Effect of Bank Loan Financing on Financial Performance of Smes in Mombasa County, Kenya

Abstract

Most firms globally are Small and Medium Enterprises (SMEs), which play a significant role in employment creation and global economic development. Despite the role of SMEs in building economic growth in Kenya, they face several challenges. Existing literature indicates that many SMEs fail to expand due to limited financial resources, poor management, outdated technologies, stiff competition from more prominent firms, poor management of account receivables, and unfavourable government policies, among others. Poor access to loans and limited finance are stated as the leading causes limiting the growth of Small and Medium Enterprises. Therefore, this study determined the effect of bank loan financing on the financial performance of SMEs in Mombasa County. The study adopted resource dependency theory. The research design used in the study was descriptive. 109 SMEs in Mombasa County, Kenya, were chosen as the sample size using the stratified sampling technique. The study adopted primary data. To examine the validity and reliability of the questionnaires, pilot research involving 15 SMEs was conducted. The validity of the questionnaire was evaluated using factor analysis, while the reliability was assessed using Cronbach's alpha. With the help of the statistical package for social science (SPSS version 25), descriptive and inferential statistics were used to analyze the data. The hypothesis analysis was tested within the range of 95% level confidence interval and 5% levels of significance.The findings showed that bank loan financing significantly affects SME financial performance indicating that hypothesis H 0 was rejected at the 5% significance. According to the study data, bank loan financing is positively correlated with the financial performance of SMEs in Mombasa County, Kenya. SMEs' financial performance was significantly influenced by bank loan financing. The study recommended that SMEs consider using bank loan financing to improve their performance. The government should implement measures to make it easier for SMEs to access bank loans.