Effects of Informal Finance on the Performance of Small and Medium Enterprises in Kiambu County

Abstract- Formal lending institutions including Commercial banks fail to satisfy financial needs of smallholders, mainly due to stringent lending terms and conditions. The general objective of this study was to assess the effect of informal finance on the performance of SMEs in Kiambu County. The specific objectives were; to establish the effect of financial Self-help groups on the performance of SMEs; to examine the effect of family and friends finance on the performance of SMEs; to determine the effect of trade credit on the performance of SMEs and lastly to establish the effect of Shylock financing on the performance of SMEs. The study employed descriptive research design. The population of the study was 7384 SMEs. A sample size of 95 was selected using random sampling. This study used primary data which was collected through use of a questionnaire. SPSS was used to produce frequencies, descriptive and inferential statistics which was used to derive conclusions and generalizations regarding the population. In particular, correlation and multiple regression analysis were conducted. The study found out that self-help group finance, family and friends finance; trade credit finance and shylock finance sources influence the performance of SMEs. Self-help group finance, family and friends finance; trade credit finance has a positive influence on the performance of SMEs while shylock finance sources have a negative influence on the performance of SMEs. The study recommended that SMEs need to put more emphasis on informal form of finance (self-help group finance, family and friends finance and trade credit finance). Shylock finance sources need to be avoided by SMEs if possible since it charges high interests and it terms and conditions are more stringen