EFFECT OF FINANCIAL INCLUSION ON MICRO, SMALL AND MEDIUM ENTERPRISES’ FINANCIAL PERFORMANCE IN BARINGO COUNTY, KENYA

Abstract

Financial sectors that mobilize savings and allocate resources for economic purposes play a pivotal role in fostering financial inclusion (FI). FI provides essential information and discipline for economic agents, enabling effective resource allocation and risk management. This, in turn, influences financial performance. Despite its significance, financial institutions in Baringo County, Kenya, are underperforming, depriving micro, small, and medium enterprises (MSMEs) of the benefits of FI. Consequently, this study aimed to address these challenges by analyzing the effects of financial access, financial usage, clients` bank loans, and clients’ awareness of

financial products on MSME performance. The study adopted descriptive and cross- sectional survey designs, guided by Financial Inclusion and Credit Access theories.

The target population comprised MSMEs registered and licensed by the Baringo County government. Data were collected from 111 MSME owners/managers across six sub-counties using purposive, stratified, and simple random sampling techniques. A structured questionnaire was used to gather primary data through face-to-face interviews. Data analysis involved descriptive and inferential statistics. Results on financial access indicate that the mean interest rate was 18.5%, while the number of lending institutions and distance to the lending institutions were 4 and 2.46 km, respectively, while 86.5% were requested for collateral, 38.7% had entrepreneurship skills and finance infrastructure. Results on bank loan usage indicate that the mean saving balance was Kshs 67,030, while the number of daily bank transactions and the number of electronic payments to banks were 4 and 6, respectively. Results on the bank loan capacity of clients indicate that financial institutions could meet 86.5% of clients' needs and offer services to 61.3% of clients, with various financial institutions available for lending to MSMEs, while most MSME owners/managers obtained loans from group contributions, accounting for 39.6%. Results on clients’ financial product awareness showed that 91% of the MSME owners/managers were aware of the financial products, 78.4% received guidance on credit access, and 51.4% underwent financial skill training on credit risk management. Regression results on financial access revealed that the number of lending institutions and the entrepreneurial literacy level positively increased performance by 46.5% and 95.1%, respectively, while interest rates decreased performance by 33%. Results on bank loan usage showed that savings balances and the number of daily bank transactions positively increased MSME performance by 98.7% and 108.6%, respectively. Additionally, results on the effects of clients’ bank loan service quality and the range of options available to clients positively influenced financial performance by 182.08% and 156.8%, respectively. Lastly, regression results on the effect of clients’ financial product awareness on MSME performance indicated that guidance on credit access and financial skill training on credit risk management increased performance positively by 258.6% and 144.5%. Therefore, it is recommended that financial institutions implement targeted interventions to address these factors. There is a need for training entrepreneurs to gain financial literacy to assist them in managing MSMEs. Additionally, there is also a need for entrepreneurs to receive training in financial literacy to aid in the management of MSMEs.