emphasized by different scholars. Financial literacy is the mastery of a set of knowledge, attitudes and behaviors. Nkundabanyanga and Kasozi (2014) define financial literacy as the ability of an individual to make informed judgment and take effective decisions regarding the use and management of money. They added that such person also possesses a facilitating attitude to the effective and responsible management of financial affairs. That is the ability to read, analyses, manage and communicate personal financial conditions that affect well-being and the ability to distinguish financial choices, discuss money and financial issues without discomfort. It has assumed the role in allowing people to make responsible decisions as they strive to attain financial wellbeing (Ani, Kelmara & Wesley, 2016). Financial literacy has become essential in the running of businesses and operations of organizations in the complex and dynamic environment today. Atkinson and Messy (2012) added that governments around the world are interested in finding effective approaches of improving financial literacy of their populations through developing strategies for financial education with the main aim of providing various learning opportunities. Tali, (2016) in conclusion underpins that many countries have developed strategies for the implementation 5 of financial education to improve financial literacy of their population as it is perceived as a life skill necessary for intelligent financial conduct in modern life and an important basis for the economic and financial stability of society and the state. 1.1.2 Growth of Micro-Enterprises A micro-enterprise is a type of small business, often registered, having five or fewer employees and requiring seed capital of not more than $35,000. Bravo-Biosca, Criscuolo, and Menon (2016) holds that growth involves an expansion of an enterprises activities or engagements as reflected by an extension of their sales, income and assets levels. Growth is one of the key objectives of small businesses as they work towards becoming large entities and expanding the shareholder wealth. Business growth is a function of the business lifecycle, industry growth trends, and the owners’ desire for equity value creation. Storey (2016) contends that growth involves the process by which enterprises expand specific lines of achievement as established in their goals of profit and shareholder wealth maximisation. Business growth can be achieved either by boosting the top line or revenue of the business with greater product sales or service income, or by increasing the bottom line or profitability of the operation by minimizing costs. The indicators of business growth include assets growth, sales growth and profit or income expansion (Koryak, Mole, Lockett, Hayton, Ucbasaran & Hodgkinson, 2015). Bekaert and Hodrick (2017) purports that sales growth is the parameter which is used to measure the performance of the sales team to increase the revenue over a pre-determined period of time. Sales growth is an essential element for survival and financial growth of the company. Moreover, Storey (2016) underscores that sales growth represents the increase in revenue over a fixed period of time. It ideally represents the proportion by which the 6 average sales volume of a company's products or services has grown, typically from year to year. To effectively understand the proportion and direction of sales growth, a business needs to have current and historical sales revenue information. Conversely, Banerjee (2015) opined that assets growth reflects an increase in the total assets’ levels of the firm. Small businesses will ideally have fewer assets which increase as the business continuous to grow and expand. Just as the sales growth, computation of assets growth requires historical information regards the assets at firms disposal from one period to the other. Net Income growth or profit growth represents an expansion in the firm’s profit figures (Petty, Zuckerberg & Pauli, 2015). One of the key goals of the firm is profit maximisation which is realised by ensuring that capacity to expand sales and competitive position is enhanced. Profit or income represents the amount of money realised by a firm after deducting expenses. Profits do change from one period to the other; year to year, or even month to month. To compute profit growth, analysts use a percent-change formula. This shows the percentage the profit grew from one period to another (Banerjee, 2015). The current study used the three parameters of business growth; assets growth, revenue (sales) growth and profit growth to indicate microenterprises growth. 1.1.3 Financial Literacy and Micro-Enterprises Financial literacy impacts microenterprises by enabling entrepreneurs to distinguish between personal and business finances as well as enabling them to be competent buyers of financial products and services. Financial literacy also enables microenterprises to avoid business failures caused by poor financial management, particularly credit management and cash flow management (ACCA, 2014). Despite the important role of financial literacy, Klein (2010) indicated that while modern technology, investments, and liberalization have made new financial products and services widely available, a 7 majority of entrepreneurs are not equipped to make informed financial choices or to evaluate complex financial products.Lack of financial literacy is one of the common deficiencies among microenterprises owners which contribute to the high failure rates among micro businesses (Ibid). Kempson (2013) reiterated that even after controlling for other relevant variables, microenterprises in developing countries performed worse than other businesses on standardised assessments of their ability to monitor expenses, to budget, and to live within their means. Conversely, Wise (2013) reviewed the impact of financial literacy on microenterprises in Canada and established that increases in financial literacy led to more frequent production of financial statements which contributed to more effective management of the enterprises. Barte (2012) conducted a study on evaluation on financial literacy in microenterprises in Philippines, established that the microenterprises owners had low financial skills which affected the incomes and growth of the microenterprises. This study aims to effects of financial literacy on the growth of micro enterprises funded by Uwezo Fund in Nairobi County, Kenya. 1.1.4 Uwezo Fund The Uwezo Fund is a flagship program for Kenya’s vision 2030 aimed at enabling women, youth and persons with disability access finances to promote businesses and enterprises at the constituency level, thereby enhancing economic growth towards the realization of the same and the Millennium Development Goals no.1 which is to eradicate extreme poverty and hunger, and no. 3 which is to promote gender equality and empower women. The Fund was launched by His Excellency the President of the Republic of Kenya, Uhuru Kenyatta, on 8th September 2013 and enacted through a Legal Notice No. 21 of the Public Finance Management Act, 2014, and published on 21st February 2014 (Buyema, 2013). The Uwezo 8 Fund monies come from the Kshs. 6 Billion meant for Presidential run-off that was left unused (Obonyo, 2014). Buyema (2013) acknowledged that Uwezo Fund is available to women, Persons living with disability and youth groups and is distributed at the constituency level. At the National level, a National Uwezo Fund Oversight Board provides overall management, design and oversight of the Fund. The fund is administered through the Constituency Uwezo Fund Management Committees who oversees implementation of the fund in all 290 constituencies in Kenya. 1.1.5 Micro Enterprises in Nairobi County The Government of Kenya, through the Microenterprise Act, 2012 defines a micro- enterprise as a firm, trade, service, industry or a business activity which employs less than ten people and whose annual turnover does not exceed five hundred thousand shillings (GoK, 2012). The sector plays an important role in the Kenyan economy contributing about 82% of total employment and over 40% of the country’s GDP (KNBS, 2013).Nairobi County has the largest concentration of microenterprises in Kenya, providing about 25% of total employment in the sector (Ibid). UN Habitat (2006) reiterated that despite its important role, the microenterprise/informal sector in Nairobi treated as a marginal economic activity and it is neither adequately regulated nor supported by the city authorities who consider informal traders as threats to city development. In addition to external challenges, Mengich, Ndalira & Juma (2013) indicated that microenterprises in Nairobi County are constrained by weak financial literacy, financial access and high transaction costs. A review of current studies on the relationship between financial literacy, financial access and transaction costs and the 9 performance of microenterprises has identified conceptual, contextual and empirical gaps which this study aims to address. 1.2 Statement of the Problem Microenterprises are key drivers of economic growth, providing employment, providing market linkages across various sectors, promoting innovation, reducing poverty and contributing to GDP in both developed and developing countries (Cole, Thomas & Bilal, 2010). In Kenya, microenterprises create over 50% of all jobs and contribute over 40% of the country’s GDP (KNBS, 2013). However, Njoroge (2013) noted that majority of entrepreneurs in Kenya suffer from weak levels of financial literacy, limited access to financial services as well as exposing them to high transaction costs of financial services. This leads to the low prevalence of new venture creation, low graduation rates and ultimately the high failure rate among microenterprises thus contributing to the missing middle phenomenon that is so prevalent in the economy (Mengich, Ndalira & Juma, 2013). Kenyan government has over recent years increased funding of micro enterprise through Uwezo fund by increasing annual fiscal allocations by the national treasury (Uwezo Fund Status Report, 2018).The Uwezo Fund will be scaled up by Ksh.2.5 billion to cover additional 500,000 beneficiaries (Third Medium Term Plan 2018 – 2022). Uwezo Fund had disbursed more than Sh5.8 billion to an estimated 960,000 beneficiaries. Despites the importance of microenterprise to the countries and government financing, their failures rate is high around the world. Anon (2010) stated that microenterprise failure rate is as high as 63% in the first two years of trading; it also stated that the reasons therefore included poor management and a lack of structure and infrastructure. However, the lack of financial literacy seemed to be the biggest reason (Ibid). Remarkably, Atkinson and Messy (2012) 10 cited that financial literacy has become essential in the running of any enterprise and operations of organizations in the complex and dynamic environment today. There is need therefore, to establish the effects of financial literacy on the growth of micro enterprises. Empirical studies reviewed present both convergent and divergent views on the role of financial literacy on the growth of micro enterprise. Usama (2019) studied the impact of financial literacy on business performance. Chepngetch (2016) studied the effect of financial literacy and performance SMEs. Financial literacy has also been associated with positive behaviors such as debt management, increased savings, wealth accumulation and avoidance of over indebtedness (Lusardi & Mitchell, 2011; Mastercard, 2011; Obago, 2014). Oblivious of financial literacy being paramount in achieving the Big Four Agenda by the president and Vision 2030, there is limited empirical evidence on the effects of financial literacy on the growth of micro enterprises, thereby presenting a knowledge gap which this study sought to fill by establishing the effects of financial literacy on the growth of micro enterprises funded by Uwezo Fund in Nairobi County, Kenya 1.3 Objective of the Study 1.3.1 General Objective The general objective of the study was to establish the effects of financial literacy on the growth of micro enterprises funded by Uwezo Fund in Nairobi County, Kenya 1.3.2 Specific Objective The study was guided by the following specific objective; i. To establish the effects of debt management literacy on the growth of micro enterprises funded by Uwezo Fund in Nairobi County 11 ii. To analyze the effects of budgeting skills literacyon the growth of micro enterprises funded by Uwezo Fund in Nairobi County iii. To assess the effects of bookkeeping literacy on the growth of micro enterprises funded by Uwezo Fund in Nairobi County iv. To determine the effects of banking services literacy on the growth of micro enterprises funded by Uwezo Fund in Nairobi County 1.4 Research Questions The following research questions informed the study i. What are the effects of debt management literacy on the growth of micro enterprises funded by Uwezo Fund in Nairobi County? ii. To what extent does budgeting skills literacy affect the growth of micro enterprises funded by Uwezo Fund in Nairobi County? iii. Does bookkeeping literacy affect the growth of micro enterprises funded by Uwezo Fund in Nairobi County? iv. What are the effects of banking services literacy on the growth of micro enterprises funded by Uwezo Fund in Nairobi County? 1.5 Scope of the Study This study was limited to establishing of the effects of financial literacy on the growth of micro enterprises funded by Uwezo Fund in Nairobi County, Kenya. Nairobi was selected because it has the largest number of micro enterprises (1859) and receives the highest amount of funds from Uwezo fund. Specifically, the study sought to establish the effects of debt management literacy, budgeting skills literacy, bookkeeping literacy and banking services literacy on the growth of micro enterprises funded by Uwezo Fund in Nairobi County. The study targeted the owners of micro enterprise in Nairobi County that have 12 been funded by Uwezo Fund, from where the sample size of the study was selected. The unit of analysis was the micro enterprises while the unit of observation was owners of the micro enterprises. The study collected financial information for a period of five years between 2014 and 2018 to determine the growth of the micro enterprises. 1.6 Significance of the Study The following categories of stakeholders seeks to draw benefit from this study; owners of micro enterprises, policy makers, scholars and academicians. 1.6.1 Owners of Micro Enterprises The study findings seek to significantly inform owner’s micro enterprises. It provides an understanding on financial literacy on the growth of micro enterprises. The owners of the micro enterprises will ensure that they gain financial knowledge through learning so as to run their business efficiently. 1.6.2 Policy Makers The study findings are also considered to be of great value to the policy makers. It provides insights on effects of financial literacy on the growth of micro enterprises. The policy makers are able to come up with strategies of educating owners of micro enterprises on financial matters so that they can manage their business finances effectively. 1.6.3 Academicians and Scholars The study anticipates that it will add value to the body of knowledge on effects of financial literacy on the growth of micro enterprises. Researchers and academicians may gain more understanding on financial literature. The study can also be used as a reference for future related studies. 13 CHAPTER TWO LITERATURE REVIEW 2.1 Introduction This chapter focuses on literature review on the effects of financial literacy on the growth of micro enterprises. It covers the theoretical review, empirical review, research gaps and the conceptual framework. 2.2 Theoretical Framework This study was informed by Theory of Planned Behavior (TPB) and personal finance education as well as dual process theory to establish the effects of financial literacy on the growth of micro enterprises funded by Uwezo Fund in Nairobi County, Kenya. The two theories were utilised in complimenting the aims of the four specific objectives. 2.2.1 Theory of Planned Behavior (TPB) and Personal Finance Education The Theory of Planned Behavior (TPB) draws its origin from the Theory of Reasoned Action (TRA; Fishbein & Ajzen, 1975). According to the TRA tenets, behavior is predicted using attitudes toward a specific behavior and subjective norms to form a behavioral intention that determines the actual behavior. Ajzen (1991) modified the TRA to create the TPB. The TPB introduced the concept of perceived control on the opportunities, resources, and skills necessary to perform a behavior to the TRA. The notion of perceived behavioral control is comparable to the notion of self-efficacy person’s perception of individual to perform the behavior. TPB was employed to underpin the framework due to its ability to capture the predictive power of financial behavior (Ibid). TPB illustrates attitudes as an important determinant of individual’s intention towards changing financial behavior. Attitude manifests individual’s specific behavior, whether to like or dislike certain outcomes. An individual may react positively on certain thing if they 14 perceived it to be good for them or react vice-versa. Thus, the study perceives owners of micro enterprises are equipped with basic financial literacy to have a positive attitude towards changing their financial behavior (Ajzen 1991; Ozmete & Hira, 2011). Normative and behavioral beliefs in TPB are able to convey financial messages to encourage people to make right financial decisions. Social norm is social pressure influencing intention to change financial behavior of individual. The surrounding pressure towards an individual dictates how she or he behaves according to the normative belief of other people. In certain occasion, an individual may refer to their social referent such as spouse, family or peers to get their opinion on a certain thing that may change their financial behavior (Ajzen, 1991). Their social influence will depend on who are the individual preferred social referent and their willingness to act according to these preferences. Ajzen and Madden (1986) acknowledged that attitudes and social norms would affect behavior by endorsing the establishment of a decision or intention to act. The TPB therefore suggested that social norm should be measured along with attitude in order to capture both social and personal influences on behavior. Perceived behavioral control is another important predictor of behavioral intentions in TPB. The ease or difficulty to perform a given behavior largely depends on the individual’s perception in perceived behavioral control. The presence or absence of important resources or opportunities does not deter someone to perform certain behaviors as perceived behavioral control is dependent on control beliefs. The theory was used in the study to explain financial literacy. From the theory attitude, normative and behavioral beliefs influence financial behavior. This means that attitude, normative and behavioral beliefs would influence financial behaviors such as debt 15 management, budgeting, booking and banking behavior. Also from the theory individual attitude would influence their decision to take Uwezo funds for investments. Therefore the theory explains the effects of financial literacy on the growth of micro enterprises. 2.2.2 The Dual –Process Theory Petty and Cacioppo proposed a dual process theory focused in the field of social psychology in 1984. Their theory is commonly referred to as the elaboration likelihood model of persuasion. In their theory, there are two different routes to persuasion in making decisions. This theory posits that financial decisions can be driven by both intuitive and cognitive processes which mean that financial literacy may not always yield optimal financial decisions. The Dual Process Financial literacy theory argues that the behavior of people with a high level of financial literacy might depend on the prevalence of the two thinking styles: intuition (system 1) and cognition (system 2) (Lusardi & Mitchell, 2011; Glaser & Walther, 2014). Intuition is the ability to acquire knowledge without inference or the use of reason. Intuition provides views, understandings, judgments, or beliefs that cannot be empirically verified or rationally justified. Taylor (1981) as cited by Chan and Park (2013) asserts that individuals who rely on intuition prefer to use mental short cuts as they make decisions which tend to be largely influenced by their emotions. Glaser and Walther (2014) point out that the positive effect of financial literacy on reasonable investment decisions is diminished by a high prevalence of intuition. Therefore, increased use of intuition results to sub optimal investment decisions. Cognition on the other hand is the process by which the sensory input is transformed, reduced, elaborated, stored, recovered, and used. Cognition is the mental processing that 16 includes the comprehending, calculating, reasoning, problem solving and decision making (Chan & Park, 2013). High cognition individuals enjoy thinking, are analytical and are better at retaining information and more likely to search out new information. They are more likely to be influenced by a relevant message and not by irrelevant information such as endorser’s appearance or use of humor (Ibid). Since the need for cognition triggers the use of analytical process, it can directly shape investment portfolio composition. Such investors will therefore more likely use the systematic approach of capital budgeting when evaluating investment opportunities and are more likely to diversify investments compared to those with a low need for cognition. Dual process theories imply that individuals who are high on cognition will seek out for information and are more likely to be influenced by a relevant message. This means that their decision-making skills can be boosted by financial literacy training using simple easy to understand methodologies. Moreover, use of intuition may be reduced by provision of relevant information to support decision making through financial education since individuals tend to rely on intuition where relevant information is lacking. However optimal results may not be achieved where individuals trust their intuitions in decision making. The theory guides micro-entrepreneurs in making decisions on the investments they should undertake. This also guides them on the decision on whether to take funds for their businesses. The study used the dual process theory as it sought to establish the effects of financial literacy on the growth of micro enterprises funded by Uwezo Fund in Nairobi County, Kenya. 2.3 Empirical Review The existing empirical literature in relation to effects of financial literacy on the growth of micro enterprises was reviewed. Specifically, the study reviewed the empirical literature 17 on the debt management literacy and growth of micro enterprises, budgeting skills and growth of micro enterprises, bookkeeping literacy and growth of micro enterprises, banking services literacy and growth of micro enterprises and growth of micro enterprise. 2.3.1 Debt Management Literacy and Growth of Micro Enterprises Debt management is the ability to perform activities of a business within a budget. A plan is usually created to help people manage their debts especially those with too much debt, often referred to as debt management plan (Assibey, 2010). Sucuahi (2013) emphasized that debt management skill is a necessary financial literacy measure that gives the ability to obtain capital at a minimum cost. Assibey (2010) noted that microenterprises entrepreneurs are not financially literate when it comes to the aspect of obtaining finance for their business. Lusardi and Mitchell (2013) in a study on debt literacy, financial experiences and over indebtedness among Americans found that only one-third of respondents in the target population could apply concepts of interest compounding to everyday situations or understand the workings of credit cards. They further established that debt illiteracy is particularly severe among women, the elderly, minorities, and those who are divorced or separated. Problems resulting from poor financial management also affect the productivity of employees. Obago (2014) found that many employees suffer from stress as a result of money problem behaviors which include: over-indebtedness, overspending, unwise use of credit, poor money management and inadequate resources to make ends meet which impacts negatively on their productivity at work. As a result of these employee problems, many companies in 18 the United States adopted financial education at workplaces aimed at equipping their employees with personal financial management skills. Lusardi and Mitchell (2011) studied the impact of literacy levels on entrepreneurs performance revealed that persons of limited financial literacy are more prone to exploitations when it comes to debt management, savings and credit, and are not able to administer their resources competitively e.g. investing in the money market, stock market and to perform better on their portfolio selection hence they end up planning poorly while individuals with high financial literacy are able to choose a feasible portfolio with lower finance cost. Furthermore, the study found out that the individuals with high financial literacy have the capacity to generate more wealth and be in a position to administer resources more optimally with less finance cost. Siekei, Wagoki and Kalio (2013) conducted a research on access of finances and financial literacy and found that accessing funds is a key element for MSEs to produce, create employment, compete in the market, business growth and eradicate poverty in the developing countries. The study indicate the constraints by the SMEs in the financial institutions due to formalizations structure thus the fail to meet the criteria set by the financiers as a proof of their ability to repay the loans advanced and this makes them to be denied finances and tagged as a risky venture. These formal sources of external finance challenges makes SME’s investment contribution lesser than the already established firms. SMEs mostly rely of the informal sources of income such as unregulated money lenders, family and friends advances and this creates bottlenecks on their growth. However, although these informal sources are an alternative, self-financing is constrained by low saving capabilities of most SME’s. The Financial Capability Report (2009) reveals that a 19 significant population of Kenyans i.e. 25% has credit difficulties and tends to borrow loans to repay loans and admit that they are not in control of their finances. Therefore, acquisition of financial literacy skills would have a positive impact on an individual’s behaviors in terms of increased savings, wealth accumulation and avoidance of unnecessary expenses. This would make MSE managers better customers for the banks, prudent managers of the limited financial resources in their businesses and better able to select the most suitable products for their businesses. The reviewed studies have focused on debt management literacy though the results were varied. The deliberations of the empirical literature are specifically on the debt management literacy of the entrepreneurs. This study filled the knowledge gap by establishing the effect of debt management literacy and growth of micro enterprises funded by Uwezo Fund in Nairobi County, Kenya. 2.3.2 Budgeting Skills and Growth of Micro Enterprises Budgeting Skills is the process of preparing, compiling, and monitoring financial budgets (Plakalovi, 2015). Budgeting is a key management tool for planning and controlling departments within an organization. Budgeting is an aid to better management of an enterprise and helps to achieve higher profits and minimize losses (Robb, 2014).Organizations prepare budgets for the process of planning to allocate resources that are limited human, physical, and financial resources. Budgets often use historical data to be formulated and as the firm grows, the accuracy of its budget becomes almost perfect because of the many historical data to draw from (Jims, 2014). Although a budget may not be hundred percent accurate, it aids to better management of an enterprise. 20 Kalekye and Memba (2012) posited that budgeting incomes and expenditure is the most important factor of business financial management and in order to do it correctly financial literacy knowledge is vital. In their study of management accounting practices among Malaysian firms in SMEs sector, Ahmad and Mohamed (2012) found out that majority of the respondents indicated a high utilization of financial budgets. The respondents also revealed that 12 months was their budgeting time frame. Rickards (2018) also conducted a survey among SME practicing budgeting in western and Central Europe. They discovered that more than 40% of those surveyed only reviewed their strategic goals at least once a year, while majority of them only did so less frequently. In their study of companies that operate without budgets, Østergren and Stensaker (2011) concluded that beyond budgeting promoted more horizontal integration as managers and subordinates made much more contact with one another and those working in the financial department such as financial controllers became more empowered. Zeller and Metzger (2013) argued that most leading organizations made use of rolling forecast either as a replacement of the traditional budgeting in order to navigate through the complex business environment. However, Ahmad and Mohamed (2012) reported that continuous rolling budgets were only undertaken by 50% of the respondents in Malaysian SMEs. The authors argued that rolling budget was infeasible because SMEs did not have adequate IT support systems. The authors further asserted that rolling budgeting was only possible with efficient IT systems that enabled entrepreneurs to improve the quality of their planning and controlling information. Fatoki (2014) asserted that most micro enterprises are survivalist they might have some form of budgeting and financial planning and control but on an informal basis a view that is in tandem with Abanis, Sunday, Burani and Eliabu (2013) who found out that most small 21 businesses do not engage in formal financial planning and control and budgeting. Joshi (2013) scrutinized budgeting financial literacy by an analysis of 54 both medium and large businesses in Bahrain aiming on budget processes which are inclusive of the participation, planning, controlling and its overall performance the researchers identified that the expansion of a firm is linked to its growth. For the two to be in harmony they require a more detailed budget development as well as implementation so as to benefit exemplarily performance. Extent of the firm and their commitments influence the nature of the budget to be adopted. Chidi and Shadare (2011) conducted a study on the challenges tackling human resource improvement in SMEs in Nigeria and made a conclusion that budgeting was the greatest challenge among SMEs. Businesses are not being accountable, thus lack of assistance and/or participation and deficiency in budgeting plans caused by the incapability to meet timelines set thus individuals do not understand the significance of prior planning and provision of providing numbers which are not viable. As a result, the studies established that budgeting skills acquired by the managers reflect on the budget procedures followed and the same will correspond with the budget implementation. Mahmood (2014) studied the relationship between budgeting process and SMEs performance and found that, the formalization of the budget will depend on how clearly the relationship of the business and the owners is defined. Where there is a clear definition the budget is well detailed and accurate thus minimal influence on the owners at expense of the business. Studies conducted in Africa have scrutinized the accounting systems used in the midst of businesses in the upcoming economies (Diamond & Khemani, 2016) and deduced that budget implementation and accounting procedures were done inefficiently because they lacked updated software and are maintained manually thus not keeping a 22 detailed trail of destructions affecting the operations of the business in case of funds shortfall or late facilitation. Manual records may fail to capture each and every data and this affects budget planning, monitoring, expenditure control and the reporting. This study also found that the quality of a system in terms of computerization reflect the budget procedures and further affects the internal control of expenditure. Wijewardena and DeZoysa (2011) conducted a study on the contributions of SMEs towards the budget process and identified that the proper budget is compromised by the two significant aspects of the expected budget process which are the budget planning and the budget control. They realized that there are three set up of firms which are as follows, firms who do not use any type of budget, firms with ample planning process in some areas of operations which is also referred to as the simple budgeting and the firms with an a detailed budgeting which includes all areas of operations. Administrations mainly focus on budget controls for checks and balances of the business. Siekei Wagoki and Kalio (2013) carried out an assessment over the possessions of budgeting skills on performance of SMEs and found that better presentation of SMEs in terms of sales increase and profitability is linked with proficiency on budgeting skills and business growth which is attained through finance education which enables the individuals to forecast sales and set achievable targets. Warue and Wanjira (2013) researched on hiccups of the businesses in Kenya and established that poor budgeting skills among Kenyans as a major contributor to the business failure in Kenya. Fin Access Survey (FSD, 2009) exposed the fact that most people above 50% are not financially independent and lack control of the same in spite of them having an idea about budgeting. The above studies discloses a positive correlation between finance education and the individual performance 23 such as the business portfolio, healthy debt administration, accumulated wealth and the business going concern strategies. The reviewed studies have entirely focused on budgeting skills and performance of SMEs. It is also important to understand budgeting literacy in microenterprises. Therefore this study determined the effects of budgeting skills literacy on growth of micro enterprises funded by Uwezo Fund in Nairobi County, Kenya. 2.3.3 Bookkeeping Literacy and Growth of Micro Enterprises Book keeping is the art of recording all money transactions so that financial position of an undertaking and its relationship to proprietors and outside persons can be readily ascertained. Every enterprise, however simple requires written records which are used by managers as guides to routine action, taking of decisions, formulation of general rules and maintaining relationships with other organizations or with individuals (Frankwood, 2010). Therefore a business without written records is like a blind man without his aid or a vehicle without a driver for it does not know which way it is going. Sucuahi (2013) posit that it is an important skill for business owners because it provides vital information for decision-making. It is a measure of financial literacy because not all summaries of daily transactions cannot be recorded in the human memory. Frankwood (2010) evaluated the benefits of bookkeeping on SMEs performance and found out that computation of the income statement is highly dependent on the proper bookkeeping which also enables the business to be able to collect their debts timely and also pay on time for their obligations. The business is able to identify the opportunities available and avoid opportunity cast as well such as stock outs etc. and be able to plan 24 progressively. Ezejiofor, Ezenyirimba and Olise (2014) investigated the impact of accounting records on SMEs and found that, a good bookkeeping scheme is reflected on its report’s quality to both internal and external users and a well-organized maintenance of records. Quality accounting information will be of help on financial administration and create room for a better funding. Wise (2013) found that increase in financial literacy leads to production of financial reports often and the individuals who have tendency of preparation of financial reports are able to repay their debts timely and this lowers the default levels. Maseko and Manyani (2011) focused on the methods of accounting used by SMEs and found that most SMEs operates on manual systems which fail to capture all data relevant for accounting purposes and this results to inefficiency of accounting information. The study is in support of computerized accounting software to improve on the quality of the accounting information, although SMES lament of unavailability of a suitable system for them. The G20 Seoul Summit (2010) also reports that low levels of financial literacy particularly bookkeeping skills worldwide is a major contributor of lost opportunities for a large number of SMEs. Information unevenness among SMEs due to unreliable financial reports makes it hard to determine the creditworthy of the SMEs and potential proposals are rejected due to lack of financial information which makes most lenders reluctant to fund small firms especially those with new products. The reviewed empirical studies have mainly focused on bookkeeping literacy and performance of SMEs. Little have been done on how bookkeeping literacy affect growth of microenterprise. Therefore, this study addressed this gap by establishing the effects of bookkeeping literacy on the growth of micro enterprises funded by Uwezo Fund in Nairobi County. 25 2.3.4 Banking Services Literacy and Growth of Micro Enterprises Banking services literacy is the knowledge and awareness of the various bank instruments, how and why to use money transfer services e-banking and m-banking and ability to understand saving products. When financial firms face knowledgeable customers, they are forced to improve the efficiency and quality of financial services because financially literate consumers demand for more appropriately priced and transparent services from financial institutions by comparing options, asking the right questions, and negotiating more effectively (Fatoki, 2014). Besides, financially literate consumers pose less risk to the financial system due to their responsible use of financial products and services which help to strengthen financial market stability and contribute to increased savings and wider economic growth (Mastercard, 2011). The increase in the number and complexity of financial products requires microenterprises to have some level of financial knowledge in order to select from among alternatives the best products for their businesses. Ekanem (2010) conducted a research on the SME owner-managers in the printing and clothing manufacturing sectors in Ethiopia and identified the uniqueness of each sector in relation to the financial literacy and firm administration. The study also found that in clothing and manufacturing sector the average debt collection period was within 30 to 90days while it is within 14 days in the printing sector. The two sectors will have to apply different measures on their debt collection policies. Cash flow statements and balance sheet are also monitored with a keen eye by the managers (Kubickova & Soucek, 2013). Djankov, McLieshand Shleifer (2012) in their study evaluated the impact of debt administration on its repayment. The study engaged the managers of the financial 26 institutions whose information was further analyzed using mean and standard deviation and it was concluded that financial education is significant on debt administration and its repayment too. Andoh and Nunoo (2011) assessed the services access and financial literacy and found that the finance education to SMEs owners plays a key role on amplifying the utilization of financial services where the financially literate managers have the ability to bargain constructively on the available bank products and pressurize the financial institutions to be facilitated financially at a low cost as compared to the managers with financial literacy deficiency they are not able to analyses and access the financial products at a lower cost. Wachira and Kihiu (2012) studied the family units in Kenya using the 2009 National Financial Access (Fin Access) survey data using the multinomial logit model and how significant the financial literacy was in relation to finance accessibility. They identified that there are other factors which affect the access to financial access that are individual based to mention just a few, marital status, age, the level of income, financial literacy was also rated low as a factor in household decision making which implies that majority of individuals did not value and seek out financial information in making financial decisions although financial literacy was significant in explaining exclusion from financial services market. It was concluded that financial literacy created awareness and enabled more individuals about 8.5% to be included in the financial services. Fatoki (2014) studied causes of SMEs failure and found out that lack of finance education have adverse effects on the SMEs and especially the new start-ups. New start-ups requires a sound financial background which will create a healthy base of a successful business hence the growth of the enterprise. Duchesneau and Gartner (2010) studied factors affecting new small firms progress and established that the individuals who have emerged 27 successful in business mostly were brought up in a business set up or were raised by successful entrepreneur parents which are a requisite for growth due to vast experience and exposure. Westhead, Wright and McElwee (2015) underpin that this gives them confidence and vigor that they will make it in the ventures they start unlike the ones raised by the unsuccessful entrepreneurs who are unsuccessful. The research also identified that lead successful firms have a good communication system; individuals have the sense of belonging and have the zeal to work with less supervision. In addition, these firms have clear objectives and strive to achieve their targets. Businesses which include more than one shareholder on their formation have better chances of existence and making it in the market. According to Siekei et al., (2013) consumers who are financially literate are able to evaluate and compare financial products, such as bank accounts, saving products, cred it and loan options, payment instruments, investments, insurance coverage, and navigating complex loan application procedures so as to make optimal decisions. However, a major challenge for most financial institutions is a low level of financial awareness of most business owners as established by the Association of Chartered Certified Accountants. The reviewed empirical findings have mainly focused on banking services literacy and performance of SMEs. Little have been done on how banking services literacy affects growth of microenterprise. Therefore, this study sought to address this gap by establishing the effects of banking services literacy on the growth of micro enterprises funded by Uwezo Fund in Nairobi County. 28 2.4 Summary of the Research Gaps Empirical studies reviewed present both convergent and divergent views on the role of financial literacy on the growth of micro enterprise. Financial literacy has also been associated with positive behaviors such as debt management, increased savings, wealth accumulation and avoidance of over indebtedness (Lusardi & Mitchell, 2011; Mastercard, 2011; Obago, 2014). However, Chan, and Park (2013) caution that financial literacy may not always yield optimal results where an individual relies heavily on intuitions in decision making. Reviewed literature reveal that many studies especially in Kenya have mainly researched on the importance of financial literacy and its effects on household or personal financial behavior with little effort to ascertain the role of financial literacy on the growth of MSEs (FSD, 2009; Mastercard, 2011). MSEs account for over 75% of the private sector in Kenya which are expected to spur economic growth under the devolved governance system. Although deliberate efforts have been made to avail subsidized capital to this sector, the failure rate remains high. Very few micro enterprises have been able to transit to medium scale. There was need to establish the effects of financial literacy on the growth of micro enterprises funded by Uwezo fund in Nairobi County, Kenya. 2.5 Operationalization of Variables The skills and knowledge of the entrepreneur are central in achieving enterprise growth therefore financial literacy of the owner manager are an important determinant of MSE growth. However, there is no standardized measure of financial literacy; different studies have used different variables to measure financial literacy (Fatoki, 2014). The Wise (2013) utilized finance related knowledge that is (awareness of sources of finance, 29 awareness of business finance technology and consumer financial literacy), finance related business skills and information skills to measure financial literacy. Siekei et al., (2013) used competence in book keeping, credit management, budgeting skills and financial control to measure financial literacy. Fatoki (2014) used financial planning analysis and control, Book keeping, understanding of funding sources, business terminology, use of technology and risk management (insurance) to measure the financial literacy of new micro entrepreneurs. Obago (2014) in a study to determine the effect of financial literacy on management of personal finances in banks in Kenya used: money basics, budgeting, saving and planning, borrowing, debt literacy, financial products, recourse and self-help. The Kenya Financial Sector Deepening (FSD,2009) identifies key themes of financial literacy education as savings culture, financial planning and budgeting, debt management, bank services and investments management. In this study, the researcher used debt management, budgeting, access to banking services and book keeping literacy in measuring financial literacy of micro entrepreneurs. 2.6 Conceptual Framework The conceptual framework is the understanding of how the particular variables in this study connect with each other. In this study the conceptual framework provides an understanding of the independent and dependent variables. The independent variables debt management literacy , budgeting skills literacy, bookkeeping literacy and banking services literacy while the dependent variable is the growth of micro enterprises funded by Uwezo Fund in Nairobi County. Figure 2.1: Conceptual Framework Debt Management Literacy • Knowledge on loans • Knowledge on credit offers. • Knowledge on Interest rates Repayments Budgeting Literacy • Financial goals 30 Independent Variables Dependent Variable 31 CHAPTER THREE RESEARCH METHODOLOGY 3.1 Introduction This chapter presents the methodology that was used in this research. The chapter covers the research design, target population, the sample frame, sample and sampling techniques. In addition, the chapter also identifies the data collection instruments utilized for data collection, the data collection procedure, pilot testing, validity and reliability of the research instrument, data analysis and presentation. 3.2 Research Design The research design facilitates the smooth sailing of the various research operations, thereby making research as efficient as possible hence yielding maximum information with minimal expenditure of effort, time and money (Mugenda, 2008). This study used descriptive research design. This design refers to a set of methods and procedures that describe variables. It involves gathering data that describe events and then organizes, tabulates, depicts, and describes the data. Descriptive studies portray the variables by answering who, what, and how questions (Babbie, 2009). The study is descriptive in nature as it is deems appropriate because it involve use of written questionnaires administered to respondents. Yin (2013) recommended descriptive design as it allows the researcher to describe record, analyze and report conditions that exist or existed.Hence, it helped in answering the study research questions. This type of study helps in obtaining data that is concerned with the present state of phenomenon and describing "what exists" in respect to condition or variable in particular situation. The design provides the possibility to observe the phenomenon being studied in a completely natural and unchanged natural environment. It also gives the opportunity to integrate the qualitative and quantitative methods of data collection. 32 3.3 Target Population Target population is the entire set of units for which the study data are to be used to make inferences; the target population thus defines those units for which the findings of the study are meant to generalize (Sarason, 2013). A population includes all elements that meet certain criteria for inclusion in a research study. It is the entire set of individuals or objects sharing some common characteristics as defined by the sampling criteria established for the study (Burns & Grove, 2013). The target population for this study was1859micro enterprise in Nairobi County that has received a financing facility from Uwezo Fund (Uwezo Fund Status Report, 2018). Micro enterprises within Nairobi County formed the target population. Each targeted micro enterprise was issued with a single questionnaire. The target population was stratified within the 17 constituencies in Nairobi as shown in table 3.1 below. Table 3.1: Target Population Constituency Frequency Percent Westlands 112 6.0 Dagoretti North 99 5.3 Dagoretti South 114 6.1 Langata 106 5.7 Kibra 109 5.9 Roysambu 106 5.7 Kasarani 105 5.6 Ruaraka 117 6.3 Embakasi South 113 6.1 Embakasi North 113 6.1 Embakasi Central 100 5.4 Embakasi East 109 5.9 Embakasi West 112 6.0 Makadara 102 5.5 Kamukunji 128 6.9 Starehe 116 6.2 Mathare 98 5.3 Total 1859 100 Source: Nairobi City County (2018) https://en.wikipedia.org/wiki/Westlands_Constituency https://en.wikipedia.org/wiki/Dagoretti_North_Constituency https://en.wikipedia.org/wiki/Dagoretti_South_Constituency https://en.wikipedia.org/wiki/Langata_Constituency https://en.wikipedia.org/wiki/Kibra_Constituency https://en.wikipedia.org/wiki/Roysambu_Constituency https://en.wikipedia.org/wiki/Kasarani_Constituency https://en.wikipedia.org/wiki/Ruaraka_Constituency https://en.wikipedia.org/wiki/Embakasi_South_Constituency https://en.wikipedia.org/wiki/Embakasi_North_Constituency https://en.wikipedia.org/wiki/Embakasi_Central_Constituency https://en.wikipedia.org/wiki/Embakasi_East_Constituency https://en.wikipedia.org/wiki/Embakasi_West_Constituency https://en.wikipedia.org/wiki/Makadara_Constituency https://en.wikipedia.org/wiki/Kamukunji_Constituency https://en.wikipedia.org/wiki/Starehe_Constituency https://en.wikipedia.org/wiki/Mathare_Constituency_(2013) 33 3.4 Sample and Sampling Techniques Slovin's Formula was adopted in this study to determine the sample size. The formula was adopted in the calculation of sample size (n) when the size of the population (N) and an error of margin (e). The researcher used stratified random sampling to reduce standard error by proving some control over variance. The selection formula was as follows: n= N 1+ N(N− 1)e2 Where n= the required sample size, N = is the Target Population e = accuracy level required. Standard error = 5% Sample calculation n= 1859 1 + 1859(1858)0.052 Whereby: n = number of samples N = target population e = margin of error (0.05) n=329 Therefore, using Slovin's Formula, the sample size were 329 respondents which was a representation of 17.7% of the entire population being targeted? Ngechu (2004) emphasized that it’s very important to select a sample from a sample frame and therefore, the sample to be used in this study was selected from a sampling frame of 1859 micro enterprise in Nairobi County that have received a financing facility from Uwezo Fund . 34 Stratified Random sampling is the technique that was applied in selecting the sample for this study. The study used stratified sampling in selecting the sample to be used in this research. The sample is 329 respondents from each stratum which represented 17.7% of the entire population. Mugenda and Mugenda (2008) defined a representative sample as a sample representing about 10-50% of the population being studied. The study selected the owners of these micro enterprises as the respondents of the study. The owners were located from their business premises. Table 3.2: Sample Size Constituency Frequency Proportion Sample Westlands 112 6.0 20 Dagoretti North 99 5.3 18 Dagoretti South 114 6.1 20 Langata 106 5.7 19 Kibra 109 5.9 19 Roysambu 106 5.7 19 Kasarani 105 5.6 19 Ruaraka 117 6.3 21 Embakasi South 113 6.1 20 Embakasi North 113 6.1 20 Embakasi Central 100 5.4 18 Embakasi East 109 5.9 19 Embakasi West 112 6.0 20 Makadara 102 5.5 18 Kamukunji 128 6.9 23 Starehe 116 6.2 21 Mathare 98 5.3 17 Total 1859 100 329 3.5 Data Collection Instruments According to Sekaran (2003) data collection instrument is the mean by which information is obtained from the selected subject of an investigation. The study collected primary data using questionnaires. The respondents were specifically targeted for their ability to provide pertinent information to the study. The questionnaire contained both structured and unstructured questions. Babbie (2009) pinpointed that the questionnaires are used for data https://en.wikipedia.org/wiki/Westlands_Constituency https://en.wikipedia.org/wiki/Dagoretti_North_Constituency https://en.wikipedia.org/wiki/Dagoretti_South_Constituency https://en.wikipedia.org/wiki/Langata_Constituency https://en.wikipedia.org/wiki/Kibra_Constituency https://en.wikipedia.org/wiki/Roysambu_Constituency https://en.wikipedia.org/wiki/Kasarani_Constituency https://en.wikipedia.org/wiki/Ruaraka_Constituency https://en.wikipedia.org/wiki/Embakasi_South_Constituency https://en.wikipedia.org/wiki/Embakasi_North_Constituency https://en.wikipedia.org/wiki/Embakasi_Central_Constituency https://en.wikipedia.org/wiki/Embakasi_East_Constituency https://en.wikipedia.org/wiki/Embakasi_West_Constituency https://en.wikipedia.org/wiki/Makadara_Constituency https://en.wikipedia.org/wiki/Kamukunji_Constituency https://en.wikipedia.org/wiki/Starehe_Constituency https://en.wikipedia.org/wiki/Mathare_Constituency_(2013) 35 collection because of their simplicity in the administration and scoring of items as well as data analysis. Secondary data was gathered from existing credible and recognized sources, the secondary data comprised of materials that are relevant to the study.The information was obtained from the stored financial information by the owners of the microenterprises. The study collected secondary data on assets growth, sales growth and profitability. 3.6 Data Collection Procedure The questionnaires were self-administered to the respondents by the researcher to the respondents through the Uwezo Fund Constituency offices. The researcher then gave the respondents one week to give feedback on the questionnaire. This gave them enough time to fill up the questionnaires and return them to the researcher either via mail or the hard copy. Some of the advantages of using questionnaires for data collection are that the researcher has the opportunity to personally introduce the study to the respondents and explain to them the intentions of the study, as he also clarify to the respondents anything regarding doubts that could have arisen during the study. The study obtained an approval from the university in order to conduct the research. Additionally, approval was got from the National Commission of Science Technology and Innovation (NACOSTI). 3.7 Pilot Testing Pretest was carried out prior to the actual study. The purpose of the pretest study is to improve the research tool making it easier for the participants to answer the questions. It also enables the study to validate the research tool and the reliability of the collected data. The researcher also did a preliminary analysis with the help of the pilot test data to ensure that the collected data can answer the research questions (Saunders, Lewis, &Thorn hill, 2012). The respondents who participated in the pilot test were excluded in the main study. This is tandem with Kothari (2009) who stated that the sample size for a pre-test is 36 determined by the costs, time and practicability and it should be 5 to 10 per cent of the sample. Pilot test of the study was tested at 10% level, thus thirty-two questionnaires were used. 3.7.1 Validity Before undertaking the actual study, the researcher conducted a pilot study to the target population to ensure that the data instruments and the data collection methods were reliable. When we conducted a pilot study, we were able detect the mistakes that exist in the data collection instruments and procedures (Nyaberi, 2010). The main rationale for this was to identify mistakes before conducting the actual study is that it enabled us to take the appropriate restitution measures before conducting the actual research. In the pilot for this research, the study gave questionnaires to 32 respondents to answer; this was equivalent to 10% of the selected sample size. The study selected 10% because according to Connelly (2008), a pilot study sample should be 10% of the sample projected for the larger parent study. The corrections that the researcher made in the data collection instruments were critical in ensuring that the data is authentic and in tandem with the main objectives of the study. 3.7.2 Reliability Reliability of instruments relates the instrument’s capacity for replication; a research instrument is believed to be reliable if it can give the same results about the variables measured every time they are measured. Reliable instruments are stable in that the instruments can be administered to the same respondents on two different occasions but yield more or less the same responses (Kalk, Paul & Grabosch, 2014). The instrument considered also to be reliable if different enumerators can use it the same way and get results that are consistent. Piloting can also go a long way in determining the reliability of 37 the questionnaire. The research used different targeted participants to pre-test the interview guide in order to ensure that it is reliable.Reliability of the questionnaire was tested using Cronbach Alpha which measures internal consistency. According to Cooper and Schindler (2008), 0.7 is an acceptable reliability coefficient therefore the study used 0.7 as the cutoff point. The study deduced an Alpha Cronbach value of 0.814 for debt management literacy, 0.786 for budget skills literacy, 0.750 for bookkeeping literacy, 0.811 for banking services literacy and 0.809 for growth of micro enterprises hence making the instruments to be more reliable. 3.8 Data Analysis and Presentation Data analysis was guided by the selected research design and the specific objectives of the study. SPSS was used to analyze the data that was collected from the field. In order to allow data to be entered into the software, the questionnaires were referenced, and the data coded. Quantitative data was collected. Quantitative data collected was analyzed using descriptive statistics techniques. Through descriptive analyses, correlations as well as experimental studies emerge and also, they provide clues on the issues that require more attention which leads to further research (Mugenda & Mugenda, 2008). Before the data is analyzed, it was first coded, cleaned, and grouped as per the variables. Pearson R correlation was used to measure strength and the direction of linear relationship between variables. A large correlation implies a strong relation exists between the variables. The extent of the level of association between 2 variables is determined using correlation analysis (Levin & Rubin, 1998). Through correlation analysis, the researcher was able to detect if there exist any chances of multicollinearity. If the Correlation coefficient is zero, then it suggests the variables are not related, if the value is ±1 the variables are strongly associated (Hair, Black, Babin, Anderson and Tatham, 2010). Small 38 association is indicated by values ranging from 0.1- 0.29, medium association is indicated by value ranging from 0.3-0.49, and strong association is indicated by value of 0.5 and above. Multiple regression models were fitted to the data in order to determine how the independent variables affect the dependent variable. Multiple regressions Analysis were used in this study because it uses the independent variables (debt management literacy, budgeting skills literacy, book-keeping literacy, banking services literacy) in predicting the dependent variable. It is a statistical tool attempting to establish whether some variables can be used together in predicting a particular variable (Mugenda & Mugenda, 2008). Multiple regression models helped quantify the association between the study variables. To determine any causal relationship, multiple linear regression analysis was conducted. As stated by Gujarati (1995), causation models are best explained by linear regression analysis and thus, the study used linear regression results for each variable as follows; Y = β0+ β1X1+ β2X2+ β3X3+ β4X4 + ε Where; Y= Growth of Micro Enterprise, β0= constant (coefficient of intercept), X1= debt management literacy; X2= budgeting skills literacy; X3= bookkeeping literacy; X4= banking services literacy; ε = error term. 3.9 Ethical Considerations Ethical clearance was obtained from Strathmore University’s Institutional Board before commencement of data collection. A research Permit was also obtained from NACOSTI. The respondents were allowed to give information voluntarily without being coerced. The respondents were allowed to withdraw from the study in case they felt uncomfortable. The researcher guaranteed the members that the data will be treated with privacy and confidentiality. This empowered them to give honest and consistent data being that they 39 were assured of their anonymity as well as the main aim of the study. This made the respondents to fully participate in the study hence making the researcher to adequately understand the effect of financial literacy on the growth of micro enterprises. The data collected was stored in the university database and can only be accessed by authorized persons. 40 CHAPTER FOUR DATA ANALYSIS, PRESENTATION AND INTERPRETATION 4.1 Introduction The fourth chapter seeks to data analysis, presentation of research findings and their interpretations. The chapter specifically covers the general information of the study this includes the response rate, reliability and demographic information of respondents. Additionally, this chapter presented descriptive and inferential statistics. 4.2 Response Rate The sample selected for the study was 329 respondents. All respondents were issued with questionnaires for data collection but the researcher received back 287 questionnaires having been dully filled. The returned questionnaires translated to a response rate of 87.2%. This response rate was excellent because as Mugenda and Mugenda (2008) asserts, a response rate of 50% and above is sufficient, 60% and above id good while that if 70% and above is excellent. Therefore, our response rate of 287 was used for analysis and reporting. Table 4.1: Response Rate Questionnaires Frequency Percent Returned 287 87.2 Un-returned 42 12.8 Total 329 100.0 4.3 Reliability Analysis Thirty-two questionnaires were used for the pilot study and data collected from the pilot test were used to test for reliability of the questionnaire. Reliability of the questionnaire was tested using Cronbach Alpha. According to Cooper and Schindler (2008), 0.7 is an acceptable reliability coefficient therefore the study used 0.7 as the cutoff point. Table 4.2: Reliability Analysis 41 Scale Cronbach's Alpha Number of Items Debt Management Literacy 0.814 6 Budgeting Skills Literacy 0.786 6 Bookkeeping Literacy 0.750 6 Banking Services Literacy 0.811 6 Growth of Micro Enterprises 0.809 4 From the reliability findings presented in Table 4.2, all variables had Cronbach alpha values greater than 0.7 which suggests that they were all reliable. The findings show that debt management literacy had alpha value of 0.814, budgeting skills literacy had alpha value of 0.786, bookkeeping literacy alpha value of 0.750, banking services literacy had alpha value of 0.811, and growth of micro enterprises had Cronbach’s alpha value of 0.809. Therefore, since all the variables were reliable all items were used in the study. 4.4 Demographic Information In this section, the study presents the general information of respondents used in the study. The study specifically sought to establish the gender, age, and level of education of the respondents used in the study. 4.4.1 Age and Gender of the Respondents Respondents were asked to indicate their gender and age. The study computed a cross table between the two and the findings were as presented in Table 4.2. Table 4.3: Age of Respondents * Gender of the respondent Cross-tabulation Gender of the respondent Total Male Female Frequency Percent Frequency Percent Frequency Percent Age 19 to 30 years 29 10.1 58 20.2 87 30.3 31 to 40 years 64 22.3 102 35.5 166 57.8 41 to 50 years 13 4.5 16 5.6 29 10.1 Above 51 years 1 0.3 4 1.4 5 1.7 Total 107 37.3 180 62.7 287 100.0 42 From the findings presented in table 4.3, majority 180(62.7%) of the respondents were female. The findings further showed that 102(35.5%) of the female respondents were aged 31 to 40 years, 58(20.2%) were aged 19 to 30 years, 16(5.6%) were aged 41 to50 years while 4(1.4%) were aged above 51 years. These findings suggest that female respondents selected for the study were of varied ages with most (35.5%) being aged between 31 and 40 years. From the 107 male respondents used in the study, 64(22.3%) were aged 31 to 40 years, 29(10.1%) were aged 19 to 30 years, 13(4.5%) were aged 41 to 50 years while only 1(0.3%) was aged above 51 years. These finding suggest that male respondents selected for the study were of varied ages with most (22.3%) being aged 31 to 40 years. In general, 166(57.8%) of the respondents were aged 31 to 40 years, 87(30.3%) were aged 19 to 30 years, 29(10.1%) were aged 41 to50 years while 5(1.7%) were aged 51 years and above. This shows that majority (57.8%) of the respondents were aged between 31 and 40 years; this could be explained by the fact that Uwezo fund is a flagship program for vision 2030 aimed at enabling women, youth and persons with disability access finances to promote businesses and enterprises at the constituency level. This explains the reason why young people are more. In addition, majority 180(62.7%) of the respondents were female. This could suggest that majority of Uwezo Fund beneficiaries in Nairobi County are women. Further, the findings show that respondents of both genders were included in the study which is an indication that Uwezo Fund has benefited both male and female enterprise owners and therefore is not gender biased in its financing process. 43 4.4.2 Respondents Level of Education The study sought to establish the level of education of respondents used in the study and therefore requested them to indicate their highest level of education. The results obtained were as presented in Figure 4.1. Figure 4.1: Respondents Level of Education From the findings, 39.8% of the respondents had diploma has their highest level of education, 33.7% had bachelor’s degree, 20.5% had certificate, while 6% had master’s degree. These findings suggest that the respondents had varied levels of education which could explain the varied rates of growth among the enterprises. It is also an indication that the respondents had some level of education and therefore they were not illiterate and therefore had some level of financial literacy. 4.5 Descriptive Statistics The likert scale questions were analyzed using means and standard deviations and the results were presented in this section. The respondents were asked to use a 5-point Likert scale where 1- Strongly disagrees, 2- Disagree, 3- Neutral, 4- Agree, and 5- Strongly agree. The mean (M) value of 0.5-1.4 was interpreted as strongly disagree, 1.5-2.4 as disagree, 2.5-3.4 as moderate, 3.5-4.4 as agree and 4.5-5 as strongly agree. On the other hand, the 20.5 39.8 33.7 6.0 0.0 10.0 20.0 30.0 40.0 50.0 Certificate Diploma Bachelor’s degree Master’s degree P e rc e n t Level of Education 44 standard deviation (SD) values showed the amount of variation in respondents’ responses. A standard deviation value greater than two means that the respondents had differing opinions while a value less than 2 is low and indicates that the respondents and similar opinions. The results are presented in subsections below. 4.5.1 Debt Management Literacy Respondents were asked to indicate the level to which they agreed/disagreed with various statements about the effects of debt management literacy on the growth of micro enterprises funded by Uwezo Fund in Nairobi County. Table 4.4 presents the findings obtained Table 4.4:Debt Management Literacy on the Growth of Micro Enterprises Statements Mean Std. Dev. I always ensure that I pay my loan in the required time 3.982 1.370 I have an understanding on the terms of debt 3.777 1.275 I usually identify all my personal debts so that I can adapt an appropriate payment plan 3.889 1.381 I communicate with my creditors to negotiate lower interest rates 3.738 1.320 I avoid taking loans with high interest rates 3.698 1.331 I communicate with various creditors so that I can identify the suitable place to get a loan 3.948 1.263 From the findings, the respondents agreed that they always ensure that they pay their loan in the required time (M=3.982, SD=1.370); they communicate with various creditors so that they can identify the suitable place to get a loan (M=3.948, SD=1.263); they usually identify all their personal debts so that they can adapt an appropriate payment plan (M=3.889, SD=1.381); they have an understanding on the terms of debt (M=3.777, SD=1.275); they communicate with their creditors to negotiate lower interest rates (M=3.738, SD=1.320); and that they avoid taking loans with high interest rates (M=3.698, SD=1.331). These findings show that all respondents agreed on the various statements on 45 debt management literacy since the standard deviation values for each statement was less than 2 which is a small value indicating that the respondents had similar opinion. The study findings agree with Lusardi and Mitchell (2011) who in his study established that persons of limited financial literacy are more prone to exploitations when it comes to debt management, savings and credit, and are not able to administer their resources competitively e.g. investing in the money market, stock market and to perform better on their portfolio selection hence they end up planning poorly while individuals with high financial literacy are able to choose a feasible portfolio with lower finance cost. 4.5.2 Budgeting Skills Literacy Respondents were requested to indicate the level to which they agreed or disagreed with various statements about the effect of budgeting skills literacy on the growth of micro enterprises funded by Uwezo Fund in Nairobi County. The results obtained were as presented in Table 4.5. Table 4.5: Budgeting Skills Literacy on the Growth of Micro Enterprises Statements Mean Std. Dev. I run my business on a set budget 3.863 1.326 I prepare a budget for my business annually 3.836 1.220 I keep records of transactions so as to continue budgeting 3.915 1.343 I categorize my transactions to know the spending in different areas 3.961 1.476 Budgeting has helped me to decide where to spend more, where to spend less, or cutting back 3.856 1.525 My business budget is flexible, it can be adjusted to meet new business needs 3.994 1.476 From the findings, the study established that the respondents were in agreement that their business budget is flexible and therefore it can be adjusted to meet new business needs (M=3.994, SD=1.476); they categorize their transactions to know the spending in different areas (M=3.961, SD=1.476); they keep records of transactions so as to continue 46 budgeting(M=3.915, SD=1.343); they run their business on a set budget (M=3.863, SD=1.326); budgeting has helped them to decide where to spend more, where to spend less, or cutting back (M=3.856, SD=1.525); and that they prepare a budget for their business annually (M=3.836, SD=1.220). Based on these findings, respondents agreed with the different statements that relate with budgeting skill literacy. The standard deviation values for each statement was less than 2 which snuggest a low standard deviation and therefore suggests that the respondents had similar responses. The study findings are in agreement with the findings of Chidi and Shadare (2011) that budgeting skills acquired by the managers reflect on the budget procedures followed and the same will correspond with the budget implementation. Kalekye and Memba (2012) posited that budgeting incomes and expenditure is the most important factor of business financial management and in order to do it correctly financi