EFFECT OF FINANCIAL SKILLS ON LOAN REPAYMENT: A CASE OF MICRO AND SMALL ENTERPRISES IN ELGEYO MARAKWET COUNTY, KENYA

ABSTRACT 
Lending to Micro and Small Enterprises (MSEs) remains a demanding and challenging activity as there are many factors influencing the performance, growth and sustainability of these ventures. Among them is lack of adequate business skills to manage the business operations effectively. The problem of poor loan repayment by MSEs is increasing. Financial skills are one of the ways which is supposed to assist MSEs to minimize the loan default rate. This study sought to establish the effect of financial skills on loan repayment by Micro and Small Enterprises in Elgeyo Marakwet County, Kenya. The specific objectives of the study were to establish the extent to which business financing skills, book keeping skills and budgeting skills affect loan repayment by Micro and Small Enterprises in Elgeyo Marakwet County. A descriptive survey design was adopted in conducting the study. The sample size was 84 MSE owners drawn from a sampling frame of 520 MSEs operating in Elgeyo Marakwet County. The study used primary data which was collected using self-administered structured questionnaire. Descriptive and inferential statistics were used to analyze data. Pearson Correlation and Multiple Regression were used to test hypothesis. Statistical Packages for Social Sciences (SPSS) was used by the researcher to facilitate the analysis and interpretation of data, and the results obtained was presented by the use of tables for easy interpretation. The result of the study indicated that at 5% significance level, financing skills and budgeting skills have a significant positive effect on loan repayment by Micro and Small Enterprises. However, book keeping skills does not significantly affect loan repayment by Micro and Small Enterprises. The study recommends that financial providers should train their clients on the importance and impact of negotiating with them for better loan repayment terms and enlighten them on the preparation of various types of budgets and how to follow up and compare the actual and the budgeted figures and determine the variances and also teach them to investigate the various causes of these variances.

CHAPTER ONE 
INTRODUCTION 
Background of the Study 
Financial skills have attracted expanding consideration in both the developed and developing countries in recent years with the changing global business arena. Financial skills, financial knowledge, and financial education often have been used interchangeably both in the academic literature and in the popular media (Huston, 2010). Financial skills refer to the ability to make informed judgments and effective decisions regarding the use and management of money (Gavigan, 2010). According to Remund (2010), financial skills refers to the degree to which one understands key financial concepts and possesses the ability and confidence to manage personal finances through appropriate, short-term decision-making and sound, long-range financial planning. 

According to Greenspan (2002), financial skills helps to inculcate individuals with the financial knowledge necessary to prepare household budgets, set up savings plans, and develop strategic investment decisions. It helps in empowering and imparting knowledge to consumers so that they are knowledgeable about finance in a way that is relevant to their lives and enables them to use this knowledge to analyze products and make informed decisions. According to Hilgert, Hogarth, & Beverly (2003), financial knowledge is directly correlated with self-beneficial financial behavior. Financial skills aid the decision making processes such as payment of bills on time, proper debt management which enhances the credit worthiness of potential borrowers to improve their livelihoods, enhance economic growth, sound financial systems, and reduction of poverty. It also gives a greater control of one’s financial future, more effective utilization of financial products and services, and reduced susceptibility to overzealous retailers or fraudulent schemes. However, Skeptics such as Lyons, Palmer, Jayaratne, & Scherpf (2006) have questioned the effectiveness of financial education in improving financial skills. In the study by Van Rooij, Lusardi, and Alessie (2007), on the Dutch adults, established that households with low levels of financial skills are more likely to base their behavior on financial advice from friends and are less likely to invest in stocks. 

MSEs are confronted with complex financial decisions to turn around the fortunes of their businesses. They make financial decisions such as savings, investment and retirement planning. Financial skills therefore become important in business financing decisions and subsequent firm performance. Indeed, recent empirical studies suggest low levels of financial skills in both developed and developing economies and few people are able to understand and apply basic financial concepts (Lusardi & Mitchell, 2007b; Lusardi & Tufano, 2009; Cole, Sampson & Zia, 2009). This situation poses a challenge for micro and small firms to enhance their performance due to the increased attention to financial skills in the recent years by a wide range of major financial institutions, government agencies and other organizations. 

Smaller scale business people frequently need adequate financial skills to make complex monetary choices they confront (Drexler, Fischer, & Schoar, 2010). This is tragic, since as indicated by Oseifuah (2010) financial proficiency among new business people contributes significantly to their enterprise abilities. Business people needing to begin new ventures need to be sure with their financial skills, and in addition the management of the new ventures (Kotzè & Smit, 2008). On the off chance that people are unskilled concerning their own accounts, their monetary administration of new pursuits will likewise be missing and will prompt diminished new pursuit creation and conceivable disappointments of SMEs (Kotzè & Smit, 2008). If people are illiterate in respect to their personal finances, their financial management of their business enterprises will also be lacking and thus reduction in new venture creation and possible failures of SMEs (Kotzè & Smit, 2008). It can therefore be seen that micro, small and medium enterprises are greatly affected by lack of financial skills and such deficiency undermines the chance of their business growth and survival. 

There are evidences in Kenya that the SME segment assumes a crucial part in the Kenyan economy. According to Maina, (2006) SMEs in Kenya contribute a great deal in employment, whereby around 5.1 million individuals are occupied with the area, representing 74% of the aggregate national job, contribute around 88% of the aggregate employment creation, and contribute around 24.5% to the Gross domestic product. Specifically, SMEs provide the necessary foundations for sustained growth and rising income in the emerging and developed economies. Due to their contributions to the economy, it necessitates the advancement of SMEs as they make large scale, low cost business opportunities, utilize locally available resources and technologies, mobilize small and scattered private savings, enhance entrepreneurship, and amend the regional imbalance in trade and development that exists in many developing countries. 

This important role of the MSEs can be harnessed and sustained through properly inculcated financial management skills of the business owners and managers. Brown et al (2006) agrees to the general principle of good business through financial skills. Good business practices lead to competitiveness in the globalized community (Borodich et al., 2010). Lack of financial skills leads to shut down of the business (Niederauer, 2010). Therefore, a good financial foundation of the MSEs owners/managers is also a significant measure of the success and growth of the enterprises in an ever competitive business environment. Regardless of the indicated advantages of MSEs in Kenya, these enterprises experience the ill effects of a high mortality rate. As indicated by Kenya National Bureau of Statistics, (2007), 60% of new MSEs don't survive the initial five years from inception. This is because of absence of sufficient business skills (Wanjohi, 2011), bring down their strength to chance (CMA, 2010), Lack of planning, improper financing and poor management (Longenecker, et al., 2006), and Absence of credit (Oketch, 2000). 

Drexler et al. (2010) points out that individuals as well as entrepreneurs are needed to make hard financial choices in many occasions in life, whether in their own individual accounts or as entrepreneurs. Cole and Fernando (2008) declare that there is relationship between financial skills, the ability to make good financial decisions and household well-being and business survival. A review of the literature on financial skills in Kenya reveals that few studies have empirically investigated the financial skills of the MSEs in Kenya. The main objective of the current study is to examine the effect of financial skills on loan repayment by Micro and small enterprises in Elgeyo Marakwet County.

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Item Type: Kenyan Project Material  |  Attribute: 76 pages  |  Chapters: 1-5
Format: MS Word  |  Price: KSh900  |  Delivery: Within 30Mins.
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