Vision 2030 has emphasized the importance of SMEs in Kenya. Small and Medium Enterprises are noted as a crucial catalyst for achieving vision 2030. The research was done on the effects of Microfinance institutions` on financial performance of small and medium enterprises in Machakos town, where the general objective of the research was to determine whether there was any significant effect of Microfinance institutions` products on the financial performance of small and medium enterprises in Machakos town. Descriptive research design was employed since the researcher collected information through descriptions and this design is also useful for identifying variables and hypothetical construction. Stratified random sampling technique was used, and the sample size was determined as 372, at 95% confidence interval. Primary data was collected through questionnaires issued to the owners and managers of SMEs, while secondary data was collected by use of secondary data collection sheet. Both descriptive and inferential statistics were used to analyze data, while correlation and regression were also used to establish the strength of the relationship between microfinance products and financial performance of small and medium enterprises. 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 bar graphs, pie charts, and table for easy interpretation. The results showed that, the MFIs` products offered (micro savings, micro credit and training) had a strong positive correlation on the financial performance of the SMEs, while there was a weak positive correlation between micro insurance and financial performance of the SMEs. The regression analysis indicated that; micro savings, micro credit and micro insurance had significance effect on the financial performance of SMEs, while training had no significance effect on the financial performance of the SMEs. The study recommended that MFIs have a great responsibility of ensuring the proper use of credit which is an important facility in financial performance of businesses. To achieve this, credits should be SMEs-oriented and not product- oriented. Proper and extensive monitoring activities should be provided to SMEs who are granted the micro credit product. MFIs can research into very profitable business lines and offer credit to SMEs who have the capacity to exploit such business lines, micro insurance is paramount to SMEs in cushioning them in the event of unfavorable occurrence, and should be enhanced properly to the SMEs, and that business and financial training should be provided by MFIs on a regular basis and most cases should be tailored toward the training needs of the SMEs.

Background to the Study 
In most parts of the continent of Africa, people are suffering from severe lack of basic needs, and therefore there is need to talk about the need to reduce poverty. The argument behind the introduction of micro finance institutions was to bring people out of poverty and into better living standards with the focus of being able to meet their basic needs. Because the poor will always be with us, it is more attainable and measurable to enable the poor people access the basic needs like shelter, food and water than to simply make a goal of reducing poverty (Yunus, 2007) 

Like other countries of the world, SMEs in Kenya have the tendency to serve as sources of livelihood to the poor, create employment opportunities, generate income and contribute to economic growth. They have been seen as the means through which accelerated growth and rapid industrialization have been achieved (Koech, 2011). SMEs have been recognized as socio- economic and political development catalysts in both developed and developing economies (Mwangi, 2011). Maalu, et al. (1999) discussed the role of Small and Medium Enterprises in the economy of Kenya and noted the important role it has played and continues to play, as being employment creation and income generation, the study noted other important roles in the economy such as production of goods and services and development of skills. 

The Kenya Government’s commitment to foster the growth of SMEs emerged as one of the key strategies in 1986 report. It was reinforced as a priority in 1989 report, a document that set out the mechanisms for removing constraints to growth of MSE sector. In 1992, the government published the MSE policy report. This report was reviewed in 2002, leading to a new policy framework that provides a balanced focus to MSE development in line with the national goals of fostering growth, employment creation, income generation, poverty reduction and industrialization. The overall goal is to, in partnership with the public, private, and development partners, create 500,000 jobs annually over the next four years (a total of 2 million jobs.) The bulky of these jobs are expected to be created in the MSE sector, 88% from the new enterprises and 12% from the growth of existing enterprises (Kenya Agency for the Development of Enterprises and Technology, 2005). The vision 2030 has also emphasized the importance of SMEs in Kenya. Small and Medium Enterprises are noted as a crucial catalyst for achieving vision 2030. 

In practice, most poverty alleviation efforts by states and major development agencies attempt to facilitate take up of an entrepreneurial culture rather than a reliance on relief efforts. Such an orientation to development is driven arguably by several forces: first is that MSEs inevitably form the bulk of economic activity of the poor since these are the forms of affordable engagement. Second, these enterprises are thought to require minimal training to run successfully; although this is debatable. Third and most important, there is a correlation between the existence of MSEs and certain aspects of economic development, particularly employment generation. 

Lack of startup capital remains one of the leading barriers to entrepreneurial activity among would-be entrepreneurs in developing economies. Access to affordable training is another. The concept of microfinance, and especially when accompanied by the development of business skills, has evolved as an institutionalized response to this challenge. As micro finance institutions are developing, they are becoming overwhelmingly commercialized. Though commercial MFIs have the most financial support, their desire to profit prohibits them from being as effective as nonprofit organizations that only seek to help the poor. 

MFIs in Kenya have a large number of low income households and MSEs in the rural and urban areas of Kenya. MFIs gained prominence in Kenya due to the fact that the formal banking sector since independence up to late 2000 regarded the informal sector as risky and not commercially viable(Kamau,2010). The MFIs developed and offered new, innovative and pro-poor modes of financing low-income households and MSEs based on sound operating principles. Since their inception, MFIs have greatly contributed to social-economic empowerment to the beneficiaries and their dependants (Kamau, 2010). 

Various studies conducted on the SMEs in Kenya reveal the influence of microfinance institutions on various aspects of operation of the SMEs. Kiiru(2007) studied on the impact of microfinance institutions on SMEs in Kenya and found out that they had a great impact on employment creation and poverty alleviation. Cooper(2012); Mwangi (2011); Koech(2011) studied on the financial challenges faced by SMEs and found that inadequacies in access to finance are key obstacles to SMEs growth. 

Chestone and Kuhn (2002) in a study on the impact of microfinance services on women empowerment found that microfinance has led to expansion of freedom of choice of women. Koech (2011) in a survey of the financial constraints hindering growth of SMEs found that the factors affecting growth were capital market, cost, capital access, collateral requirements, capital management and cost of registration. Coopper (2012) studied on the impact of microfinance services on the growth of SMEs in Nairobi and found a strong positive impact. 

As the idea of microfinance continued to spread, so many Microfinance Institutions also began to spring up. According to the Association of Microfinance Institutions in Kenya (AMFI), there are 53 microfinance institutions in Kenya, serving about 6.5 million poor Kenyans. Some are banking institutions, NGOs, Christian Organizations and Non-banking Financial Institutions. They are spread across the whole country. However, with the emergence of many MFIs in Kenya, there seem to be some hope for the poor, who without any extra money, have no possibility to save and accumulate wealth. Poor people aren’t always served by banks either because they are not desirable candidates or because they have no money to put into the bank in the first place. If they are able to take a loan from a local bank, they are mandated to pay an interest rate of around 300%. At a rate this high, they can’t take out much money and are stuck repaying the interest on the loan rather than using the money they make for economic development. Micro credit was created to combat this issue. First time loans are generally very small, no more than ksh.20,000 or ksh.30,000. They are usually short term loans to be paid back in 3 to 6 months at an interest rate that varies by institution types. When smaller loans are repaid in a timely manner, the borrower builds credit which allows them to take out larger loans to expand their business (Ondoro& Omena, 2012). Many micro finance institutions require their members to save very small amounts of money in their bank before they are allowed to take out a loan. This isn’t so they have money to claim as an asset, rather it is to teach them how to save. To improve on the loan repayment by the small and medium enterprises, the microfinance institutions offer training to the businesses to facilitate their operations in term of management skills, record keeping and on marketing. The microfinance institutions in collaboration with insurance companies offer the insurance covers to small and medium enterprises, to cushion 
them in the event of unfavorable occurrence (Robinson, 2003). Based on this background of the products provided by microfinance institutions to small and medium enterprises, there is need to determine their effect on the financial performance of the small and medium enterprises.

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Item Type: Kenyan Topic  |  Size: 56 pages  |  Chapters: 1-5
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