Financial management is a critical component of efficient working capital management of both small and large firms. MSEs business remain the most dynamic force and agent of economic growth and development of a nation. However, MSEs sector have the problems of accessing funds for their working capital because they do not have securities. Despite the provision of fund by MFIs, many MSEs businesses still fail because they neglect the principal of efficient working capital management. This study sought to establish the effects of MFI’s lending on working capital management of micro and small businesses in Narok Town. The specific objectives of the study were to establish the effects of Microfinance institution lending on the cash management, inventory management, receivables management and payables management of the MSEs. The findings from the study will aid MSEs in making efficient use of loans advance to them by MFIs and Government will use for policy formulation. The study used descriptive survey design and the target population comprised of 240 MSE’s. Purposive sampling technique was used to select a sample of 71 MSE’s from the population. Primary data were collected using face to face interviews through the aid of structured questionnaire. Descriptive statistics which includes percentages, frequencies, means, standard deviation and inferential statistics namely; Pearson product moment correlation and multiple regressions were used to analyze the data. Test of significance was tested at α=0.1. The Statistical Package for Social Science (SPSS) aided the data analysis. In general the study established that MFI’s lending (cost of lending, loan period and loan size) positively effect on working capital management (cash management, inventory management, receivables management and payable management) of MSEs in Narok Town. In conclusion, it is evident that adoption of MFI’s lending is likely to significantly improve the working capital management of MSEs in Narok Town.

1.1 Background of the Study 
Microfinance traces its origins to 1976, when Yunus started a small microfinance scheme as an experiment in the rural areas of Bangladesh. The experiment evolved from its initial success into the Grameen Bank, the world’s first microfinance institution, which popularized group lending, in which loans were issued to individual members of small, homogeneous groups, who collectively guarantee loans issued to their members. All members were barred from further access to credit in the case of default by one group member, providing strong incentives for the group to ensure repayment by each individual borrower. This microfinance model eventually spread around the world, especially in third world countries (Roy, 2009). 

Microfinance has now turned into an industry according to Robinson (2001). One of the key roles that microfinance plays in development is the bringing of access to financial services to the poor, to those who are neglected by the formal banking sector. Mainstream banks target clients that have collateral. The poor do not have assets to act as collateral, therefore they are ignored by the formal financial sector. These banks tend to be found in urban centers while the majority of the poor in the developing world live in rural areas, where financial services are not provided. Atieno (2000) on factors affecting the performance of small business indicated that once a business is established, expansion is hampered by lack of funds and credit. Bank credit is simply not available for small scale operation because they usually don’t have securities and administration cost of small loans is prohibitive. Therefore, if MFIs are to fill this void they must reach the rural and semi-urban poor. However, according to most studies, microfinance is only reaching a small fraction of the estimated demand of the poor for financial services (Littlefield and Rosenberg, 2004). 

Despite MSEs being the main driving forces of economic growth and job creation. MSEs in most countries have challenges in accessing finance, difficulties in exploiting the technology, insufficient managerial capabilities, low productivity and regulatory burdens in their business environment, (Cabbar, 2000). Provision of financial services is an important means for mobilizing resources for more productive use. The extent to which small enterprises could access fund is the extents to which small firms can save and accumulate own capital for further investment (Lawson, 2007). 

Goldberg and white (1999) reveals that MFIs across developing countries affects small business lending positively in urban markets and negatively in rural markets. This kind of borrowing is necessary for business performance and improving MSEs development if it fully accessible at fair cost of money. MSEs cannot function without an appropriate finance because of the nature of their operations and management. The importance of financial services to MSEs cannot be overemphasized. MSEs particularly those in developing countries need a range of enabling and sustainable financial services in order to enable them effectively exploit abundant resources in their areas and fulfill their productive potential (Nwanna, 2000). 

Lending to MSEs entails higher administration and transaction cost owing to inadequacy of records and information relating to their operations. Some MSEs have difficulty in raising short-terms funds for working capital as well as long-term funds for business investment. Enterprises can take in trade credits in addition to institution loans in short term finances which later hinder their performance in the short period (Ebong, 2007). According to Wanja 2009, access to credit facilities is the main constraint for MSEs and limited access to capital to meet their operating working capital and long term investments. Therefore, this makes it difficult for them to achieve their performance in terms of liquidity and profitability hence leading to loss of business opportunities, and failure to grow in terms of size and financial resources (Badagawa, 2008) 

Efficient working capital management is important for the success and survival of small business which needs to be embrace to enhance performance and contribution to the economy, (Padachi, 2006). Working capital starvation is generally credited as the major course of small business failure in many developed and developing countries. The success of a firm depends ultimately, on its ability to generate cash receipts in excess of disbursement. Efficient management of working capital and more recently good credit management practice is pivotal to the health and performance of the small firm sector, (Peel and Wilson, 1996). 

Like in many countries the world over, Kenya has been a leader in developing a network of microfinance institutions that extend loans to small farms, businesses, and entrepreneurs. The Association of Microfinance Institutions (AMFI) was formed to serve the interests of these institutions by creating an enabling environment for microfinance, sharing best practices, and creating business connections between various regional firms. Narok town is a fast growing town that is a home to several Micro Finance Institutions namely Kadet, KWFT, Faulu Kenya, Puani Fosa, Nasaruni Sacco, and Narok Teachers Fosa Account. The target clientele for most MFI’s in Narok Town can broadly be classified as micro and small-scale enterprises made up of women/men in the informal sector; unemployed youth; subsistence and small- scale producers in the agricultural sector. This study seeks to find out the effect of MFIs lending on MSEs working capital efficiency in Narok Town.

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Item Type: Kenyan Topic  |  Size: 64 pages  |  Chapters: 1-5
Format: MS Word  |  Delivery: Within 30Mins.


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