THE EFFECTS OF INFORMAL MICROCREDIT FINANCE IN THE PERFORMANCE

OF SMALL AND MICRO ENTERPRISES IN KIAMBU COUNTY, KENYA.

A SURVEY OF SMALL AND MICRO ENTERPRISES IN RUIRU TOWN

BY ANNAH SYOMBUA

A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE

REQUIREMETS FOR THE AWARD OF BACHELOR IN ACCOUNTING AND
FINANCE

ZETECH UNIVERSITY
 DECLARATION
This is to declare that this research project is my original work and has not been presented in any
university or institution of higher learning.

Sign………………………… Date…………………………
MUTUNE ANNAH SYOMBUA BAF-05-0066/2019

This research project has been submitted for examination with my approval as the university
supervisor.

Sign………………………… Date…………………………………….

MR. RAPHAEL MPUTHIA

Lecturer
Department of business,
School of Business,
Zetech University,
Thika Road Campus.

ii
 DEDICATION
I dedicate this research project to God for seeing me through the entire process of doing my
research and for the gift of good health. I also dedicate this project to my family, friends and
everyone else who has positively influenced my academic journey and welfare in school.

iii
 ACKNOWLEDGEMENT
I thank God for giving me the grace to do the research project to the end. I acknowledge my
supervisor, Mr. Raphael Mputhia for his guidance, advices and availability for consultation in the
entire period of doing my research project.

iv
 ABSTRACT
Worldwide, small and micro enterprises play a critical role in social and economic development
of a country through contribution to the growth of the gross domestic product and employment
creation. Sources of capital, interest rates, access to financial services and financial literacy are
essential to the effectiveness and growth of small and medium businesses. The purpose of this
research was to determine the effects of informal microcredit finance on the performance of
small and micro enterprises in Ruiru town, Kiambu County. This study was guided by the
following objectives- to assess the effects of lending on the performance of SMEs in Ruiru town,
to examine the effects of financial literacy on the performance of SMEs in Ruiru town, to
determine the informal sources of capital for the SMEs in Ruiru town and to determine how the
access to financial services affects the performance of SMEs in Ruiru town. The target
population was 620SMEs in Ruiru town. The study used stratified random sampling to select a
sample size of 144 respondents. This research used both open-ended and closed-ended
questionnaires to collect primary data from the respondents. Data was analyzed used descriptive
statistics and the findings of the study were generalized to the entire population using correlation
and regression analysis. The study found out that majority of the respondents were in wholesale
and retail sector (47.06%). Regarding the sources of finance, respondents agreed to that they
relied mostly on the informal sources if finance (p=0.000). They also agreed that borrowing from
table banking firms was easy since the interest rates were low (p=0.000). they also agreed to
agreed extent that table banking financial literacy helped them borrow wisely and also made
them make prompt payments (mean=4.34) and they also agreed that access to financial services
didn’t take long (p=0.000). Financial literacy was found to be the best and significant of financial
performance (p=0.000). the study concluded that informal sources of finance were indeed the
best in financing SMEs in Ruiru town, table Banking firms usually lend at low interest rates
compared to the formal sources, easy access to financial services in table banking groups helped
respondents to accumulate funds for re-investment in entrepreneurial ventures and business
knowledge acquired through table banking helped SMEs diversify their investment thus reducing
risks.

Table of contents
DECLARATION.............................................................................................................................ii
DEDICATION................................................................................................................................iii
ACKNOWLEDGEMENT..............................................................................................................iv
ABSTRACT....................................................................................................................................v
CHAPTER ONE..............................................................................................................................1
INTRODUCTION...........................................................................................................................1
1.1 Background information.....................................................................................................1

v
1.1.2 The informal finance in the world..................................................................................1

vi
 CHAPTER ONE

INTRODUCTION

1.1 Background information

Formal microcredit finance organizations have failed to satisfy the needs of small and
microenterprises [SMEs]. This scenario is mostly brought about by their high interest rates their
shorter payback periods. For example, the central bank of Kenya [CBK], lends at about
12%which is a very high rate for the SMEs. This therefore paves way in for the informal
microenterprise organizations. Table banking, merry-go round and Chama” are used
synonymously to explain informal finance. It is therefore an agreement conducted without
reference or recourse to the legal system to exchange cash in present promises of cash in future
while in centrally a formal microcredit finance organization is an institution that as a legal basis
and his subject to regulation by the government. Examples include; Faulu Kenya, Kenya
women micro- finance bank, choice micro finance bank etc.

SMEs are businesses whose personnel numbers fall below certain limits. They play a big role in
the development of a country’s economy. The gross domestic product [GDP] of a country of
about 60-70 is developed by SMEs. According to Berrone, F. [2014], SMEs are the critical
sources of employment and income at both local and national levels as they typically account for
a large share of economic units in any economy. For instance, in Mexico SMEs has been the
subject of many programs and policies by the three levels of government [federal states and
municipalities.

According to Lavia, H. (2015) says that SMEs contribute the most relevant research in getting a
clear concept on how moving average {MA} tools are used differently by large companies. SME
gives an overview background of how these tools are used and their impact to large companies.
Moreover, SMEs contribute to sustainability integration and for them to successfully integrate
this principle within the business culture, they always understand the merging opportunities and
how they can be relevant to them. Although SMEs struggle to identify how they could use
sustainability as a force for growth and adapt to mega trends such as; increased globalization,
digitalization, the new industrial revolution etc. The recent 2018 SMEs ministerial conference
paper reveals how domestic government and international bodies can design policies and
strategies for effective deployment, measurements and monitoring of sustainability integration in
micro firms, young, innovative and high growth SMEs. Thus, the idea of informal finance came
in to help the less fortunate and disadvantaged in the society by allowing them to borrow money
at low interest rates and also giving them longer installments
1.1.2 The informal finance in the world
The informal finance has been practiced over years all over the world. They have been noted has
the most developers of the economy in any country. SMEs in the world have mostly been
developed by women through the concept of merry-go round.

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In China, studies intensively embark on the relationship between formal and informal finance.
According to Alexander. W. (2009), the domestic and foreign experiences in the development of
informal finance from historical perspective, explore the relationship between formal and
informal finance. According to Jung, Y. (2008), he uses the theories of financial ecology to
analyze economic foundation of informal finance and its functions. It is the features of obscure
legal status secrete operation pattern and out of reach of supervision that make the informal
finance may induce the hidden danger of financial risks. At the same time the marketed; interest
mechanisms of informal finance would have same negative effects to formal credit market.
Zhang et al. (2009) argues that informal finance has a comparative advantage in SMEs
financing mainly on information cost, negotiation cost and regulation cost. AS the size of
informal financing increases, the comparative advantage on trading cost will gradually
diminish.

SMEs play a very important role in the industrialization process in China leading to its fast
economic growth. They pay a vital role in increasing the China’s per capital income and output
to promote balanced regional development by diversifying the industries in rural areas.
According to World Bank report 2014: promoting opportunity, growth and prosperity, it is
outlined that about 90% of all new jobs in the world are developed by SMEs. However, SMEs
face financial problems all over; this slows down their development because the informal
financial sectors are not well developed in all regions of the world. In contrast, if those sectors
are supported it is believed they can promote the best economy growth and employment.

1.1.3 Informal financial sectors in Kenya

Recent surveys have revealed increased use of informal financial sector in Kenya both in urban
and rural areas. In past years the use of merry-go round concept was seen as an activity for
those people living in rural areas and slums. The Kenyan vision 2030 plans have mostly
embarked on developing and impacting knowledge on SMEs for job creation and self-reliance
as revealed by the government of Kenya report, 2012: Kenya population situation analysis.

According to the government of Kenya report, 2018: public finance management reforms, it
seeks to support SMEs by facilitating access of affordable credits, skill development,
entrepreneurial culture and linkage to domestic and external opportunities. This includes
enactment into law and implementation of national credit.

In Kenya, SMEs have continued to face challenges related to credit access. Commercial
banks are still bargaining the issue of collateral due to limited land ownership status in
Kenya, entrepreneurs are unable to provide the necessary collateral needed for loan request.
According to international labor organization report ,2008: global income inequality gap,
factors affecting ground then is perhaps the women entrepreneurs in SMEs is that women
make up nearly half of all small and microenterprises and 40% of small holder farm
managers, yet they have less than 10% of the available credit.

2
Realizing that the present grinding of poverty does not give the better results, it will be
advantageous to give entrepreneurs the capacity to focus and upscale their enterprises since they
are concerned meeting their very basic needs that is food , shelter and sustenance , reducing the
divergence of policy proposals and the reality on the remaining policy challenge that stands in
the way of Kenyan reaping the full benefits other countries such as India and Brazil are
currently enjoying as a result of a rebuts SMEs sector.

ground then is perhaps the women entrepreneurs in SMEs is that women make up nearly
half of all small and microenterprises and 40% of small holder farm managers, yet they have
less than 10% of the available credit.

Realizing that the present grinding of poverty does not give the better results, it will be
advantageous to give entrepreneurs the capacity to focus and upscale their enterprises since they
are concerned meeting their very basic needs that is food , shelter and sustenance , reducing the
divergence of policy proposals and the reality on the remaining policy challenge that stands in
the way of Kenyan reaping the full benefits other countries such as India and Brazil are
currently enjoying as a result of a rebuts SMEs sector.

1.1.4: The concept of table banking

Financial inclusion is listed as a target paramount in achieving 8 of the 17 global sustainable
development goals [SDGs]. As a matter of fact, women have not been able to access loans from
the commercial banks. Table banking has therefore come in to meet the needs of women who
definitely cannot meet those collateral needs required by the banks. Therefore, table banking is
a group-based funding system involving the merry go round money contribution system aimed
at raising individuals in a group financially. It is mostly conducted by women. Members in the
group hold regular meetings, where matters affecting the group are discussed, fines paid when
a crime is committed, and loans administered to group members who urgently need them and
also defaulters are confronted.

For instance, according to Daily Nation report, 2020 Milele alliance stands out as the best table
banking group. The group is revealed to be making an investment profile of Ksh.35 million. This
group started out by each contributing a minimum of 30,000 a month for 8months. Their first
investment was 1.25-acre plot in Juja and 2 acres in Elementaita. The plots were retained as their
value increased. They later bought a residential property in Thika and started renting it out and
have since expanded into a car cleaning in Nairobi. This clearly shows the table banking concept
when applied appropriately can make a very huge difference to the general economy of a
country.

However, despite these groups being of great importance, according to Lawrence.M. (2006),
some of the individuals who enter into these groups lack the skills and knowledge to operate and
run their own businesses. This foster a big problem and it is always found that some of them end

3
up quitting at an early stage since they don’t believe that after investing one needs to take time
to be earning profits. They therefore opt to non-farm employments as revealed by the
international labor organization report, 2019: Global Employment trends. These also face a great
challenge in decision making. It is always noted that when people are many, reaching a
conclusion to a particular subject matter is always a problem Sundaram,K.(2012).

4
1.2 statement of the problem
SMEs are established to help boost the economy. To perform this, they must work hand in hand
with the informal finance organizations since they lend money at low interest rates and they
give longer installments. However, SMEs face great challenges such difficulties in credit access,
information and financial illiteracy and poor decision making. According to Ackah et al. (2011),
in the situation where some SMEs are able to provide collateral, they end up lacking adequate
finance needed to on their projects as SMEs assets-based collateral are usually rated at carcass
value to ensure that the loan is realistically covered in the case of default due to the uncertainty
surrounding the growth and survival of SMEs.

According to Mwaniki, L. (2019), lack of sufficient knowledge and skills is a greater problem
to expansion and growth of SMEs. Most SMEs in Kenya do not have the privilege to enjoy
economies of scale which frequently inhibits their elasticity. This consequently inhibits the
financial health of SMEs in terms of liquidity, profitability and gearing which gives rise to
opportunity cost and hinders growth.

1.3. Research objectives

1.3.1. General objective
The general objective of this study is to determine the effects of informal microcredit finance on
the performance of SMEs in Ruiru town.

1.3.2. The specific objectives

1. To assess the effects of lending on the performance of SMEs in Ruiru town.

b) To examine the effects of financial literacy to the performance of SMEs in Ruiru town.
c) To determine the informal sources of capital for the SMEs in Ruiru town
d) To determine the access to financial services by SMEs in Ruiru town

1.4. Research questions

a) What is the effect of lending on the performance of SMEs in Ruiru town.
b) What is the effect of financial illiteracy on the performance of SMEs in Ruiru town.
c) What are the informal sources of capital for the SMEs in Ruiru town.
d) How access to financial services eases the growth of SMEs in Ruiru town.

1.5. Significance of the study

Through this research, the county government of Kiambu and the country of Kenya at large can
get to understand the impacts of informal microcredit finance and the performance of SMEs
and be able to formulate policies to encourage table banking in the county and country at large.

The results of this study can help future researches with information favorable for academic
researches.

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Through the recommendations of this study, policy makers can get information on how to
formulate laws beneficial to the performance of informal microcredit finance.

The research also can help the formal financial sector in understanding the role of finance of the
informal sector and this could actually make them to reduce their interest rates in favor of
SMEs.

1.6. The scope of the study

The scope of the study focused on the effects of informal microcredit finance on the
performance of SMEs in Kiambu County, Kenya. The study was carried out in Ruiru town
Kiambu County. The independent variable for the study was informal microcredit finance
while the dependent variable was the performance of SMEs.

The study focused on objectives like; assessing the effects of lending on the performance of
SMEs and effects of financial and information literacy on the performance of SMEs. The target
population was 620 SMEs in Ruiru town.

This study was conducted for a period of three months and the estimated budget of the study
was Kshs 5000 which enhanced access and collection of data.

1.7: Chapter conclusion

The study is carried out to determine the effects of informal finance on the performance of
SMEs. Its objectives are; assessing the effects of lending on the performance of SMEs and
examining the effects of financial and information literacy on the performance of SMEs.
The study will be of great importance since it will provide recommendations to the policy
makers on how to make policies that suits the performance of SMEs and also make it clear for
the government and formal financial institutions in understanding the role of informal finance.

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 CHAPTER TWO

LITERATURE REVIEW
2.1 Introduction
The chapter explains the theoretical review of this study. Theoretical review covers the corpus of
theories that have accumulated in regard to the performance of SMEs. It also explains the
empirical review of the research which covers the past studies regarding the performance of
SMEs. This chapter will also include the critique of the study.

2.2 Theoretical review

The theories explaining the performance of SMEs over time and its growth include enterprise
growth theory and social network theory.

2.2.1 Enterprise growth theory

This theory describes the development process of an enterprise like the life of a person. It was
proposed by Robert Malthus. According to this theory enterprise keeps the tendencies of
balanced and stable growth of the total performance level or keeps realizing the large
enhancement of total performance and the stage spanning of development quality and level
Jansen, C. (1994). According to Tang, W. and Panfeng, L. (2005), enterprise growth is an
interactive process with scale extension, knowledge accumulation and system construction.

According to Linda, D. (2018), factors that make enterprises to fail in their operation include
poor planning set ups in the organization, lack of resources and financial and information
illiteracy. Most SMEs in Kenya fail in their operation due to similar problems like financial and
information illiteracy and poor planning. The informal microcredit finance organizations through
the concept of table of banking have come out to solve these problems.

2.2.2 Social Network Theory

This theory tries to explain how people, organizations or groups interact with others inside
their network. It was proposed by Jacob Moreno. According to Charlie, P. (2006), networks can
be thought of as neighborhoods since they are comprised of the actors and the relationships
between those actors e.g. table banking

According to Atterto, A. (2007) social interactions are of great importance to the operation of
informal finance services. These social interactions always strengthen the social ties among
members in a group which actually enhances the concept of table banking. In table banking
group members come together in a meeting discuss various issues like rising money to buy an
estate where they can invest and be earning. Through such forums they are able to gain
knowledge on business operations and others get ideas from such meetings and they thus go
ahead to start their own businesses. This is how SMEs emerge in a country and upgrade its
economy.

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2.3 Empirical review
The performance of SMEs is greatly influenced by such factors like interest rates, financial and
information literacy, sources of capital and the access to such finances. The theories assume that
SMEs operating in areas with easy access to informal finance can record good results in terms
of their performance.

2.3.1 Sources of capital for the SMEs

The performance of SMEs has greatly been affected by the hindrances of them accessing
capital. Obtaining finances is of the several barriers to starting a business. According to
Fielden, S.L. (2000), he indicates that 75% of the world’s SMEs worry because they do not
understand taxes, national insurance and how to do bookkeeping ,67% of SMEs experience
difficulties in obtaining capital and 56% of the SMEs do not have a guaranteed income.

Self-help groups are the key financing sources for the SMEs in Kenya since the formal
microcredit organizations always lend money at high interest rates which SMEs cannot afford.
According to Paul, M. (2020), group-based financing has become an important means in lending
to SMEs. According to Sriraman, B, B. (2007), women self-help groups are increasingly being
used as a tool for various development interventions. Credits and its delivery through self-help
groups have also been taken as a means for empowerment of rural women. According to
Thusanang, P. (2019), self-help groups allow people to save money and borrow so that they can
improve their lifestyle and build self-reliance.

SMEs also got to access finance inform of loans from family and friends. This includes monies
usually in the form of a loan that a business owner gets from either family members or friends in
order to help finance their start up or growing businesses. According to Jea, Y. (2021), it makes
sense people with whom you have close relationships with know you are reliable and competent
and you can. Also, if friends or family members insists on buying stock in your business you
should try to make it non- voting stock so they don't have the right to second guess your every
management decision.

2.3.2 Interest rates and the performance of SMEs

SMEs find it easier to borrow money from informal microcredit organizations such as table
banking groups due to their low interest rates. According to Kinuthia, M. (2015), women in the
most regions of Kenya are actually breaking the culturally introduced financial limitations
through the concept of table banking. He says that this practice generally gets rid of long queue,
lack of collateral and also economic limitations to women who require finance to put into
productive businesses.

According to Ng'ang'a, M. (2015), it is clear that the interest rates on formal loans are very high.
This has hindered women from getting them and many of them opting for maids. However, since
the introduction of informal finances in Kenya, the situation for women has changed. Most
women in rural areas have now increased their status of agriculture through loans for investment

8
acquired through table banking. Many of them have been able to acquire more land through such
loans and advanced their agricultural farms. This has definitely improved their status. Today it is
very clear that women prefer informal loans to formal loans due to their low interest rates. This
has actually elevated their lives through support given to them by the table banking groups and
hence improved their social status.

In a study on the effects of interest rates on loan repayment. According to Honghui,Z.(2016),

there is a strong negative relationship between interest rates and loan repayment in the
microfinance institutions. When Interest rates are high there is the women capacity to cause loan
Default. In another study Ngahu, M.D (2016), found out that interest rates negatively influence
loan performance. This shows that high interest rates lead to an increase in loan default or even
poor loan performance. On the other hand, low interest rates lead to a decrease in loan default as
most borrowers will be in a position to pay. Informal microcredit finance loans are characterized
by low transaction costs and hence are affordable to women

The easy access of loans to women in informal microcredit organizations has transformed their
lives of almost 90% of women in Kenya. This is due to Naho the fact that the loans have flexible
repayment schedules helping borrowers to improve their income generating activities and hence
improved livelihoods Mubhoff, P. (2014). Flexible repayment terms allow the redistribution of
the principal payment during periods of low agricultural returns and high agricultural returns.
This is due to the fact that most women who are engaged in table banking mostly borrow loans to
improve their agricultural conditions.

2.3.3 Financial and information literacy on the performance of SMEs

The fact that most table banking groups are operated by people in rural areas who are illiterate
makes a great challenge for the success of such SMEs. Most of them end up making big losses
than expected and therefore giving up. According to Wanjohi, A.M. (2011) most SMEs lack
training and management skills to enable them manage funds effectively. SMEs have a capacity
to absorb only small amounts of funds from financial institutions. This prevents the enterprises
from accessing adequate credit because of high intermediation costs including the cost of
monitoring and enforcement of loan contracts.

According to Seoul, F.C. (2010), information asymmetry arising from SMEs lack of accounting
records, inadequate financial statements or business plans makes it difficult for creditors to
assess the creditworthiness of potential SME proposals. Lack of financial literacy, operational
skills, including accounting and finance and business planning represent a formidable challenge
for SME borrowers

Most SMEs in Kenya fail in their operation due to lack of proper skills required in budgeting.
This will definitely affect their growth and profitability. According to Mahmood, et al. (2008), it
is clear that most SMEs do not clearly define the relationship between the business and
budgeting process. This makes the operation sophisticated and processes inaccurate leading to

9
their failure. Financial and information literacy remains an interesting issue in both developed
and developing economies and has elicited much interest in the recent past with the rapid change
in the finance landscape Messy. (2005).

2.3.4 Financial access in SMEs

For any business to thrive and grow rapidly then the process of accessing finances should
be simple and flexible. Easy access to loans allows to SMEs to innovate, improve
efficiency, expand to new markets and provide millions of jobs.

According to SMEs poverty report action 2009, developing countries financial institutions assess
SME loan applicants using information supplied to them by credit bureaus. However, such credit
bureaus are not available in all parts. Banks usually rely on time consuming methods to obtain
credit histories directly from loan applicants. Incomplete financial records and unverifiable client
information further increases the cost of accessing SMEs loan application making banks
reluctant to lend to SMEs. This is the reason why SMEs will definitely prefer loans from
informal microcredit organizations. The traditional microfinance groups usually require clients
to repay loans in weekly, monthly or yearly installments. This makes the way through for SMEs
to borrow loans of their choice and be able to repay them.

2.5 critique of the Review

Various researchers conducted studies relating to the effects of informal microcredit finance on
the performance of SMEs. Mungiru, J.W. (2015) conducted a study on the effects of informal
finance on the performance of SMEs. This study is different from our research since it was
conducted in 2015 while our research is conducted in 2021. The research uses objectives like
assessing the effects of shylock finance sources on the performance of SMEs while our research
objectives are; examining the impacts of financial and information literacy on the performance
of SMEs and determining the effects of lending o the performance of SMEs. The study used
adverse selection theory of financial markets while our study has used enterprise growth theory
and social network theory.

Keegan, N. (2018), conducted research on the effects of informal finance on the performance of
SMEs. However, this research is different from our research since it was conducted in 2018
while our research is conducted in 2021. This research was carried out in Nanyuki town while
our research is carried in Ruiru town. This study uses credit rationing theory and financial
intermediation theory while our research has use enterprise growth theory and social network
theory.

Adebisi, R.O. (2015) conducted similar research. The research is however different from our
research since it was carried out in Nigeria while our research is carried out in Kenya. The
research has a target population of 73 SMEs while our research has a target population of 150
SMEs. The research uses theories like; evaluating the efficiency of the different sources of funds
available for SMEs in Nigeria and identifying challenges associated with SMEs in Nigeria while

10
our research has used objectives like; examining the effects of financial and information literacy
on the performance of SMEs and the effects of lending on the performance of SMEs in Ruiru
town.

Murigi, P.M. (2014) conducted research on the effects of informal finance on the performance of
SMEs. This research is different from our research since it was conducted in Mukuru slums
while research is conducted in Ruiru town. The research was conducted in 2014 while our
research is conducted in 2021. The research did not have the specific objectives while our
research has specific objectives; determining the impact of lending on the performance of SMEs
and examining the effects of financial and information literacy on the performance of SMEs in
Ruiru town. This research uses financial liberalization theory and adverse selection of financial
markets while our research has used enterprise growth theory and social network theory.

Benjamin.P (2019) conducted research on the effects of informal finance on the performance of
SMEs. The research is different since its objectives are; to find out the relationship between
table banking credit access and the performance of SMEs in Nairobi county and to determine the
relationship between table banking saving mobilization and the financial performance of SMEs
in Nairobi county while our research objectives are; determining the effects of lending on the
performance of SMEs in Ruiru town and examining the effects of financial and information
literacy on the performance of SMEs in Ruiru town. This research was conducted in 2019 while
our research is conducted in 2021.

2.7 chapter conclusion

The chapter brings out the theories associated with the study that is social network theory
and enterprise growth theory. It also explores deeply factors affecting growth and
profitability.

1.7 The conceptual framework

This study intends to investigate the effects informal finance on the performance of SMEs. The
independent variable for this study is the informal microcredit finance measured by interest rate,
information and financial literacy, sources of capital and access to financial services The
dependent variable for the study is the performance of SMEs. This is presented by figure1.1 .

11
INDEPENDENT VARIABLES DEPENDENT VARIABLE

Sources of capital

Performance of
SMEs:
Interest rates  Growth
 profitabilit
Financial literacy: y
 Budgeting
 Business skills

Access to financial
services

Figure1.1: The conceptual framework (source: Author, 2021)

12
 CHAPTER THREE

RESEARCH DESIGN AND METHODOLOGY

3.0 Introduction
The chapter brings out the methods and procedures used in the collection of data and
information. It also gives a highlight of the research design, population of the study, sample
size, sample sizes, research instruments, validity and reliability of the instruments.

3.1 Research design

This study used descriptive research design. A descriptive research design aims at accurately and
systematically describing a population, situation or phenomenon. It can therefore use a wide
variety of research methods to investigate one or more variables. According to Krathwohl, G.
[1993] descriptive research design emerges following creative explorations and serves to
organize the findings in order to fit them with explanations and then test or validate those
explanations. According to Hitech, B. [2019] using descriptive research design, statistical
information can be obtained and analysis of that can be made to deduce desired results.

3.2 Target population

According to Merrium, K. [2021] a population is the total of individuals occupying an area or
making up a whole. A statistical population can be a group of existing objects or a hypothetical
and potentially infinite group of objects conceived as a generalization from experience. This
study focused on the SMEs that utilized the informal sources of finance in Ruiru town such as
table banking. The target population was drawn from all the SMEs in Ruiru town. This research
targeted a population of 620 SMEs in Ruiru town. This information is illustrated by table 3.1.

Some of the SMES found in Ruiru town are hawkers, accommodation, entertainment
facilities, cafeterias, clothing, wholesale and retail, day care facilities, arts and design, media
and information technology.

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Table 3.1; Target population

Sector Population

Hawkers 100

Accommodation 150

Entertainment facilities 50

Cafeterias 50

Clothing 40

Wholesale and retail 70

Daycare facilities 60

Art gallery 50

Media and information 50

Technology

Total population 620

(Source: author.2021)

3.3. Sample size

According to Shona, M. (2019) whenever you conduct research about a group of people it is
rarely possible to collect data from every individual in that group instead selecting a sample will
be of great importance. This research has used proportionality in getting the sample size that is
stratified random sampling formula. The reason for sampling in this study is to enhance accuracy
of the results, saving time and cost of the study. Therefore, the sample size for this study was 144
respondents. This is shown in table 3.2 below

Table 3.2 sample size

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 Sector Target percentage Sample size
population
Hawkers 100 16 16
Accommodation 150 24 16
Entertainment 50 8 16
Cafeterias 50 8 16
Clothing 40 6 15
Wholesale and retail 70 11 16
Daycare facilities 60 10 17
Art gallery 50 8 16
Media and information 50 8 16
technology
Total 620 100 144

3.4. Sampling techniques

This research has used stratified random sampling to come up with the sample size according
to Dan,S.(2020) stratified random sampling is a type of probability sampling in which a
researcher can branch off the entire population into a multiple non overlapping, homogeneous
groups (strata) and randomly choose final members from the various strata for research. This
sampling technique is used in the study because it enables the researcher to control sample size
in the strata, increases statistical efficiency, provides data to represent and analyze sub groups
and reduces the cost of the study.

3.5. Research instruments

This research has used both open ended and closed ended questionnaires to collect data from the
respondents. The closed ended questionnaires enable the respondents to select answers that best
describe their situation while the open-ended questionnaires gave the respondents complete
freedom to respond depending on the space provided. According to Saul Mcleod, (2018)
questionnaires provide a relatively cheap, quick and efficient way of obtaining large amount of
information from a large sample of people. Using questionnaires data can be quickly collected
because the researcher would not need to be present when the questionnaires are being
completed. Closed ended questionnaires can provide ordinal data which can be ranked.

3.6. Data collection

This study has used primary data collected from the respondents. According toArti,R[,2014)
primary data means the original data that has been collected specifically for the purpose in
mind. It means someone collected the data from the original source first hand. According to
Silvia. [2017) primary data resolve specific research issues giving better accuracy and up to
date information is obtained.

3.7. Validity and reliability of the research instruments

15
According to (Fiona, 2019) reliability refers to how consistently a method measure something. If
the same result can be consistently achieved by using the same methods under the same
circumstances, then the measurement is considered reliable. Validity is how accurately a method
measures what is intended to measure that is, the product results correspond to the real
properties, characteristics and variations in the physical or social world.
To test the reliability of the data, this research has used test-retest and measured each individual
sector two times at different time intervals (two weeks’ interval time). The results obtained from
the questions administered to the respondents were almost the same. This clarifies that the data
obtained is reliable.

To test the validity of the instruments used in the study the researcher consulted the supervisor
for his opinion regarding the content of the questions that were to be administered to the different
sectors during the study. From the feedback, the research instruments were then modified and
ensured there is no ambiguity in them. the researcher also ensures that all those SMEs studied in
Ruiru town got there financing from the informal financing sectors.
3.8. Data Analysis
This study used descriptive statistics that is, mean, median and standard deviation to explain the
various characteristics of the study variables. In generalizing the study findings to the entire
population, this study used correlation and regression analysis. Regression analysis was used to
predict the effects of interest rates, financial and information literacy, capital sources and access
to financial services on the performance of SMEs in Ruiru town, Kiambu County, Kenya. Profit
margins, compounded annual growth rate, interest rates and various balance sheets and profit
and loss account were obtained to measure the variables. This is shown by table 3.3 below.

Table3.3 Measurement of the variables

Variables Type Operationalization Measurement

SMEs performance Dependent variable Growth and Profit margins,

16
 Profitability compounded annual
growth rate

Sources of capital Independent variable Informal sources Interest rate

Financial and Independent variable Effectiveness Balance sheet and

information literacy profit and loss
account

Access to finance Independent variable Access to finance Compounded annual

leading to high growth rate
growth rate

3.9. Simple regression model

The performance of SMEs using informal financial services was determined as shown below.
Y=α+β1 X1+β2X2 +β3X3+ε

Where,

α =constant

β = coefficient of the independent variables

Y =performance of SMEs (dependent variable)

X1 = sources of capital

X2 =financial and information literacy

X3 =access to finance

ε =error term

17
 CHAPTER FOUR
RESULTS AND CONCLUSIONS
4.0 Introduction
This chapter presents the data which was collected, analyzed and interpreted. It also describes the
actual findings derived from the primary data of the 100 SMEs in Ruiru town and links them the
study objectives.

4.1 Response rate

This research was conducted on a sample of 144 respondents in Ruiru town to which both open-
ended and closed ended questionnaires were administered. A total of 144 questionnaires were
therefore issued whereby a total of 134 questionnaires were returned duly filled in making a
response rate of 93% while 10 of them were returned unfilled making a total of 7%. According to
Kavitha, S. (2020) a response rate of at least 60% is considered acceptable.

Table 4.1 Response rate

Response Frequency Percentage
Filled questionnaires 134 93
Unfilled questionnaires 10 7
Total 144 100

4.2 Demographic features

4.2.1 Age
The study sought to find out the age of the respondents. From the data obtained, the following
information was observed
Table 4.2.1 age
Age bracket Response rate Percentage
18-25 10 11.76
26-35 20 23.53
36-45 30 35.29
46-55 10 11.76
55-59 10 11.76
60 and above 5 5.88
Total 85 100

The data showed majority of those running SMEs in Ruiru town have the age bracket between
36-45. This is because they are the adults who have engaged themselves in self-help groups to
generate income for their livelihoods. Also, the study found out that 23.53% of the age bracket
26-35 also engaged in table banking. 11.76% of the age bracket 18-25 engaged in table banking.
Their turn out is low because probably these youths lacked capital to start their own businesses.
Those between 46-55 and 55-59 turnout was low and the minority was those with 60 years and
above.

4.2.2 Gender

18
The respondents were requested to note their genders and the findings are shown below

35%

male
female

65%

Figure 4.3.2 gender

From the figure above the majority of the respondents were females with a response rate of
64.70% while the males were 35.29%. This clearly shows that majority of the people who
concentrate in table banking groups are females. The percentage of males in table banking is
smaller because most of the males in the society have not yet adopted table banking.

4.2.3 Sector classification

Table 4.2.3 sector classification
Sector frequency Percentage
Hawkers 16 16
Accommodation 16 24
Entertainment 16 8
Cafeterias 16 8
Clothing 15 6
Wholesale and retail 16 11
Daycare facilities 17 10
Art gallery 16 8
Media and information 16 8
technology
Total 144 100

The studies found out that majority of SMEs were the daycare facilities. This is because they
have little amount of capital to start. A quite number of people also engaged in accommodation
mode of business. Hawking was also found to be practical quite often.entertainment, cafeterias,
shops, clothing, wholesale and retail, art gallery and media were not practiced more often.

19
4.2.4 Number of years in business

Table 4.2.4 number of years in business

Years Frequency
Less than 2 years 10
1-5 years 15
5-10 years 40
10-15 years 10
More than 15 years 10

The study showed that majority of the people running SMEs had been into the business for 5-10.
A quite number of them had been in the business for 1-5 years. Few of them had been into the
business for more than 15 years.

4.2.5 Number of table banking groups

20%

55%

25%

less than 5 firms 5-10 firms more than 10 firms

Figure 4.2.5 number of table banking groups

The study showed that indeed there is a quite number of table banking groups around Ruiru
town. Many respondents responded by indicating that their area had more than 10 table banking
groups. A quite a number of them indicated that they had table banking groups ranging between
5-10 and a few had less than 5 table banking groups in their areas.

4.2.6 Lending efficiency of table banking groups

This study evaluated the lending efficiency of table banking groups. Through the study, majority
of the respondents indicated that the lending is high 45%. A quite a number of them indicated

20
that the lending is very high 35%. 15% of the respondents indicated that the lending at table
banking groups is average and only 5% who indicated that the lending is low.

Chart Title
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
very high high average low

Column1
Figure 4.2.6 Lending efficiency
4.3 descriptive statistics
According to Prashanth, A. (2020) descriptive statistics describes data. It is method to collect,
organize, summarize, display and analyze sample data taken from the population. This study
sought to find out the extent of agreement from the respondents on the effects of various
independent variables on the dependent variable.

4.3.1 Sources of capital

The questionnaires administered to the respondents had questions asking them if they had
borrowed from the table banking groups in the last 3 years. A large number of them indicated
that they had borrowed the money 80% while a few of them indicated that they had not 20%.

21
 20% Figure
4.3.1

80%

didn’t borrow borrowed

sources of capital

Those who had borrowed the money they had further been asked to indicate the amount of
money that they had borrowed.60% indicated that they had borrowed 0ver 50000 in 2020 40%
indicated that they had borrowed between 10000-20000 in 2021 and 50% indicated they had
borrowed over 50000 in 2019.

Table 4.3.sources of capital

Year Less than 20000 Between 200000- Over 500000
40000
2021 40% 30% 30%
2020 6% 34% 60%
2019 30% 20% 50%

The results obtained were tested using Pearson’s correlation. They indicated that there was a
positive correlation between table banking finance and the performance of SMEs in Ruiru town.
r= 0.38 p= 0.000

Correlation matrix Performance of Table banking

SMEs finance
Performance of Pearson correlation 1.000
SMEs
Table banking Pearson correlation 0.38 1.000
finance
0.000

Table banking finances were deemed to be great sources of finance for the SMEs as they
smoothen the business operation.

22
4.3.2 Evaluation of interest rates in table banking
The questionnaires administered to the respondents had questions inquiring the rate of interest
offered by table banking groups in their areas. The ranges for the interest rates were 8-10, 10-12,
12-15.
Table 4.3.2 interest rates
Statement Percentage
Interest rate between 8-10 80%
Interest rate between 10-12 12%
Interest rate between 12-15 8%

From the data obtained majority of the respondents had indicated that most table banking usually
lend money at interest rates between 8-10 which is a relatively low interest rate compared to
formal organizations which lend at 12%. Only few of them indicated that the lending is between
10-12 and also a few indicated there are few tables banking groups which lend at interest rate of
between 12-15%.
Therefore, a bivariate correlation was conducted between interest rates and the performance of
SMEs in Ruiru town. The results obtained were positive and hence there was a positive
correlation between table banking interest rates and the performance of SMEs in Ruiru town. r=
0.7, p= 0.000

Correlation matrix Performance of Interest rates

SMEs
Performance of Pearson’s correlation 1.000
SMEs
Interest rates Pearson’s correlation 0.7 1.000
0.000

Hence the table banking group interest rates were relative and many could afford them for
financing.

4.3.3 Evaluation of financial literacy

The research questionnaires also sought to find out the effects of financial literacy on the
performance of SMEs in Ruiru town. the respondents were asked to indicate the extent of their
agreement with each statement by using a scale of 1-5 where 1-not at all, 2-small extent, 3-
moderate, 4-great extent and 5- very great extent

Financial literacy Mean Standard deviation

Financial literacy has led to 3.82 0.471
capital assigned to viable
profitable investments
There is reduced risk as 4.10 0.591
entrepreneurs practice
diversification by assigning
funds to various investment
streams
The enterprise assigns 4.39 0.671

23
 adequate funds to the
working capital
Financially literate 4.34 0.679
entrepreneurs borrow wisely
and make prompt payments
Financially literate 4.31 0.687
entrepreneurs can use their
products appropriately hence
leading to economic
development

Table 4.3.3 financial literacy

The results showed that the respondents agreed to a large extent that table banking financial
literacy enabled them to reduce risks by diversifying funds to various investments streams
(mean=4.10). Also, respondents agreed to a large extent that financial literate entrepreneurs
borrowed wisely and made prompt payments (mean= 4.34). With regard to product knowledge
the respondents agreed to a large extent that literate entrepreneurs could use loans wisely hence
contributing to economic development (4.31). The study findings agreed with Fatoki, A. (2011)
that financially literate entrepreneurs pose little risk to financial institutions because they borrow
wisely and invest wisely.

4.3.4 Evaluation of table banking financial services access

The questionnaires administered had questions asking the respondents how long it takes for them
to get finances once they have applied for them. The questionnaires gave duration of 2 months, 3
months, 4 months, 5 months and 6-12 months.

Table 4.3.4 access to financial services

Duration 2 months 3 months 4 months 5 months 6-12 months
Percentage 80 10 5 5 0

The results obtained showed that table banking groups’ usually take the shortest time possible (2
months) to lend their money to the SMEs in Ruiru town.

A bivariate correlation was conducted between SMEs financial access and their performance.
The results obtained showed that there was a positive correlation between the financial access
and SMEs financial performance.

Correlation matrix Performance of Financial services

SMEs access
Performance of Pearson’s correlation 1.000
SMES
Financial services Pearson’s correlation 0.82 1.000
access
0.000

24
The results obtained showed that with effective finances SMEs can work greatly to better
themselves, Ruiru town economy and the economy of the entire country.

4.4 regression model

A simple regression analysis was conducted to find out the effects of sources of finance, interest
rates, access to financial services and financial literacy on the performance of SMEs in Ruiru
town. The findings were presented below
Model Unstandardized Standardized
coefficients coefficients
Beta Standard beta T Sign
error
Sources of 0.173 0.10 0.151 1.60 0.000
finance
Interest rates 0.270 0.11 0.070 0.530 0.560
Access to 0.182 0.160 0.123 1.420 0.100
finance
Financial 0.682 0.17 0.475 3.680 0.000
literacy

Table 4.4 regression analysis

From the results (standardized coefficient column) financial literacy was the best and significant
predictor if financial performance beta=0.475 p=0.000. The findings of this study tally with those
of Mungiru, P. (2016) who reported that financial literacy had a significant effect on the
performance of SMEs in Mombasa County

Sources of finance was the second predictor of financial performance. a beta of 0.151, p of
0.000.the findings are in line with the world bank report 2011, women entrepreneurship
development project (WEDP) which reported that finance is the key factor needed for any
business to thrive in Kenya as a whole.

Access to finance was the third predictor of financial performance with a beta of 0.123 and p of
0.100. However, it was not a significant predictor since p= 0.100. These findings vary with those
of Itonga, et al (2016) who argued that access to finance by women owned SME’s insignificantly
affect financial performance. However, the results of the current study are centrally to Iraya, O.
(2020) who unveiled that access to finance was a significant predictor of financial performance
of SMEs in Nairobi County.

Finally, interest rates were the least predictor of financial performance of SMEs with a beta of
0.070 and a p of 0.560.the findings confirms that interest rates though significant to the
performance of SME’s, they do not matter very much.

The regression model was fitted using the beta values in the unstandardized co-efficient column
to become

Y=1.400+0.173X1 +0.270X2+0.182X3+0.682X4, where

Y= Financial performance of SME’s

25
X1= sources of capital
X2= interest rates
X3= access to financial services
X4= Financial literacy
From the model one-unit increase in sources of finance will lead to 0.173increase in financial
performance, one-unit increase in interest rates will lead to 0.270 increase in financial
performance, one-unit increase in access to financial services will lead to 0.182 increase in
financial performance and one-unit increase in financial literacy will lead to0.682 increase in
financial performance.
The fitness of the model was evaluated and its R square found to be 20%. This implies that 20%
of the variation in the dependent variable can be explained by the independent variables while
80% of the variation is absorbed by error term

Model R square Standard Error of estimate

1 0.200 0.800

Predictors: constant, sources of finance, interest rates, access to financial services and financial
literacy
Dependent variable: performance of SME’s

The results in the table below indicated that the model was statistically significant
p=0.000meaning that informal financial services affect the performance of SME’s in Ruiru town.

model Sum of df Mean F Sig

squares square
Regression 3.922 3 1.300 5.986 0.000
Residual 18.120 84 0.216
Total 22.042 87

a) Dependent variable: performance of SME’s

b) Predictors: constant, sources of finance, interest rates, access to financial services and
financial literacy.

26
 CHAPTER FIVE
CONCLUSION AND RECOMMENDATIONS

5.0: Introduction
The chapter presents the summary of the findings, conclusions, recommendations and
suggestions for further studies. The purpose of this research was to find out the effects of
informal microcredit finance on the performance of SMEs in Ruiru town.

5.1: summary of findings

5.1.1: sources of finance

From the results obtained majority of the respondents indicated that they had borrowed money
from table banking groups. Very few of them had not borrowed money from the table banking
groups. This showed that small and medium size enterprises in Ruiru town relied on table
banking finances as their sources of capital.
Furthermore, majority of them borrowed the money in large amounts that is over 50000. Those
questionnaires administered enquiring on the number of table banking groups in areas of
operation were returned indicating that there were more than 10 firms by a big percentage of the
respondents. The lending efficiency examined indicated that it was highly efficient for table
banking groups to lend money. This clearly showed that SMEs in Ruiru town strongly relied on
table banking groups as their sources of finance.

5.1.2: interest rates

From the results obtained, majority of the respondents indicated that table banking groups
interest rates were low compared to those of the formal sources. This clearly showed the reason
as to why majority of the respondents preferred borrowing money from table banking firms as
compared to the formal sources. Also, the study revealed out that table banking firms did not
impose difficult conditions such as collateral requirements for loan access.

5.1.3: Access to financial services

On financial services access respondents indicated that, to access loan from table banking firms
did not take a long period of time. Also, respondents agreed that table banking services were very
essential because they helped them accumulate funds for re- investment in entrepreneurial
ventures. Moreover, respondents consented that table banking funds had contributed to business
expansion.

5.1.4: Financial literacy

Through the study findings, respondents agreed that through table banking services, they were
able to Also, help themselves in investing their funds wisely and hence minimizing risk. The
respondents agreed that financially literate entrepreneurs could use their loans wisely hence
contributing to economic growth. From the results of the regression analysis, it was indicated
that financial literacy was the best predictor of the financial performance of SMEs.

27
5.2: conclusions
5.2.1: Sources of capital
The study concluded that informal sources of finance were indeed the best in financing SMEs in
Ruiru town. From the findings, it was revealed that table banking cost was cheaper than that of
the formal sources.

5.2.2: interest rates

Regarding interest rates, the study concluded that table banking firms usually lend at low interest
rates compared to the formal financial institutions. Through table banking, members were able to
easy get sufficient funds for initial and working capital.

5.2.3: access to financial services

Easy access to financial services in table banking groups helped respondents to accumulate funds
for re- investment in entrepreneurial ventures. This has contributed to economic growth in Ruiru
town.

5.2.4: Financial literacy

The study found out that business knowledge helped SMEs in diversifying their investments thus
reducing risks. The study further revealed that financial literate entrepreneurs borrowed money
wisely and paid it promptly.

5.3: Recommendations
From the study findings it was revealed that table banking groups fostered good relationship
among members. Therefore, more SMEs in Ruiru and other parts of Kenya should form table
banking associations so that they benefit from such relationships.
The government of Kenya should put in place a public policy that would create awareness
amongst SMEs in about various financing options so as to enhance monetary accessibility.
The government of Kenya should create an enabling environment for SMEs to conduct their
businesses throughout the country and Kiambu county in particular. The favorable environment
should encompass adequate security, affordable license fees and efficient business registration
processes.

5.4: limitation of the study

Some SMEs refused to respond to the questionnaires administered claiming that they were afraid
of exposing their businesses.

5.5: Suggestion for further study

The research sought to find out the effects of informal microcredit finance on the performance of
SMEs in Ruiru town Kiambu county. Further studies should be conducted on the effects of
saving mobilization on the performance of SMEs in any County in Kenya.

28
References
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modelling 2015:37: 388-400.

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Honghui, Z.(2016) , factors influencing access to finance by SMEs Article number ;13(2016)

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30
APPENDICES
APPENDIX 1
Letter of introduction
Dear Respondent,
I am a student at Zetech University. I am conducting a research study on that the effect of
informal financial services on financial performance of micro and small enterprises
in Ruiru town, Kiambu county Kenya.
You have been selected as one of the respondents to assist in providing the requisite data and
Information for this research study. I kindly request you to spare a few minutes and answer a few
Questions. The information obtained will be used for academic purposes and will be treated with
Utmost confidentiality. Your identity will be anonymous and your name shall not be recorded.
Yours faithfully,
Mutune Annah syombua
Student,
School of business,
Zetech University.

APPPENDIX 2
QUESTIONNAIRES
Please fill in the questionnaires as diligently as you can. Tick in the appropriate box where the
questions requires you to do so. Where the space is provided, please fill in your answer.

Part A:

1. Gender? Female [ ] Male [ ]

2. Age group? 18 to 25[ ] 26 to 35[ ] 36 to 45[ ] 46 to 59[ ] 60 and above

3. What kind of business do you run?

. Tick where appropriate
Hawking
Accommodation
Entertainment
Cafeteria
Clothing
Wholesale and retail
Daycare facilities
Art gallery
Media and information technology

3. The number of years your business has been operating

Less than 2 years [ ]

31
1-5 years [ ]

5-10 years [ ]

10-15 years [ ]

More than 15 years [ ]

4. How many table Banking (Chama/Merry-go-round) groups operating around

this area?

Less than 5 firms [ ]

5-10 firms [ ]
More than 10 firms
[]
5. Any table banking/Chama/Merry-go-round operating at your business location?
Yes [ ]
No [ ]
If yes above, are you:

a) A member of the table banking [ ]

b) Seeking for table banking services despite not being a member [ ]

6. What is your evaluation of the efficiency of the lending services by

table banking/Chama/Merry-go-round?
Very high [ ] High [ ] Average [ ] Low [ ]Very low [ ]

32
Part B: Informal Financial
Services Table banking Credit
Access

7. Part B

Financial literacy: strongly agree or disagree

Table banking has led to profitable investment
The enterprise assigns adequate capital
Financial literature entrepreneurs borrow wisely
Financial literate entrepreneurs have greatly impacted
economic development
Table banking has led to equality in development

8. Part C:
financial performance of SMEs
Strongly agree or disagree
There has been increase in sales
There has been increase in sales over time
There has been increase in annual profitability in SMEs
There has been increase in annual return on asset

9. Part D
What should be done in order to reduce the hindrances to the performance of SMEs

Strongly agree or disagree

Depending on self funding by informal financial services
Strengthening management supervision
Financial literacy to members in the community
Developing policies meant to increase financial
accessibility by SMEs

10. How many employees do you have in your business? Kindly indicate here..........

APPENDIX 3
BUDGET

ITEM QUANTITY
Transport 2000
Note book 300
Pens 200
Printing 1000

32
Meals 1200
Miscellaneous 300
Total 5000

33