Effect of Microfinance Lending on the Financial Performance of Businesses: A Case Study of Small and Medium Enterprises in Nakuru East Sub-County, Kenya

This Research project was set to provide a critical appraisal of the debate on the effects of microfinance lending on the financial performance of small and medium enterprises. While microfinance has developed some innovative management and business strategies, the effects of microfinance lending on the financial performance of small and medium enterprises remain in doubt. Access to affordable microcredit and business development services such as business training are essential for growth and development of micro and small enterprises. However, entrepreneurs in the SME industry have come to develop great reliance on microfinance lending as a tool for business growth and profitability. Against this background, the number and the spread of MFIs in Kenya continues to grow rapidly. However, their wide presence does not correspond with the extent of reduction in the major challenges that affect the financial performance of SMEs in the country. A study of this nature is very important as it would provide the government with the needed information in designing a policy frame work to enhance the development of the SME industry. It would also enlighten the public on the role MFIs play in the SMEs sector. This research was cross sectional and employed a survey research design. The target population under study was 8, 139 SMEs within Nakuru East Sub County. Stratified simple random sampling was used to select a sample size of 99 SMEs from the target population. The research employed the use of questionnaires as instruments of data collection. Data collected from the questionnaire was analyzed, summarized and interpreted accordingly with the aid of descriptive as well as inferential statistical techniques. The study confirms the positive contribution of MFIs loans towards promoting SMEs financial stability, operational efficiency and profitability. It was recommended that MFI interest rates should be standardized. Further study should be conducted on how best SMEs can make use of equity finances such as Venture Capital, Business Angels and other alternative sources of finance available to SMEs in Other Counties.