CHAPTER ONE

INTRODUCTION

1.1Background of the study

According to Grasmuck (2000), a small enterprise is a type of small business,

often registered, having five or fewer employees and requiring seed capital of not more
than $35,000. The term is often used to refer to a business with a single owner-operator,
and having up to 20 employees. The European Union defines micro-enterprises as those
that meet 2 of the following 3 criteria of fewer than 10 employees, balance sheet total
below EUR 2 million and turnover below EUR 2 million. The term small enterprise
connotes different entities and sectors depending on the country. In developed countries,
microenterprises comprise the smallest end (by size) of the small business sector,
whereas in developing countries, microenterprises comprise the vast majority of the small
business sector result of the relative lack of formal sector jobs available for the poor.
These micro entrepreneurs operate microenterprises not by choice, but out of necessity
(Munoz, 2010).

Micro and Small Enterprises (MSE's) are important for raising the economic
efficiency of a country. They are breeding grounds for entrepreneurship, innovations and
inventions hence a reservoir for employment. Sustainable jobs, creates income which in
turn reduces the level of poverty, (Bokea, 2005). The challenges faced by SMEs in Kenya
are; inadequate knowledge and skills, most managers of SMEs in Kenya lack adequate
education, they are not well informed in terms of managerial knowledge and skills. Lack
of managerial training, More often than not small and medium enterprises establish
managerial strategies through trial and error mechanism. Their managerial techniques
only focus on operational plans rather than strategic plans of their organization. In
addition, these managerial techniques are not standard with those of other global
managers. Consequently, managers of small and medium enterprises are not able to
adequately handle challenges facing enterprises. Rapid technology changes, Technology
change poses a big challenge to the growth of small and medium enterprises. Most of

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these enterprises are not able to adopt new technology due to its high initial and
installation costs. In addition, this new technology, more often than not, does not suit the
needs of these enterprises. For example, a small enterprise located in a rural area cannot
reap the full benefits of internet connection due to lack of rural electrification. Adopting
to new technology has also been hampered by the slow rate of economic growth in
Kenya. Lack of adequate finance, many small and medium enterprises do not have access
to finance and credit especially from financial institutions such as commercial banks.
This is because of the lending conditions given to them such as collateral for the loan.
These enterprises may not be able to provide collateral such as immovable assets due to
their small asset base. Consequently, most of these enterprises resort to borrowing from
friends and relatives. However, this type of finance is inadequate to cater for all the needs
of the medium and small enterprises. As a result, lack of credit forces the management to
use cheap and local technology which most times is inappropriate. And new laws and
regulations, Everyday, the government and other stakeholders continue to introduce new
regulations for industries and enterprises in Kenya. New laws are being enacted in a bid
to regulate the operations of enterprises. These laws are also meant to spearhead
sustainable economic growth in the country. However, such regulations sometimes pose
tremendous threat to the growth of small and medium enterprises in Kenya. This is
because some of these laws are too tough. (Viona, 2012).

Several factors are identified as limiting market access to SMEs in Kenya and
include; lack of market information, poor access to physical markets, market premises
and spaces, poor linkages with export markets, weak advertising and promotional
capacities, poor quality products and services that restrict entry in some markets, limited
market research and analysis, narrow product diversity, weak capacity for e-commerce
and imperfect markets. Stiff competition due to globalization, high transaction costs due
to inefficiency, distance to markets, poor systems and concentration of activities in a few
sectors making them vulnerable to risks and competition (GOK, 2005, KIPPRA, 2006).
Many SMEs lack the necessary information on market opportunities limiting them to
narrow local markets; on customers and market demand due to lack of market research
leading to saturated markets with goods whose demand is low. Many SMEs produce
goods and services without considering the market and customer needs and consequently

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they are not able to penetrate the market. Lack of physical market structures to sell is
another challenge for Kenyan SMEs resulting in illegal hawking of their goods at the
road side and in town streets leading to running battles with the authorities. Transaction
costs remain a major problem affecting market access in SMEs. According to the
Transactional cost theory, reduced transactional costs are important in marketing and in
enhancing market access. The high costs arise due to market inefficiencies, poor
infrastructure and information asymmetry. Stiff competition due to globalization and
liberalization bar SMEs from accessing most of the local and international markets.
SMEs are not able to compete effectively due to poor quality products, skewed customer
preference, unconducive pricing and limited product diversity. Most SMEs in Kenya
exhibit weak linkages with customers contrary to the relationship marketing theory that
argues that good customer’s relationships are essential for successful marketing.
(KIPPRA, 2006).

In view of the above challenges, this research is sought to investigate the

influence of SMEs if when looked into and implemented accordingly on improvement of
service delivery in the CBD Bungoma county.

1.2 Statement of Problem

SMES are the major agents of economic growth and employment, and they lead
to increased participation of indigenous people in the economy in the economy, use
mainly local resources, promote the creation and use of local technologies and provide
skills training at low cost to society (ILO 1989). In kenya over 60% of small businesses are
estimated to fail each year (Kenya National Bureau of statistics, 2007). Mead (1998) observes
that the Heath of the economy as a whole has strong relationship with the health and nature of
SMEs. However, despite government efforts in Kenya to promote SMEs service delivery, not
much progress seems to have been achieved, judging by the performance of the informal sector.
When the state of the macro economy is less favorable, by contrast, the opportunities for
profitable employment expansion in SMEs are limited. Not many small enterprises grow into
medium-scale and large scale enterprises to significantly contribute to employment creation and
economic growth. This study sought to investigate the factors influencing the performance of
SMEs that may have on service delivery improvement in the Central Business District (CBD)
Bungoma County.

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1.3 Purpose of the study
The purpose of the study was to investigate the factors influencing the
performance of Small and Medium Enterprises in the Central Business District Bungoma
County.

1.4 Objectives of the study

The objectives of the study were:
1. To determine how entrepreneur characteristics influence the performance of
Small and Medium Enterprises in the Central Business District Bungoma County.

2. To establish how business characteristics influence the performance of Small and

Medium Enterprises in the Central Business District Bungoma County.

3. To determine how the adoption of Information Communication Technology

influence the performance of Small and Medium Enterprises in the Central
Business District Bungoma County.

4. To assess how the availability of finance influence the performance of Small

Medium Enterprises in the Central Business District Bungoma County.

1.5 Research Questions

1. In what ways do entrepreneur characteristics influence the performance of Small
and Medium Enterprises in the CBD Bungoma County?

2. How do business characteristics influence the performance of Small and Medium

Enterprises in the CBD Bungoma County?

3. How does the adoption of Information Communication Technology influence the

performance of Small and Medium Enterprises in the CBD Bungoma County?

4. To what extent does the availability of finance influence the performance of Small
and Medium Enterprises in the CBD Bungoma County?

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1.6 Assumptions of the study

Assumptions are conditions or events that the researcher takes for granted although
they might affect the outcome of the research. These could be beliefs or ideas that one
holds to be true without any evidence and therefore, the study assumed that:
The selected sample represented the population of interest who cooperated and adhered to
the rules stipulated on the questionnaire forms and interview schedule that gave optimum
time to obtain responses from the research tools.

1.7 Significance of the study

The SME sector plays a critical role in the social-economic development of
Kenya and as such, the government expects it to deliver on its several development
strategies in terms of employment creation, poverty eradication and industrialization.
This requires that the sector remains competitive to deliver. It is imperative that the
various constraints to the sector’s competitiveness especially market access are
effectively addressed if the sector is to remain relevant to economic development as
envisioned. ICT is taking centre stage in the growth and competitiveness of all sectors
globally and there is need to apply ICT to improve SMEs competitiveness and finance
related challenges. Financial and banking that advance credit facilities to SMEs will be in
a better position to review their lending policies and adjust them to the needs of the SMEs
where possible. By exploring the opportunities offered by ICT to improve market access
in SMEs, this study provides the necessary knowledge required for improving the
sector’s competitiveness to enable it deliver to the country’s expectations. The knowledge
is important for policy makers, SMEs as well as researchers/ academicians. Research has
shown that small and medium enterprises in Kenya either collapsed prematurely or grew
at a very low rate due to finance related challenges. A study that looks into the influence
of Small and Medium Enterprises on the improvement of service delivery was key to
improving business at individual/proprietor level. On completion of this document, the
study may be used as a point of reference by future researchers who have an interest in
the line of SMEs. Any person reading this document gains the present status on
performance of Small and Medium Enterprises in Bungoma County. Because both the
central government and the County government depend on Small and Medium

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Enterprises to spur economic growth and accelerate economic development, an
understanding the factors influencing performance of Small and Medium Enterprises in
the Central Business District Bungoma County was important.

1.8 Limitations of the study

Due to the fear of not keeping the information confidential the researcher had
difficulties in accessing the respondents due to the rules and regulations of their SMEs.
The perception of the respondents also made the research reliability and validity to be
jeopardized because of their attitude towards researchers from outside. The data
collection process faced a certain level of resistance, suspicion and hostility especially
from respondents who were skeptical about the motive behind the study. Respondents’
skepticism divulging vital information due to suspicion was expected to be an
obstacle but the researcher reassured the respondents that the research was purely
academic and was confidential which mitigated the problem.

1.9 Delimitation of the study

The researcher administered questionnaires that were collected after sometime.
Respondents were not required to indicate their names on the questionnaires. The
researcher presented a letter from her learning institution to prove that she was actually a
student collecting data for research. The researcher also endeavored to lay the foundation
from the onset of the project that the researcher was just a student doing research for the
purpose of completion of a course and little research had been done on factors
influencing the performance of SMEs in the CBD Bungoma County.

1.10 Definition of terms

Small and Medium enterprises: Enterprises, business organizations employing between
one and fifty workers. They include all the self-employment endeavors and
dynamic enterprises operating a vast array of activities in both rural and urban
areas
Entrepreneur characteristics: Involving the observable features of the business owner
such as gender, age, education level, initiative among others

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Business characteristics: Involving the observable features of business such as size,
number of staff, nature of business, and location among others
Information Communication Technology: It is a term that stresses the role of unified
communications and the integration of telecommunications, computers as well
as necessary software, middleware, storage and audiovisual systems, which
enables users to access, store, transmit and manipulate information
Finance: Involving the sources of money to start, run and expand the business and the
ease of accessing money from the sources.

1.11 Organization of the study

This study investigated the factors influencing performance of Small and Medium
Enterprises in the Central Business District Bungoma County. Chapter one presents
introduction of the study, the statement of the problem, the purpose of the study, the
research objectives, and research questions, significance of the study, limitation and
Delimitation of the study and definition of terms.

Chapter two described literature review which helped the researcher to understand
the existing body of knowledge well and adopted theory that suit the study. It includes
overview of small and medium enterprises in Kenya, Improvement of service delivery,
The theory of Resource based of competitive advantage, business characteristics,
entrepreneur characteristics, Integration of ICT, availability of finance by SMEs,
conceptual framework summary and knowledge gap.

Chapter three discussed the research methodology. It includes research design, the
target population, sample size and sampling procedures, data collection instruments, data
collection procedure, validity of instruments, data analysis techniques, ethical
considerations and operational definition of variables.

Chapter four discussed the research findings. It includes introduction, presentation

and interpretation of results as per specific objectives.

Chapter five presented summary of the research findings, conclusion,

recommendations and suggestion for future research.

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 CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction
This chapter looks into previous works that have been done relating to various
characteristics influencing performance of Small and Medium Enterprises, they include;
Entrepreneur characteristics such as demographic characteristics, personal traits, formal
education, entrepreneurial orientation and readiness, and previous experience. Business
characteristics such as Size of the enterprise form of business, business activity, length of
time. The use of Information Communication Technology (ICT) such as computers,
networking and IT training in market identification and access, promotion of goods and
services and Accounting Information Systems (AIS). There is also the issue of finance
which includes the sources of finance, access to finance and capital requirements,
summary of literature review, knowledge gap, theoretical frame work and
conceptual framework

2.2 Overview of Small and Medium Enterprise

According to Wikipedia the free encyclopedia, SMEs are businesses whose personnel
numbers fall below certain limits. The abbreviation "SME" is used in the European
Union and by international organizations such as the World Bank, the United Nations and
the World Trade Organization (WTO). Small enterprises outnumber large companies by a
wide margin and also employ many more people. SMEs are also said to be responsible
for driving innovation and competition in many economic sectors.
A business enterprise that employs people between 1-9, 10-49, and 50-99 is
considered as micro, small, and medium; respectively. The sector is characterized by
small scale level of activity, self employment, with high proportion of family workers
and apprentices; little capital and equipment; labour intensive technologies; low skills
and low level of access to organized markets. It has evolved rapidly in terms of activities.
Participation in informal sector has not only been associated with junior public and
private sector employees, but also with corporate executives. Hence, the sector has
developed as a means of extension of formal businesses (Rosenberg, 2004).

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 In Europe, there are three broad parameters which define SMEs; Micro enterprises
have up to 10 employees, small enterprises have up to 50 employees and medium sized
enterprises have up to 250 employees (European Commission, 2003). The European
definition of SME follows: “The category of micro, small and medium-sized enterprises
which employ fewer than 250 persons and which have an annual turnover not exceeding
50 million euro, and/or annual balance sheet total not exceeding 43 million euro” (2003,
Enterprise and Industry Publications: The new SME definition, user guide and model
declaration).
The SMEs sector in Poland generates almost 50% of the GDP, and out of that, for
instance, in 2011 micro companies generated 29.6%, small companies 7.7%, and medium
companies 10.4% (big companies 24.0%; other entities 16.5%, and revenues from
customs duties and taxes generated 11.9%). In 2011 out of the total of 1,784,603 entities
operating in Poland, merely 3,189 were classified as "large", so 1,781,414 were micro,
small or medium. Companies of the SMEs sector employed 6.3 million people out of the
total of 9.0 million of labour employed in the private sector. In Poland in 2011 was 36.2
SMEs per 1,000 of inhabitants. (D.Walzcak, G.Voss). Within the United States (US)
economy, SMEs account for the vast majority of firms and approximately half of the
gross domestic product (GDP) generated by non agricultural sectors(2010,United States
International Commission).
In Ghana the most commonly used criterion in describing SMEs is based on the
number of employees (2002, Kayanula and Quartey). In its Industrial statistics, the Ghana
statistical service (GSS) considers firms with fewer than 10 employees as small scale, and
their counterparts with more than 10 employees as medium and large sized enterprises.
SMEs represent 92% of business, contributing 70% of Ghana’s GDP and over 80%
employment. The SMEs can be categorized into urban and rural, Urban are categorized
into “organized” and “unorganized” enterprises. The organized ones have paid employees
with a registered office, whereas the unorganized category is mainly made up of artisans
who work in open spaces, temporary wooden structures or at home, and employ few or in
some cases no salaried workers (2002, Kayanula and Quartey). Majority of SMEs in
Ghana are female-owned, mostly based at home, being sole-proprietorship business the

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lack the necessary collateral to qualify for loans. (1994, Aryeetey et al 2006, Abor and
Biekpe).
According to the International Research Journal of Finance and Economics-issue 39
of 2010 “ The mostly widely used framework in South Africa is the definition of National
Small Business Act 102 of 1996, which defines five categories of businesses. The
definition uses the number of employees per enterprise, size category combined with the
annual turnover, the gross assets excluding fixed property. The definitions for various
enterprises are: Survivalist enterprise; income generated is less than the minimum income
standard; this category is considered pre-entrepreneurial and includes hawkers, vendors
and subsistence farmers. Micro enterprise; the turnover is less than the VAT registration
limit, they lack the formality in terms of registration examples include spaza shops,
minibus taxis they employ less than 5 people. Very small enterprises; they employ fewer
than 10 paid employees except in mining, electricity, manufacturing and construction
sectors, in which the figure is 20 employees. Small enterprises; upper limit is 50
employees; they are more established than very small enterprises and exhibit more
complex business practices. Medium enterprises; maximum number of employees is 100
or 200 for the mining, electricity, manufacturing and construction sectors. They are
characterized by decentralization of power to an additional management layer.” In South
Africa SMEs account for about 91% of formal businesses, contributing between 52% and
57% of the GDP and providing about 61% employment.(1998, CSS; 1999, Ntsika; 2000,
Gumede; 2002,Berry et al.)
The Government of Uganda classifies SMEs as businesses employing between 5and
50 people as small scale, and those employing between 51 and 500 people as medium
scale.(2003, Kasekende and Opondo; 2001,Schiffer and wedder; 2003,Uganda Bureau of
Statistics; 2008 Okello-Obura et al.) In Uganda the economy is supported mainly by
MSMEs contributing about 90% of the private sector. SMEs are the prime source of jobs
and play a crucial role in income generation. SMEs by sheer limitation of their size and
resources are highly dependent on the Business Development Services (BDS) to provide
capacity building and support business growth in areas such as training, advice,
information, business planning, marketing technology, communications and other
services. BDS complement credit and microfinance program, and assist small enterprises

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with growth potential to become medium sized. SMEs faces challenges in Uganda which
include Limited access to finance, lack of entrepreneurial skills, management skills,
marketing and financial planning.(2008, Uganda Investment Authority, small and
medium enterprises business guide).
In Rwanda SMEs comprise 98% of all the establishments; micro establishments are
those employing 3 people and account for 92.6% of all establishments, while
establishments with 1 worker account for 72% of all establishments. Though the sector is
largely un-enumerated estimates show that SMEs account for roughly 60% of the
workforce and 25% of industrial output in value terms in Rwanda.(2000, Neureldin).
Rwanda is among the poorest countries and this attributed to rapid population of
8,162,715 people, and it’s landlocked. SMEs contribute 20.5% to the GDP. No institution
is fully dedicated to SMEs. Currently the key players are MINICOM (Minister for
Commerce and Industry), RDB (Rwanda Development Board), (REIC) Rwanda
Investment Company, and (PSF) Private Sector Federation. MINICOM remains in charge
of policy oversight, (2010, MINICOM, SME policy).

In Kenya SMEs are categorized based on the number of employees and the
company’s annual turnover. (2012, MSMES Act); Micro enterprises have less than 10
workers, have an annual turnover of less than ksh.500,000 and capital formation of less
than ksh.5million for services or less than 10million for enterprises doing manufacturing.
Small enterprises employ 10 to 50 workers with an annual turnover of between ksh.500,
000 and 5 million. Capital formation is between ksh.5million and ksh.20million for
services or between ksh.5million and 50million for enterprises doing manufacturing.
Medium enterprises employ between 50 and 99 workers.
Informal sector accounts for more than 74% of the total persons engaged in employment
per year and contributing more than 18.4% of the country’s GDP. According to Amyx
(2005), one of the most significant challenges is the negative perception towards SMEs;
potential clients perceive small businesses as lacking the ability to provide quality
services and are unable to satisfy more than one critical project simultaneously. Often
large companies are selected and given business for their clout in the industry and name
recognition alone.

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Lack of planning, improper financing and poor management have been posted as the
main causes of failure of small entrepreneurs, (2006, Longenecker et al.). Lack of credit
has also been identified as one of the most serious constraints facing SMEs and hindering
their development. (2000, Oketch; 1992, Tomecko and Dondo; 1991, Kiiru)

2.3 Performance of Small and Medium Enterprises

The economic pillar aims at providing prosperity to all Kenyans through an
economic development programme aimed at achieving an average Gross Domestic
Product (GDP) growth rate of 10 % per annum the next 25 years (GoK, 2009). The social
pillar seeks to build a just and cohesive society with social equity. The political pillar
aims at realizing a democratic political system founded on issue-based politics that
respects the rule of law, and protects the rights and freedoms of every individual in the
Kenyan society (NESC, 2009). There is a huge expectation that devolution will result
into more equitable development, with more marginalized areas greatly benefiting from
the transfer of resources. There are disparities in access to services such as water and
sanitation, roads, education and health services across counties. However, whether
expectations about improved service delivery will translate into reality greatly depends
on whether counties will have adequate resources and capacity to meet the much-needed
services. Governments have historically financed development projects through
budgetary allocations. However, as the demand and scale of projects grow and access to
resources becomes limited, the public sector has increasingly looked to the private sector
to provide financial resources, innovation and technical expertise.
The Micro and Small Enterprise (MSE) sector in Kenya is an important and fast
growing sector employing 42 per cent of the working population, and accounting for 75
per cent of all modern establishments in Kenya as at 2011. MSEs dominate in majority of
the sectors, including wholesale and retail trade, restaurants, hotels, community and
social services, insurance, real estate, business services, manufacturing, agriculture,
transport and communication and construction. Interestingly, while the number of
employees in MSEs increased between 2010 and 2011, there was a decline with respect
to employees in medium and large enterprises. The manufacturing value added
contribution made by MSEs also increased, though the contribution is still low,

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accounting for 14.2 per cent yet two thirds (67%) of manufacturing firms are MSEs. The
statistics on tax performance reveal that Pay as You Earn (PAYE) and income tax
payments have been increasing over the years. Value Added Tax (VAT) contributions;
however, experienced a decline in 2008/09 and 2010/11, which is attributable to the
introduction of Turnover tax (TOT), which has been increasing steadily since its
implementation.
Informality within the sector is a huge challenge, with statistics revealing that the
number of persons operating informally has been increasing over the years, in spite of the
licensing reforms that include the introduction of a Single Business Permit. While
licensing reforms have ensued, including the introduction of an E-registry to
electronically host the licences, multiplicity of licences issued by different regulatory
agencies is a key concern. This is further exacerbated by the decentralization of the
regulators, who are scattered in different Ministries and different locations. While the E-
registry was expected to lower transaction costs associated with obtaining licences, there
seems to be limited awareness of this service. It is approximated that 30 per cent of
businesses are not aware of the service; majority of those who are aware of it have not
used the service.
Youth unemployment is a growing problem, as it constitutes 70 per cent of total
unemployment in Kenya. The population of youths in Africa is estimated at 200 million
with an approximately 30 per cent of the population (age between 18-35 years) in Kenya
(World Bank, 2009). The youths are faced with insufficient vocational skills, social
capital and limited understanding of market dynamics. An estimated 67 per cent of
Kenyan youths lack vocational skills after dropping out of secondary school education,
and this has led to high youth unemployment that is posing a serious threat to Kenya’s
social and political fabric. This has jeopardized equitable economic growth and social
cohesion by denying the country a chance to reap from the potential benefits of her
growing youth population. Micro, Small and Medium Enterprises (MSMEs), defined as
firms employing less than 100 employees, form a large part of private sector enterprises
in Kenya. It was estimated in the last national survey of the sector carried out in 1999 that
Kenya had a total of 1.3 million MSMEs employing 2.3 million people. It was further
estimated that Small and Medium Enterprises (SMEs), defined as firms employing 10-99

13
employees, accounted for 75 per cent of total employment in Kenya but contributed only
18 per cent of GDP (Government of Kenya, 2007). The Constitution of Kenya assigns
county governments trade development and regulation functions, including markets, trade
licenses, fair trading practices, local tourism and cooperative societies. In conjunction
with other devolved functions such as agriculture, county public works and planning,
county governments will play critical roles in MSME sector growth.
Due to the large share of enterprises, MSMEs form the base for private-sector-led
growth, and deliberate policy efforts have often targeted the sector in developing
countries as an engine of employment and growth. MSMEs act as a catalyst for
entrepreneurial seedbed for industrial transformation (McPherson, 1996). Kenya Vision
2030 recognizes the sector and envisages MSMEs’ improved productivity and innovation
by enhancing the investment climate, including access to finance. Policy efforts targeted
at the MSME sector are anchored on the premises that MSMEs are the engine of growth,
but market imperfections and institutional weaknesses impede their growth (Beck and
Demirguc-Kunt, 2006). Under the devolved governance structure, MSMEs are not only
significant in employment creation but also in revenue generation for the county
governments in form of service fees. Single business permit fees will form a significant
source of own revenues for county governments, which will be used for delivery of
county services. During the 2009/10 fiscal year, single business permit fees amounted to
Ksh 2.9 billion, accounting for 17 per cent of local government own revenues
(Government of Kenya, 2010).
The role of MSMEs can only be maximized by mitigating growth constraints
resulting mainly from adverse investment climate, poor infrastructure, credit constraints,
insecurity and regulatory burden. Various empirical studies have established that an
adverse investment climate, including weak property rights protection, stringent
regulatory frameworks, poor infrastructure and lack or limited access to credit, constrains
MSME investment and growth. For example, using cross-country data of 80 countries,
Ayyagari et al. (2005) found that crime incidences and political instability negatively
affect firm investment and growth.
A study by KIPPRA (KIPPRA and Ernst and Young, 2008) established that being
in an industrial location, access to electricity, lower incidences of insecurity, access to

14
bank loans and positive perceptions of the entrepreneur regarding the courts in terms of
affordability and fairness positively affect firm growth. The study used the MSME
Competitive Project Baseline Survey 2008 data collected by KIPPRA. The data set
comprised of 2,590 MSMEs in 19 counties.
Theoretically, economic efficiency is achieved when consumers pay prices that
ensure value for money. The fewer the transactions a consumer has to go through, the
higher the level of efficiency. Wholesale and retail supermarkets improve efficiency in
distribution by encouraging competition, lower prices, market information and stocking
of many goods compared to ordinary shops. Their role reduces per unit marketing costs,
promotes stable markets for local produce, and encourages increased output and
productivity. Supermarkets basically have to perform the following three functions cost-
effectively: physical exchange of products; standardization of products in terms of
weights, measures and quality; and exchange of information between suppliers and
buyers.
Infrastructural development is key to attracting investment in the counties. As
pointed out in Vision 2030, the trade sector in Kenya is characterized by inefficiencies
along the supply chain from producer to consumer and from importer to the final buyer.
This is largely due to the poor state of roads, drainage and water supply, inadequate
power supply, poor transportation and communication system, handling and storage
facilities and wastage and waste disposal systems. In addition, there are limited and
poorly-designed markets and lack of housing facilities with enough loading bays and
parking spaces. In addressing some of these challenges in order to facilitate commerce,
trade and rural enterprise development, the Ministry of Finance in the 2009/10 budget
launched the Economic Stimulus Programme (ESP). Under this programme, the
government through the Ministry of Local Governments was to support the construction
of markets in the country’s 210 constituencies. The success of this project is crucial
because it opens the opportunity to link producers and consumers in every constituency
within a county. Good infrastructure will also go a long way in linking the counties with
surplus production with those with scarcity.
The Ministry of Trade is responsible for the promotion of retail and wholesale
trade according to the Presidential Circular No.1/2008. The ministry is responsible for

15
promotion of business through the Kenya National Trading Corporation (KNTC),
Assistance to Micro and Small Enterprises Programme (ASMEP) and Joint Loans Board
(JLB) among other institutions. The KNTC’s major objectives are to develop small and
micro enterprises (SMEs) markets, expand and diversify trade, and improve and
strengthen the supply chain and distribution systems. On the other hand, the JLB seeks to
promote small-scale enterprises through provision of affordable credit of between Ksh
20,000 and Ksh 100,000.

2.4 The Theory of Resource - Based of Competitive advantage

A theory defines a system that explains phenomena using constructs, laws and
generalizations and organizes knowledge and isolated findings from different research
studies into powerful explanatory frameworks. The theory of Resource-Based is defined
as ‘the match an organization makes between its internal resources and skills and the
opportunities and risks created by its external environment.’ The proponent of the theory
was Grant, R, M, (1980) which looked at the principal developments in strategy analysis
which focussed upon the link between strategy and the external environment. Prominent
examples of this focus are Michael Porters analysis of industry structure and competitive
positioning and the empirical studies undertaken by the PIMS project. By contrast, the
link between strategy and the firm’s resources and skills has suffered comparative
neglect. Most research into the strategic implications of the firm’s internal environment
has been concerned with issues of strategy implementation and analysis of the
organizational process through which strategies emerge.

Recently there has been a resurgence of interest in the role of the firm’s resources
(in this case SMEs) as the foundation of the firm’s strategy. This interest reflects
dissatisfaction with the static, equilibrium framework of industrial organization
economics that has dominated much contemporary thinking about business strategy and
has renewed interest in older theories of profit and competition associated with the
writings of David Ricardo, Joseph Schumpeter, and Edith Penrose. Advances have
occurred at several fronts. At the corporate strategy level, theoretical interests in
economies of scope and transaction costs have focussed attention on the role of corporate

16
resources in determining the industrial and geographical boundaries of the firm’s
activities. At the business strategy level, explorations of the relationships between
resources, competition and profitability include the analysis of competitive limitation, the
appropriability of returns to innovations, the role of imperfect information in creating
profitability differences between competing firms, and the means by which the process of
resource accumulation can sustain competitive advantage. Together, these contributions
amount to what is termed, ‘the resource based view of the firm.’ Borrowing from the
theory, the study sought to determine how the adoption Information Communication
Technology (ICT) influence performance of SMEs and the extent of availability of
finance influence performance of Small and Medium Enterprises in the CBD Bungoma
County.

The resource-based view (RBV) argues that firms possess resources, a subset of
which enables them to achieve competitive advantage, and a subset of those that lead to
superior long-term performance. Resources that are valuable and rare can lead to the
creation of competitive advantage. That advantage can be sustained over longer time
periods to the extent that the firm is able to protect against resource imitation, transfer, or
substitution. In general, empirical studies using the theory have strongly supported the
resource-based view.

A resource must enable a firm to employ a value-creating strategy, by either

outperforming its competitors or reduce its own weaknesses. Relevant in this perspective
is that the transaction costs associated with the investment in the resource cannot be
higher than the discounted future rents that flow out of the value-creating strategy. To be
of value, a resource must be rare by definition. In a perfectly competitive strategic factor
market for a resource, the price of the resource will be a reflection of the expected
discounted future above-average returns (Barney, 2006) If a valuable resource is
controlled by only one firm it could be a source of a competitive advantage This
advantage could be sustainable if competitors are not able to duplicate this strategic asset
perfectly. To transform a short-run competitive advantage into a sustained competitive
advantage requires that these resources are heterogeneous in nature and not perfectly
mobile. Effectively, this translates into valuable resources that are neither perfectly

17
imitable nor substitutable without great effort If these conditions hold, the firm’s bundle
of resources can assist the firm sustaining above average returns.

2.5 Entrepreneur characteristics and the Performance of Small and Medium

Enterprises
Characteristics of an entrepreneur play an important role ensuring the business
success in SMEs. Characteristics of an entrepreneur are categorized as demographic
characteristics, personal traits, formal education, entrepreneurial orientation and
readiness, and previous experience. Demographic characteristics like age, gender, and
individual background.

Available theoretical discussion explaining the influence of the age of the

owner/manager advocates for the younger owner/manager; the argument here rests on the
fact that the younger owner/manager has the necessary motivation, energy and
commitment to work and is more inclined to take risks (1994,Storey; 2003Watkins et al.).
The logic is that the older owner/manager is likely to have reached his/her initial
aspiration, (2000, Reynolds et al.) found that individuals ranging from 25 to 44 years
were the most entrepreneurially active. Finding from another study in India by (1996,
Sinha) disclosed that successful entrepreneur were relatively younger in age. In their
study on Internet café entrepreneurs in Indonesia, (2003, Kristiansen, Furuholt, & Wahid)
found a significant correlation between age of the entrepreneur and business success.
Much of the research conducted in the 1980s identified business challenges
specific to women entrepreneurs. Some of the difficulties reported included obtaining
start-up funds, financial management and development of effective marketing and
advertising (Hisrich et al., 2008). The root causes of limited financial success were often
attributed to early management practices of the women entrepreneurs. Female owners
tended to prefer internal to external sources of financing. In addition, women used
smaller amount of capital at the start-up phase and that they are less likely to use financial
instruments such as overdrafts, bank loans, and supplier credit. Women were more likely
to use their banks for a source of advice, but men were more likely to respond to that
advice (Republic of Kenya, 2005). Specifically, women-led businesses that used bank
loans as a primary source of start-up capital outperformed those that used alternative

18
funding sources. Therefore Namusonge (2006) stressed the importance of having a
relationship with a bank in place at the time of the business launch. This is because
having access to financial resources and emphasizing the financial aspects of the business
had stronger effects on performance than did intention or choice. However, it was
reported that one of the biggest obstacles facing women entrepreneurs is the
discrimination they suffer from the banking and finance communities (Mutuku, et al.,
2006) Thus, they prefer to rely on their own personal funds. Many women entrepreneurs
feel that there is a huge barrier for them to obtain debt capital at banks and lending
agencies. It is therefore crucial for the government agencies, banks and lending agencies
and women associations especially Women Enterprise Fund to assist the women
entrepreneurs in terms of financial problems. Mazzarol et al. 1999; found that female
were generally less likely to be founders of new business than male. Similarly, (1996,
Kolvereid) found that males had significantly higher entrepreneurial intentions than
females. The proportion of firms owned by men exceeds those owned by women (2001,
Kentor, 2001, Chell, 2001), with most studies reporting that failure rates for female
owned firms are higher than those for male. Reasons for this include limited access to
finance, stringent collateral requirements, Women’s double duties (1990, Riding and
Swift; 2000, Carter and Jones-Evans, 2000). Some studies show that women-owned
businesses are more likely to fail than men-owned (Langowitz, N. & Minniti, M. 2007).
Namusonge (2006) however, reported that women perform less well on quantitative
measures such as job creation, sales turnover and profitability since women do not enter
business for financial gain but to pursue intrinsic goals (for example, independence, and
the flexibility to run business and domestic lives)
As relates to personal traits, some attempts have been made to explain business
success or failure in terms of personality traits of the entrepreneur. (1998, Glancey, Greig
& Pettigrew; 1998, Stewart Jr., Watson, Carland & Carland 1998). Nooteboom (1994)
highlighted that one of the most important characteristics of the small business is its
diversity. The sources that produce diversity lie in the variance of the backgrounds,
motives and goals of the entrepreneurs. According to Yusuf (1995) personal qualities and
traits, such as self-confidence and perseverance, have been suggested to affect firm
success. In their study of new small firms, Duchesneau and Gartner (1990) found that

19
lead entrepreneurs in successful firms were more likely to have been raised by
entrepreneurial parents, to have had a broader business experience and more prior startup
experience, and to believe that they had less control of their success in business, than
unsuccessful entrepreneurs. They also found that lead entrepreneurs in successful firms
worked long hours, had a personal investment in the firm, and were good communicators.
Moreover, successful firms were those initiated with ambitious goals, and lead
entrepreneurs had a clear and broad business idea (1990, Duchesneau and Gartner ).
As relates to the education level (2003, Greve and Salaff) argue that an SME owner with
a better education background will also be more likely to network more than an SME
owner with less education background. (2004, MacGregor) finds that the education level
of an SME owner is positively associated with the networking of the SME and the types
of networks an SME is engaged in. Education and prior experience in business have been
seen as critical success factors for small firms (1995, Yusuf; 1996, Wijewardena &
Cooray).
Studies have generally found that SME owner/managers with more managerial,
sector experience or prior SME experience as owner/manager tend to correlate with
greater growth (Storey et al., 1989). A study carried out by Hall (2000) found that SME
owner/managers in the UK with little experience at the start-up phase could have
problems remaining solvent with an increase in expenditure in relation to their earnings.
When it comes to Entrepreneurial orientation and readiness, some researchers have
argued that success is driven by entrepreneurial orientation (1991, Covin and Slevin;
1996 Lumpkin and Dess; 2004, Wilkund and Sheperd). According to Lumpkin and Dess
(2001), the concept of entrepreneurial orientation consists of five dimensions: autonomy,
innovativeness, risk taking, proactiveness and competitive aggressiveness. Autonomy is
defined as an independent action by an individual aimed at bringing forth a business
concept or a vision, and carrying it to completion. Innovativeness refers to the
willingness to support creativity and experimentation. Risk taking means a tendency to
take bold actions. Proactiveness is an opportunity-seeking or forward-looking
perspective, and Aggressiveness reflects to the intensity of a firm’s effort to outperform
the industry rivals (2001, Lumpkin and Dess). According to Koning and Brown (2001),
entrepreneurial orientation is positively associated with opportunity alertness.

20
Entrepreneurial readiness refers to self-efficacy; the term self-efficacy derived from
Banduras (1977) social learning theory, refers to person’s belief in his/ her capability to
perform a given task. According to Ryan (1970), self perception plays an important role
in the development of intention. Intentions and their underlying are perception- based,
which should mean that they are learned and can be continuously influenced, and not
fixed by personality traits formed since childhood. Cromie (2000), states that self-
efficacy affects a person’s beliefs regarding whether or certain goals may be attained. The
attitude provides the foundation for human motivation (2002, Pajares) and personal
accomplishment; unless people believe that their actions can produce the outcomes they
desire, they have little incentive to act or persevere in the face of adversities (2002,
Pajares). Kriatinsen and Indarti (2004) found a significant correlation between self-
efficacy and entrepreneurial intention.

2.6 Business Characteristics and the Performance of Small and Medium Enterprises
SME characteristics that influence its improvement on service delivery include;
Age of the firm, size of the business, the form of the business or its legal status, and the
capital source. The age of the firm is an important factor influencing the growth of the
firm (1994, Storey; 1996, Barkham et al.) length of time in operation (age of the
business) may be associated with the learning curve. Old players most probably have
learnt much from their experiences than have done by new comers. Kristiansen, Furuholt
and Wahid (2003) found that the length of time in operation was significantly linked to
business success. Moussavi (1988) in his unpublished PhD thesis stated that experience
on the part of the owner/ manager factor contributing to the survival of the business.

Size of the SME reflects how large an enterprise is in employment terms.

McMahon (2001) found that enterprise size significantly linked to better business
performance. Larger enterprises were found to have a higher level of success. Audretsch
and Klepper (2000), Sutton (1997), Caves (1998), all note that a small firm has a lower
likelihood of survival. This is supported by Westhead (1995) in his study of high
technology firms in England, who found that larger firms have more propensities for
growth than their smaller counterparts.

21
 As relates to the form of business or legal form of the SME, a firm constituted
such that the owner/ manager enjoy limited liability has been said to have greater
incentive to pursue risky projects and therefore expects higher profits and growth rates
than other firms (1981, Stiglitz and Weiss). Harhoff et al. (1998) in their study of German
firms found that firms with limited liability have above average growth rates. Freedman
and Godwin (1994) in their study of small businesses in the United Kingdom found that
the prime benefit of corporate status is the limited liability. Also studies carried out by
Kalleberg and Leicht (1991) on small firms in the United States came to the same
conclusions. The other factors were: interference from local authorities, insecurity, lack
of physical facilities to put up their premises, and lack of access to clean water.

According to the World Bank Doing Business Report 2013, simple business
regulatory reforms have had positive outcomes in terms of increasing business and job
creation. As much as majority of the MSEs in Kenya operate informally, there are over
35,000 formal MSEs that employ over 40 per cent of the working population. Data on
formal (modern) establishments as obtained from the Kenya National Bureau of Statistics
(KNBS) Statistical Abstracts does not include data on small non-agricultural rural
establishments and smallholdings that are outside ‘Scheduled Areas’. It is, therefore,
important to note, at the onset, that the statistics available may not provide a clear picture
of the performance of the sector. Majority of enterprises in Kenya have less than 50
employees, especially in trade. The figure also indicates that majority of formal MSEs in
Kenya operate in the service sector, including trade, construction, finance, real estate and
insurance. The number of employees in the MSE sector increased between 2010 and
2011, while that of medium and large enterprises declined during the same period. As
indicated earlier, MSEs in Kenya operate largely informally. This is evidenced by two
studies: The 1999 MSE National Baseline Survey and the 2008 KIPPRA Study on MSEs
in Kenya. According to the 1999 MSE Survey, 88.6 per cent of MSEs operate informally.

The 2008 KIPPRA Study established that 72 per cent of the over 2,500 firms
sampled were not registered; of those that were registered, only 8 per cent of sampled
firms were formally registered as limited companies with the Registrar of Companies.
The study also established that the low level of business registration is due to the many

22
registration requirements, the long period it takes, and the long distance to be covered to
register. It is also important to note that a number of MSEs confused licensing for
registration, thus revealing that they considered licensing as sufficient requirement for
operating the business. A review of available statistics reveals that the number of persons
operating informally has been increasing over the years. Youth unemployment is a
growing problem, as it constitutes 70 per cent of total unemployment in Kenya. The
population of youths in Africa is estimated at 200 million with an approximately 30 per
cent of the population (age between 18-35 years) in Kenya (World Bank, 2009). The
youths are faced with insufficient vocational skills, social capital and limited
understanding of market dynamics. An estimated 67 per cent of Kenyan youths lack
vocational skills after dropping out of secondary school education, and this has led to
high youth unemployment that is posing a serious threat to Kenya’s social and political
fabric. This has jeopardized equitable economic growth and social cohesion by denying
the country a chance to reap from the potential benefits of her growing youth population.

Various empirical studies have established that an adverse investment climate,

including weak property rights protection, stringent regulatory frameworks, poor
infrastructure and lack or limited access to credit, constrains MSME investment and
growth. For example, using cross-country data of 80 countries, Ayyagari et al. (2005)
found that crime incidences and political instability negatively affect firm investment and
growth. Concerning the capital source, in a study in Australia, Mcmahon (2001)
discovered that greater dependence upon external finance associated with better business
growth. In a more recent study by Furuholt and Wahid (2003) found that financial
flexibility was significantly correlated to business success. The SMEs that took advantage
of family and third party investment experienced higher levels of success.

2.7 ICT adoption and the Performance of Small and Medium Enterprises
ICT is defined as an array of primarily digital technologies designed to collect,
organize, analyze, store, process and communicate information, (Ritchie & Bridley,
2005). As a broad concept ICT includes; Information systems, information technology
and digitization. ICT can be categorized into old that include telephones, radio,
television, films, audio and video cassettes and new ICT that include, computers, mobile

23
phones, faxes, point of sale systems, global positioning systems, Informational
geographical systems, satellites, networked environments and Internet (Lashgarara et al.,
2011).

The role of ICT in marketing

ICT offers enterprises a wide range of possibilities for improving competitiveness

and market access that include; providing mechanisms for accessing new market
opportunities, facilitating product innovations, accelerating market transactions and
intensifying the use of information, knowledge and communication in processes,
(Fulantelli & Allegra, 2003). ICT is also closely linked to knowledge, communication
and human intelligence enabling new types of innovation in management, organization
and business models. Enterprises can benefit from ICT in terms of reduced transaction
costs, inventory controls, quality controls, access to wider market space and global
networking (Fulantelli & Allegra, 2003). ICT provides information channels that
facilitate the decoupling of information from its physical repository to permit access and
transmission (KIPPRA, 2006). Application of ICT can be a catalyst for enterprise
competitiveness by improving access to information, increasing trade in commodities and
services and in achieving efficiency gains in resource allocation, Fulantelli & Allegra,
(2003). In Kenya where transaction costs are very high as a result of logistics, ICT can
contribute to market efficiency as well as in the reduction of transaction and coordination
costs within and across organizations.

ICT transforms traditional firm transactions and creates new market places by
altering the process by which transactions take place, creating new products and services
and by creating new markets in time, space and information that did not previously exist
(Hanna, 2010). The power of ICT enables business networking within and between
enterprises and geographical regions to grow. This in turn provides a platform for the
exchange of experiences, options and opportunities for mutual cooperation and
technology transfer (GOK, 2006). Firm’s marketing networks also helps organizations to
access disseminate, and incorporate best practices). Investment in ICT in the business
sector makes firms more productive, more competitive, network ready and able to exploit
new trading opportunities such as E-commerce.

24
ICT and SME market access

Marketing is important success function for SMEs that is facilitated by market

access. Information plays a key role in market access and is the main core of any
marketing system. Market access in developing countries is a major challenge to small
businesses due to market imperfections that can be attributed to lack of market
information, lack of linkages between the actors in the supply chain, distortions or
absence of input and output markets, high transaction cost and high presence of trade
intermediaries. Different strategies exist for improving market access of which the use of
ICT is one. Strategies that enhance market access greatly impacts on the performance of
small enterprises (Shepherd, 2007).

Potential benefits of ICT to SMEs include enhancing efficiency, reducing costs

and broadening the market both locally and globally, empowering SMEs to participate in
the knowledge economy by facilitating connectivity; helping to create and deliver
products and services on a global scale and providing access to new markets (Chyau,
2005). ICT can significantly impact the market –oriented dimensions of products and
services (Ritchie & Bridley, 2005). Market –oriented ICT include websites which display
the goods, services and information of a firm on the world wide-web (WWW). It can also
integrate the e-commerce functionality, such as offering the ability to place orders. The
www is a powerful platform for expanding and reaching new markets for SMEs while the
Internet is critical in enhancing a firm's market reach and operational efficiency. ICT
offers SMEs flexibility in trading by enabling 24 hours of trading, borderless market
space and leverage SMEs to compete against larger enterprises on the same platform. In
addition, ICT facilitates remote access to knowledge, suppliers and a borderless
environment, offering SMEs the ability to deliver products and services on a different
platform that is easily accessible. ICT can be used to reduce barriers of entry into
different market segments exposing SMEs to a wider customer base (Lloyd & Kroeze,
2008).

Mutula & Van Brakel (2006) noted that ICTs, especially the internet, have a
significant impact on the operations of SMEs by facilitating their access to global
markets, enabling them to sell to international customers, and to compete favourably with

25
large corporations. Strategic use of ICTs is viewed as near solutions to firm’s problems
e.g. ICT has the potential to reduce the impacts of distance, reduce transaction costs, be
used in information gathering and dissemination, inventory control, and quality control.
ICT can enable SMEs to participate in the regional and international markets which are
strategic for competitiveness, growth and further development (Ramsey et. al., 2003).
Access to global markets offers a host of business opportunities, such as new niche
markets; possibilities to exploit economies of scale, the upgrading of technological
capability; and ways of spreading risks (OECD, 2000). Internet based technologies
provide small firms the Opportunity to effectively overcome the limitations of size and
compete and/or in larger markets with bigger sized establishments. There is some
evidence to suggest that the Internet has increased international opportunities for SMEs
(Hanna, 2010).

ICT also has the ability to transform global and local markets to become more
efficient. Electronically mediated markets greatly impacts on the cost, speed and
transparency of market-based transactions. As a result lower transaction cost and
increased reach result in up to 15% lower costs to consumers, and up to 20% lower costs
in business procurement .Business-to-business (B2B) net-based transactions are
transforming supply chains across the globe, leading to the rise of new channels or net-
based intermediaries, and enabling SMEs to pool resources and auction or collectively
supply large multinationals. Net-based business-to-consumer (B2C) transactions and
point-of-sale scanners provide producers, with detailed and instant information on local
and distant buyers and markets. For consumers, C2B transactions cut consumer search
costs, reduce lead time wait, and broaden choices. Increased information on both sides
helps align supply and demand ever more tightly (Hanna, 2010). At a more basic level,
ICTs are the lifeblood of efficient markets and have the potential to develop markets and
alleviate poverty.

Market prices act as coordinating signals for producers and consumers, where
sources of information are limited basic ICT could play a major role in creating efficient
markets, improving producer practices and speeding innovation, through the provision of
information on market prices (Hanna, 2010). ICT causes fast accessibility to the market,

26
increases selection power, improves communication, facilitates identification of markets,
improves marketing and reduces business transaction costs. From a Survey conducted in
Kenya and Tanzania (Matambalya & Wolf, 2007); SMEs that used different forms of ICT
rated their effects mostly positive. On top were telephone and computer applications that
are assumed by 88% and 76% of users to considerably increase management efficiency
and competitiveness respectively. Mobile phones are considered to contribute
significantly to regional market expansion by most enterprises followed by fixed phones
and faxes. ICT has a proven role in enabling SMEs to increase their productivity and
access information and markets, but remain unaffordable, (Minges, 2003; OECD, 2000).

The mobile phone is the most used ICT tool in that is rated most significantly in
terms of desirability, accessibility and affordability. Mobile phones emerge as the
preferred ICT tool to SMEs due to affordability, ease of use, and a reliable network. More
than 95% of SMEs in Kenya own mobile phones with subscription reaching 30.7 million
in April, 2013 and mobile penetration at 78%. (CCK, 2012) This offer SMEs a great
opportunity to employ the services of this preferred tool to enhance market access.
Mobile phones offer various functionalities that can enhance market access and include
communication, enabling market transactions, product promotion, customer relationship,
market research and other internet enabled services. Mobile phones offer a quick,
efficient and affordable way of communication to SMEs which is essential for initiating
and maintaining customer relationship, facilitating market transactions, acquisition of
market information and for communicating product information to customers.
Communication can be achieved through voicemail or the short message service that is
relatively cheap. SMEs can also benefit from the use of Interactive Voice response which
uses voicemail for information delivery on the user dialing given numbers to access
information through simple menu steps. This will give SMEs the opportunity to obtain
market information necessary to achieve market access. (Mukhebi et al, 2007) Mobile
phones can also be used to facilitate market transactions to improve efficiency and reduce
high transaction costs. Such transactions include m-banking, m-payments and mobile
money transfer. SMEs can take advantage of services that already exist e.g. pay-bill
service, “Lipa na M-Pesa”, “M-Pesa banking and money transfer from Safaricom service
providers. M-internet is a fast growing technology that can be used for mobile commerce

27
to facilitate online marketing, communication, networking, and market research. SMS-
marketing can used to market their products at low costs while Social-networking can be
used for communication, promotion and in the actual selling through the phone.

Another promising ICT tool for enhanced market access in SMEs is the computer
with all the computer related applications. Statistics indicate computer usage in Kenya
has increased over the years, 77% SMEs indicating they own a computer (Kiveu, 2008).
However, majority use computers for basic applications like automation and
communication. In a study on ICT adoption and use by SMEs, only 28% of interviewed
SMEs had Websites and 24% indicated they used ICT for product marketing and e-
commerce (Kiveu, 2008). The computer has the advantage of having much functionality
that can be used to for communication, e-commerce, promotion, design and development
of superior products, market research, customer-relationships, networking and the
creation of linkages, acquisition of important market information. A significant
application for market access in computers is the internet whose users in Kenya stand at
16.2 million currently, with an internet penetration of 41.1%. Internet offers SMEs an
opportunity to create their websites for promotion, communication and for efficient
market transactions. According to Chacko and Harris (2006) the use of e-commerce has
emerged as an efficient gateway for SMEs to take greater advantage of opportunities in
the global markets. Internet can be to identify markets and for market research, for social
networks to promote products, for communication and networking to increase market
access. However a great impediment to the use of computer by SMEs is the high cost of
computer hardware and connectivity, unreliable network, lack of awareness and limited
computer knowledge and skills (Minges, 2003; Kiveu, 2008).

Radio and television can be used by SMEs to improve market access as they are
widely used in Kenya and have the advantage of reaching a larger audience. They can be
used for product promotion, acquisition of market information disseminated by various
actors and for interaction with potential customers. Through radio and TV media, SMEs
have the opportunity to develop and use virtual markets to promote and sell their products
through interactive programmes. Such will require the integration of several ICT tools

28
like e-payments or M-payments and an information system to facilitate, transactions.
(Mukhebi et al, 2007)

According to world development report (1999), for leading countries in the world
economy, the balance between knowledge and resources has shifted so far towards the
former that knowledge has become perhaps the most important factor determining the
standard of living more than land, tools, and labor. Today’s most technologically
advanced economies are truly knowledge based. Countries in the world are moving from
an industrial economy to a knowledge economy in which economic growth is dependent
on a country’s ability to create, accumulate and disseminate knowledge. Wolf, S. (2001)
found that in most African countries, small and medium enterprise (SME) account for a
significant share of production and employment and is therefore directly connected to
poverty alleviation. Especially in developing countries SMEs are challenged by the
globalization of production and the shift in the importance of various determinants of
competiveness. ICTs can improve efficiency and increase productivity by different ways
including, improving efficiency in resource allocation, reducing transaction costs, and
technical improvement, leading to the outward shifting of the production function. There
are very few studies about ICT adoption in developing countries (2003, Temtime et al),
(2006, Mutula et al.), (2007, Yeh et al.), (2007, Ssewanyana et al.), (2006,
Kapurubandara et al.). (2007, Lal ) investigating adoption of ICT in Nigerian SMEs
found that, one of the major factors inhibiting ICT diffusion and intensive utilization is
poor physical infrastructure. In developing countries some of the ICT adoption challenges
include legal and regulatory issues, weak ICT strategies, lack of Research and
Development, excessive reliance on foreign technology and ongoing weaknesses in ICT
implementation (2003, Dutta et al).

Despite the importance of ICT and emphasis by various governments to

encourage SMEs to adopt ICT, it has been reported that SMEs have been slow in
adopting ICT for various reasons (2004, Houghton and Winklhofer), (2001, Smallbone et
al.), (2002, Dawn et al.) and (2003, Lawson et al.). SMEs have limited financial and
human resources to adopt ICT, (2002, Duan et al.) Identified lack of ICT skills and
knowledge in SMEs as one of the major challenges faced by all European countries,

29
particularly in the UK, Poland and Portugal, in their study. (2004, Houghton and
Winklhofer) have reported a slow response of SMEs relating to adoption of ICT, (2003,
Shiels et al.) found that characteristics of the firm and industry sector are contributory
factors to the adoption and exploitation of ICTs by SMEs, (2006, Kapurubandara et al.)
have categorized internal and external barriers that impede adoption of ICT by SMEs in a
developing country. The internal barriers include owner manager characteristics, firm
characteristics, cost and return on investment, and external barriers include:
infrastructure, social, cultural, political, legal and regulatory.

In their studies of the effect of information technology on productivity,

Brynjolfsson and Hitt (1995) observed that alongside firm effects, ICT capital contributes
positively and significantly to output and productivity for large US firms. Similar results
are also found when examining the effects the use of various ICTs has on productivity.
These results were consolidated even further in a more recent study (2000, Brynjolfsson
and Hitt), which underscores the importance of complementary factors such as
restructuring the enterprise and improving the skills level of the personnel to get
productivity growth as a result of investment in ICT. Müller-Falke (2001) found out for
Indian manufacturing SMEs that enterprises that use more advanced forms of ICT have
on average a higher labour productivity and a higher growth rate. In a survey of 59
electric and electronic manufacturing Indian SMEs mainly employing less than 50
people, Lal (1996) observed higher profit margins, skill intensity and export and import
intensities for firms using IT. There is also some evidence that export performance of
SMEs is related to ICT adoption (1999, Lal; 2001 Nassimbeni). However it is not the
investment in the technology alone but the combination with other technologies and
especially relevant skills that make ICT work. Most organizations have continued to
increase spending on information system and their budgets continue to rise. Moreover,
economic conditions and competition create pressures about costs of information.

Generally, information system is developed using information technology to aid

individuals in performing their jobs. Therefore, most organizations focus on developing
information systems in order to support decision making, communication, knowledge
management, as well as many others. The key part of information system needed for

30
decision making in organization is accounting information system. Accounting
information systems (AIS) is one of information systems that produce many amounts of
data for use by decision makers both within and outside organizations. Since accounting
information is able to measure and present economic events to users of financial
statements for judgment and decision making. American Accounting Association (AAA)
address accounting information system (AIS) as one part of management information
system (MIS) that gather, classify, and compile data for internal and external decision
making. Therefore, job success must be obtaining reliable, relevant and timely accounting
information for decision making (Kharuddin et al., 2010).

Learning organization is organization’s ability to continually expand capacity to

create the future (Senge, 1990). In other words, learning organization is good at creating,
acquiring, and transferring knowledge, and modifies behavior to reflect new knowledge
(Garvin, 1993. There is need of becoming learning organizations by focusing on
continuous learning and use of AIS to increase knowledge and improve performance.
This is considered a vital key for organization's success. More recent studies show that
the need to become learning organizations is an integral component to innovation,
effectiveness, and success (Buckler, 1998; Buhler, 2002). This has stressed the
importance of the learning organization as a strategy to improve effectiveness, and as the
only sustainable competitive advantage for organizations (Buhler, 2002; Davis and
Daley, 2008; Korth, 2007). Therefore, the learning organization's ability is to focus on
understanding and satisfying the needs of financial statements users through effective
accounting information system. With regard to the organizational support, the top
management will create the atmosphere to offer the capital, manpower, infrastructure,
knowledge training, trust, and hope to achieve the effectiveness of accounting
information system (AIS) on the accounting information quality production (Masquefa,
2008; Young and Jordan, 2008). The top management is supposed to understand the
effectiveness of accounting information system (AIS) which impacts on their function
enhancement.

Every organization is located within a particular configuration of contingencies. It

is dependent on the market and technological environment in which it operates its scale

31
and diversity of operations, the technology applied to its work, and the type of personnel
it employs. To achieve congruence, an appropriate design is the one which best suits it’s
contextual and operational contingencies. According to Moores and Yuen (2001), the
management of organizations faces a challenge to reinforce the management accounting
system, strategies and structures together in order to achieve competitive advantage and
enhance performance. Thus, research needs to be carried out to help management make
appropriate decisions in order to achieve this congruence. As the firm strives to achieve a
better fit with its environment, and to be more successful; sustaining and improving
current performance will become critical. However, very limited research has taken place
into how the usage of AIS has led to the successful financial management in public
organisations in kenya. Most empirical evidence in this area originates from research in
developed countries (Baines & Langfield-Smith, 2003; Burns, Ezzamel, & Scapens,
1999; Chenhall & Euske, 2007;

Automatic generation of a stream of accounting reports is of momentous

importance to any organisation if it is to achieve sound financial success. Chang (2001)
asserts that accounting information plays a significant role in enhancing organizational
effectiveness in a global competitive environment. Doms, Jarmin and Klimek (2004) say
that financial statements still remain the most important source of externally feasible
information on companies. In spite of their widespread use and continuing advance, there
is some concern that accounting practice has not kept pace with rapid economic and high
technology changes which invariably affects the value relevance of accounting
information. Information technologies have been paramount in recent decades and have
been leading developments in the globalization and societies. Information technology
plays a vital role in the accounting profession. It can be a strategic weapon to support the
objective and strategy of the organization. Most organizations get competitive advantage
by use of new information system. In the view of this fact, the key to organization's
survival is the continuous improvement of its performance. The need to integrate these
often diverse systems led to the accountant's appreciation of shared databases that
provide a picture of the organization's data, eliminating duplications and reducing data
conflicts (Moscove et al., 1999).

32
2.8 Availability of Finance and the Performance of Small and Medium Enterprises
Finance refers to activities involved in managing cash flows in a business
environment. Companies everywhere must choose an organizational structure to make
the best use of capital at their disposal; while balancing the objectives of corporate
shareholders, managers and other stakeholders. Finance involves five basic related
functions which include: raising capital to support company operations and investment,
selecting best projects to invest in, managing the firm’s internal cash flows and its mix of
debt and equity financing, developing corporate governance structures and managing the
firms exposure to risk to maintain optimum risk-return trade off and therefore maximize
shareholder value (Ledgerwood, and Victoria, 2006). Business raise money either
externally from investors or creditors or internally by retaining operating cash flows.
Most businesses raise the bulk of funding they need yearly by internal means. Access to
external financing influences the form of business. Sole proprietors and partnerships for
instance face limited external funding opportunities as compared to companies which
have access. Some companies decide to form corporations to enhance their capital base.
Corporations can raise capital either by selling an ownership interest or by borrowing
from creditors. In business terms, an ownership interest of for example security such as
stocks is called equity and money borrowed from creditors is termed as debt. When
corporations sell securities to investors the raise capital in a primary market transaction.
In such a transaction, money flows from investors to firms and firms then invest the
money to exploit investment opportunities. Investors who hold a firm’s securities can
trade them with other investors. Such secondary market trade transactions (trade between
investors) generate no cash for the firm but the existence of an active secondary market
makes the firm’s securities more attractive to investors (Jonathan, 2005). To avoid
bankruptcy which may expose firms to compulsory winding up or liquidation, the
businesses should analyse the various funding sources and go for those that are suitable
for their needs.

According to the good financial management guide (2003) the finance function
encompasses everything involved in managing the enterprise's financial resources. It
involves activities such as: Budgeting and forecasting; planning how the enterprise wants

33
things to happen, Cash and treasury management; ensuring the enterprise has money
when it's needed, Accounts payable and receivable; ensuring the enterprise receives what
it's owed and pays what it owes, Tax planning/filing and reporting; meeting obligations to
the government, Risk management; ensuring the enterprise doesn't get surprised by
something unfavorable, External and internal (management) reporting; providing
visibility into the enterprise for those who need it. The finance function is broad in scope.
Through proper leadership, the finance function provides the information that the
executive team requires to run the enterprise. The financial function has analytic needs.
Given the broad scope of the finance function and the wide variety of business strategies
enterprises use today. The two most common views of the enterprise in the financial
world are the balance sheet and the income statement. A balance sheet is a snapshot of an
enterprise's financial condition at a specific moment in time, usually at the close of an
accounting period. A balance sheet comprises assets, liabilities, and owners' or
stockholders' equity. An income statement, otherwise known as a profit and loss (P&L)
statement, is a summary of a company's profit or loss during any given period of time,
such as a month, three months, or a single year. The income statement reflects all
revenues and operating expenses during the period. (Helms, 2006).

Lack of access to credit is almost universally indicated as a key problem for

SME’s. This affects technology choice by limiting the number of alternatives that can be
considered. Many SME’s may use an inappropriate technology because it is the only one
they can afford. In some cases, even where credit is available, the entrepreneur may lack
freedom of choice because the lending conditions may force the purchase of heavy,
immovable equipment that can serve as collateral for the loan. Credit constraints operate
in variety of ways in Kenya where undeveloped capital market forces entrepreneurs to
rely on self-financing or borrowing from friends or relatives. Lack of access to long-term
credit for small enterprises forces them to rely on high cost short term finance. There are
various other financial challenges that face small enterprises. They include the high cost
of credit, high bank charges and fees. The scenario witnessed inKenya particularly during
the climaxing period of the year 2008 testifies the need for credit among the common and
low earning entrepreneurs. Numerous money lenders in the name of Pyramid schemes

34
came up, promising hope among the ‘little investors,’ that they can make it to the
financial freedom through soft borrowing. The rationale behind turning to these schemes
among a good number of entrepreneurs is mainly to seek alternatives and soft credit with
low interest rates while making profits. Financial constraint remains a major challenge
facing SME’s in Kenya (Wanjohi and Mugure, 2008)

Alongside Government led efforts of change, there has also been international
support towards the SME sub-sector. For instance the International Finance Corporation
(IFC) along with the Central Bank and the ministry of Finance have been working hand
in hand to establish a credit reference bureau that should benefit SME entrepreneurs
(mostly women). This reform could enable Non-land Assets to be acceptable as
collateral. According to a 2007 Kenya Women Finance Trust (KWFT) report ‘Improving
Access to Finance for SME: International Good Experiences,’ removing the obstacles to
financial access for SMEs requires that commercial banks, micro-credit institutions,
community groups and Business Development Service (BDS) institutions work closely
together. Pushing for agreements between financial bodies and BDS suppliers can help
make up for lack of capacity and reduce costs by more efficient division of labor. The
BDS supplier makes the initial choice of projects on a purely technical basis and the
credit institution looks at financial viability. Making loans to intermediaries (NGOs and
federations of SMEs) with the job of allotting funds to members can also help cut
administration costs.

The Intelligent enterprise journal (2002) indicates that most enterprises will want
to examine how their balance sheets and P&Ls have changed over time. This is the most
obvious type of analysis. This time-series analysis will typically have a monthly grain.
For P&Ls, much analysis will be based around finding the origins of revenue and
expenses: Which parts of the enterprise are producing and consuming financial
resources? How do different subcomponent organizations within the enterprise compare
with one another in the production and consumption of financial resources? How does
reality stack up against what was planned (budgeted/forecasted)? As you can see, the
analytic needs are wide and significant to the leadership of the enterprises. Historically
many finance teams have focused 80% of their time on the processing and only 20%

35
focus on the strategic information requirement. When thinking about finance, many
people instinctively associate it with book-keeping and tiresome bureaucratic controls,
and only peripherally with forward planning, so the finance team can be seen as blockers
rather than enablers for change and development. To ensure that the finance function -
whether that is a team or an individual - can add value to both planning and management
it should see it as having the following key roles: Providers of information for decision-
making and Business management.

In lending agreements, collateral is a borrower's pledge of specific property to a

lender, to secure repayment of a loan. The collateral serves as protection for a lender
against a borrower's default - that is, any borrower failing to pay the principal and interest
under the terms of a loan obligation. If a borrower does default on a loan (due to
insolvency or other event), that borrower forfeits (gives up) the property pledged as
collateral - and the lender then becomes the owner of the collateral. In a typical mortgage
loan transaction, for instance, the real estate being acquired with the help of the loan
serves as collateral. Should the buyer fail to pay the loan under the mortgage loan
agreement, the ownership of the real estate is transferred to the bank. The bank uses a
legal process called foreclosure to obtain real estate from a borrower who defaults on a
mortgage loan obligation (Hirschland, 2005).

2.9 Conceptual Framework

Indicators are shown by the main variables under the study to ensure that they are
measurable. Reiche and Ramey (1991) define a conceptual framework as “a set of broad
ideas and principles taken from relevant fields of enquiry and used to structure a
subsequent presentation”.

36
 Figure 2.1 Conceptual Framework
Determinants
Independent Variable Moderating Variable
Entrepreneur Characteristics Government policy

- Gender of SMEs owners - Laws and

Regulations
- Age of SMEs owners

- Personality traits

Business characteristics
- BusinessDependent
activity Variabl Dependent Variable
- Size of business
Performance of Small and
- Form of business Medium Enterprises
- Profits
ICT integration
- Market expansion
- Market identification
and access - Economic growth /
- Promotion of Goods equity
& Services
- Employment
- AIS in reports
generation, decision
making & data
retrieval & sharing Source: Researcher, (2015)

Availability of Finance

- Sources of finance

- Access to finance

- Capital requirements

Figure 2.1 of conceptual framework shows relationships between variables

37
 It is evident that the concepts or variables can be observed, described and
measured and therefore can be conceptualized as a framework comprising different
components that are inter-related as shown in the figure 2.1. This conceptional
framework is founded on the existing theory of Resource based as postulated by Grant,
R.M. and the literature review of the study. The graphical representation of the
conceptional framework depicts the major variables and categories connected by lines
and arrows to show the relationships and interactions where performance of Small and
Medium Enterprises in central CBD Bungoma County is dependent on independent
variables like entrepreneur characteristics, Business characteristics, ICT adoption and
how availability of Finance influence the performance of Small and Medium Enterprises
in Central CBD Bungoma County. Although Independent variables have a direct
influence on performance of Small and Medium Enterprises in Central CBD Bungoma
County, however, there are intervening and moderating variables which indirectly affect
the set parameters of standards and time frame hence impacting on the performance of
SMEs, for instance, an independent variable like finance may influence the same
owing to the amount of money to be used. Moreover, moderating variables which include
business registration and licensing form the government policy may impact either
positively or negatively.

2.10 Knowledge Gap

This chapter has reviewed literature in relation to the influence of SMEs on the
improvement of service delivery. The researcher notes that while there are various studies
most of them cover growth of micro and small enterprises and have not been conducted
in the context of Bungoma County and Bungoma CBD in particular since introduction of
devolved government system in Kenya. Previous studies have also adopted different
research designs mostly case studies of individual entities and not survey of different
small and medium enterprises. This study therefore endeavors to assess the factors
influencing performance of SMEs in Bungoma County by carrying out a survey on
selected small and medium enterprises in Bungoma County CBD.

38
2.11 Summary of Literature
This chapter has reviewed literature on the factors influencing Performance of
SMEs in Bungoma County. These factors relate to entrepreneur characteristics, business
characteristics, ICT, and finance. Most micro-entrepreneurs lack the knowledge and skills
required to keep proper business records or prepare business plans, which are required by
most financial institutions for proper lending purposes. Without such records, it is very
difficult to determine the credibility of the micro-entrepreneur or the viability of his
business venture.

Business profits are used to meet domestic needs instead of ploughing them back
to the business for growth and most do not bank their sales. Thus financial institutions are
unable to establish repayment ability. Most SMEs are unbanked because they consider
banks to be for more established businesses and cannot accommodate small businesses
and their meager profits. The development of a sound infrastructure is of paramount
importance to the rapid development and eventual realization of set goals like the vision
2030. Information and Communication Technology as such has been embraced as a
major highway to development and so the registration meant to bring order in e
commerce is indeed viewed as a necessity

Finance involves five basic related functions which include: raising capital to
support company operations and investment, selecting best projects to invest in,
managing the firm’s internal cash flows and its mix of debt and equity financing,
developing corporate governance structures and managing the firm’s exposure to risk to
maintain optimum risk-return trade off and therefore maximize shareholder value.

39
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction
This chapter contains entire process of planning and carrying out research
activities undertaken by the study. It discussed the research design, target population,
sampling method, sample size, data collection and data analysis.

3.2 Research Design

The study applied a descriptive research design. Descriptive research design is a

systematic, empirical inquiry into which the researcher does not have direct control of
independent variables as their manifestation has already occurred or because they are
reflecting the state of happenings and qualify the obtained findings through the use of
quantitative analysis (Mugenda and Mugenda 2003). Descriptive research is concerned
with how, what is or what exists is related to some preceding event that has influenced or
affected a present condition or event (Best, 1970). This is in line with the purpose of the
study as it sought to investigate the influence of Small and Medium Enterprises on
improvement of service delivery in the Central Business District Bungoma County. The
researcher prefered descriptive research design because the variables under study have
already occurred and beyond control. Also this design gives this study the advantage of
collecting original data for the purpose of describing a population which is too large to
observe directly hence good for the purpose of generalization (Cohen, Manion and
Morrison, 2000). Descriptive survey gathers data on a one-shot basis and hence is
economical and efficient (Morrison, (1993). Descriptive survey is also compatible with
questionnaire and interview schedule which the research employed in collecting data
(Mugenda and Mugenda, 1999).

3.3 Target Population

In the context of this study the target population can be defined as the totality of
objects or individuals under consideration of which the statistical attributes may be

40
estimated by the study of a sample or samples draw from it (Mugenda and Mugenda,
2003). The target population was 427 employees and SMEs managers of selected small
and medium enterprises (SMEs) in Bungoma CBD.

3.4 Sample Size and Sampling Procedure

The research used a descriptive research design. The research employed

stratified random sampling in selecting respondents. The population was segregated
into several mutually exclusive subpopulations or strata herein referred to as business
SMEs categories. According to Chandran (2004) sampling is the selection of a portion
of population such that the selected portion represents the population adequately.

3.4.1 Sample Size

A sample is finite part of a statistical population where properties are studied to
gain information about the whole (Webster, 1985). Subjects included in this research
study were selected to meet specific criteria. Elaborate formulae have been developed to
help the researchers estimate the most realistic sample sizes for their studies (Cochran,
1977; Fink, 2002). A sample size of 50% was adopted noting the sample sizes were
below 10,000. Since this was a descriptive research, the study was limited to Small and
Medium Enterprises in the Central Business District Bungoma County. The researcher
used purposive sampling to select the Small and Medium Enterprises by virtue of their
location and status. It was hoped that the diverse population characteristic were a true
representative of the entire population of the Small and Medium Enterprises sector.

Kerlinger, (1986) recommends a sample size of not less than ten percent of
population as a suitable one to be used in social science research. The researcher sample
219 SMEs out of an accessible population of 427 SMEs using 50% of the type categories
selected. This sample size was deemed appropriate for the study because of its ability to
establish facts which resulted in formulation of important principles of knowledge about
populations that are too large to be observed directly (Mugenda & Mugenda, 1999;
Kathuri & Pals, 1993; Lomax & Li, undated).

41
3.4.2 Sampling Procedure

This involves how respondents were chosen. The study used stratified
proportionate random sampling to get Small and Medium Enterprises . This is method of
sampling that involves the division of a population into smaller groups known as strata.
In stratified random sampling, the strata are formed based on members' shared attributes
such as general retail, hotels and workshops among others. A random sample from each
stratum was taken in a number proportional to the stratum's size when compared to the
population. Stratified sampling also allows the use of disproportionate sampling that
gives unequal weight (Kothari, 2004). The advantage with stratified proportionate
random sampling is that it ensures inclusion in the sample of every sub group (Kothari,
2004).

3.5 Data Collection Methods

The researcher employed two data collecting instruments in the study. These were:

i. Researcher developed questionnaires, and

ii. Interview schedule.

In researching human beings, no single source of information can be trusted to

provide a comprehensive perspective in any study program. As a result it is imperative to
use several methods of data collection to improve on the reliability and validity of the
data collected (Smith, 1975; Kitainge, 2005). Schofield and Anderson (1984) reports that
using a combination of data sources and collection methods are a validating aspect which
cross-checks the data. This use of combined data collection methods and sources such as
interviews and questionnaires increases the validity and reliability of the information
since the strength of one approach compensates for the weakness of another approach
(Cohen, Manion and Morrison, 2000).

3.5.1 Questionnaire

The main technique applied by the study was of the questionnaires which were
issued to the respondents and given enough time to answer the questionnaires. Mugenda

42
and Mugenda (2003) points out that questionnaire are easier to administer as compared to
interview. They also promote confidentiality as the respondent identity is not indicated.
Questionnaire technique was preferred because it covers a wide range of area and also it
reaches many respondents at a cheaper cost. It also saves a lot of time (Kothari, 2004).

3.5.2 Interview Schedule.

The researcher used structured interview to interview the Small and Medium
Enterprises. Structured interviews are easier to analyze, economical and provide a basis
for generalization (Kothari, 2004).

3.5.3 Pilot Testing

Piloting is trying out of research instruments on the respondents who will not be
used in the main study. It is important for a pilot study to be carried out before any
research is done as stated by Peter (1994). In this study, 15 small and medium enterprises
outside Bungoma CBD were used in testing the questionnaires. Groll (1986) notes that a
pilot study is necessary because" a researcher embarking on classroom research for the
first time found it valuable to spend some time in 15 small and medium enterprises
outside Bungoma CBD to establish systems and looking at the kind of issues which arose
in turning her own research questions into a set of criteria and definition for use in small
and medium enterprises." Peter (1994), states" even the most carefully constructed
instrument cannot guarantee to obtain a hundred percent reliable data". Therefore it was
necessary to pretest the instruments of the research on a small sample of respondents in a
preparatory exercise to find out if there is any weakness so that it can be corrected for the
main study.

3.5.4 Validity of the Instruments

The need to test the content and construct validity of the research instruments was
inevitable; this serves to ascertain whether what was produced was relevant. Cohen et al,
(1998) stress that experts of research should identify the validity and the reliability of
research instruments. Validity is the extent to which the instrument measures what it
appears to measure according to the researcher’s subjective assessment (Nachmias:

43
1958). Validity deals with the adequacy of the instruments for example, the researcher
needs to have adequate questions in the written task in order to collect the required data
for analysis that can be used to draw conclusion. In this study, the researcher sought help
from the supervisors, lecturers and colleagues in the Department of Extra-mural studies
to judge the validity of the questionnaire and the questions in the written task. Their
suggestions and clarifications were used to improve representation or sampling adequacy
of the content that was to be investigated and improvements on the instruments. A high
reliability for the data collection instruments is necessary but not sufficient criterion for
the adequacy of an instrument, it must be valid too. For a data collection instrument to be
considered valid the content selected and included in the instruments must be relevant to
the need or gap establishment (Koul, 1992).

3.5.5 Reliability of the Instruments

Reliability is a measure of the degree to which a research instrument yields
consistent results or data after repeated trials (Mugenda and Mugenda: 2003). It also
refers to consistency (Koul, 1993, Bryman and Cramer, 1997). The concept of reliability
has two aspects to it; internal and external reliability. Internal reliability is the ability of a
scale to measure a single idea and whether it is internally consistent; its reliability can be
computed. External reliability refers to consistency of measure over time. To ensure
reliability of the research instruments, the researcher conducted a pilot study. Test-retest
method was employed to assess the reliability of the research instruments. The results
were used to compute the correlation coefficient.

3.6 Data Collection Procedures

Formal authority to conduct research was sought from the National Council for
Science Technology and Innovations using an online mechanism. Data collection was
achieved through the administration of questionnaires. After administration of
questionnaires, an interview schedule was conducted by the researcher to Small and
Medium Enterprises. After data collection, the questionnaires were coded and data
tabulated for analysis.

44
3.7 Data Analysis and Presentation
The gathered data were analyzed through the use of quantitative and qualitative
techniques. Quantitative analysis was for closed ended questions while qualitative
analysis for open ended questions. Descriptive statistics was used to analyze data
presenting it in the form of frequencies and APA tables through Statistical Package for
social sciences (SPSS).

3.8 Ethical Consideration

Ethics was an integral part of this research study right from planning stage to the
actual conduction of the study. The respondent’s information was not passed to the third
party. The researcher strived to keep confidentiality of the information by safeguarding
the respondents’ names. In case of a respondent desiring to be bribed before divulging
information, the researcher tried to explain the reason for research and strived to remain
incorruptible. She obtained permission from the County Education Office before
collecting data, respecting and valuing and people’s culture, keeping time, respecting
respondent’s decision as well using a method that was friendly to the respondents.

45
 3.9 Operational definition of variables
Objective Type of Indicators Source Scale of Statistical Signific
variable measurement Test ance
Level
To determine how Independent: Gender of SMEs Central Business Nominal Frequencies, 0.05

entrepreneur characteristics Entrepreneur owners District Bungoma cross tabulation

characteristics County
influence the performance of
Age of SMEs
SMEs in the CBD Bungoma
owners
county

Personality traits

Dependent: Profits optimization Central Business Ordinal

Performance of Market Expansion District Bungoma Nominal
SM Es Employment County
Economic growth
To establish how business Independent: Business activity Central Business Ordinal Frequencies, 0.05
characteristics influence the business Size of business District Bungoma Nominal cross tabulation
performance of SMEs in the characteristics Form of business County
Central Business District
Bungoma County
Dependent: Profits optimization Central Business Ordinal
Performance of Market Expansion District Bungoma Nominal
SM Es Employment County
Economic growth
To determine how the adoption Independent: Market identification & Central Business Ordinal Frequencies, 0.05
of Information Communication ICT integration access District Bungoma cross tabulation
Technology influence the County
Promotion of goods &
performance of SMEs in the
services
Central Business District
Bungoma County AIS in reports
generation, data retrieval
and decision -making

Dependent: Profits optimization Central Business

Performance of Market Expansion District Bungoma
SM Es Employment County
Economic growth
To assess how the availability Independent: Sources of finance Central Business Ordinal Frequencies, 0.05
of finance influence the Extent of District Bungoma cross tabulation
Access to finance
performance of SMEs in the availability of County
Central Business District finance by SMEs Capital requirements
Bungoma County
Dependent: Profits optimization Central Business
Performance of Market Expansion District Bungoma
SM Es Employment County
Economic growth

46
 CHAPTER FOUR

DATA ANALYSIS, PRESENTATION, INTERPRETATION AND DISCUSSION

4.1 Introduction

This chapter dealt with data analysis, presentation and interpretation and
discussion of the research findings. In the first section, descriptive statistics was used to
provide data for the study. The second section presents the analysis of the responses to
the specific objectives of the study as provided by the respondents in the questionnaires
and interview schedule. The purpose of the study was to investigate the factors
influencing the performance of SMEs in Central Business District Bungoma County.

The findings are presented as follows; response rate and also presents and
interprets data analysis on entrepreneur characteristics which captured gender of SMEs
members such as age, academic qualification, work experience and training of SMEs
members, business characteristics, and the adoption of Information Communication
Technology by SMEs and availability of finance by Small and Medium Enterprises on
performance of SMEs in the Central Business District Bungoma County.

4.2 Response return rate

A total of 219 questionnaires dispatched to SMEs Managers and employees of the

selected Small and Medium Enterprises out of which 200 were duly filled and returned
giving a response rate of 89.0%. Table 4.1 shows the response return rate.

47
Table 4.1 Response return rate

Type of firm Issued questionnaires Returned Return Rate (%)

Workshops 18 16 88.9

Cyber cafe 24 20 83.3

Boutique and Hair salon 43 40 93.0

General retail & hardware 62 60 76.8

Hotels & Restaurants 35 32 91.4

Agri-business/Agro-vets 9 9 100.0

Construction and Research 6 5 83.3

Supermarkets 6 5 83.3

Pharmaceuticals 16 13 81.3

Total 219 200 89.0

From the Table 4.1, the percentage return rate was 200 (89.0%). According to
Nachimias and Nachimais (1958) 80% to 90% return rate is enough for a descriptive
research study. This return rate was appropriate for data analysis and discussion for a
descriptive study. Therefore the return rate boosted the reliability of the study. According
to Mugenda and Mugenda (1999), a 70% response rate is very good. Although the results
may be interpreted to indicate a good response rate, a failure of 11.0% to report may be
explained by lack of knowledge in SMEs and time constraints due to detailed returns of
the data collection tools.

48
4.3 Influence of Entrepreneur characteristics on Performance of SMEs in the CBD
Bungoma County

The study sought to determine how entrepreneur characteristics influence the

Performance of Small and Medium Enterprises in the Central Business District Bungoma
County. The respondents were asked to state their opinion that best described their
responses on Gender and its influence on Performance of SMEs and the results are as
shown in table 4.2.

Table 4.2 Gender of Respondents

Gender Frequency Percentage (%)

Male 149 74.5

Female 51 25.5

Total 200 100.0

As portrayed in table 4.2 above, 149 (74.5%) of the respondents were male and 51
(25.5%) were female. The result shows that men were more involved in Small and
Medium Enterprises in the Central Business District Bungoma County. These research
findings are similar to other studies by Mazzarol et al. 1999; who found out that female
were generally less likely to be founders of new business than male. Similarly, (1996,
Kolvereid) found that males had significantly higher entrepreneurial intentions than
females. The proportion of firms owned by men exceeds those owned by women (2001,
Kentor, 2001, Chell, 2001), with most studies reporting that failure rates for female
owned firms are higher than those for male. Reasons for this include limited access to
finance, stringent collateral requirements, Women’s double duties (1990), Riding and
Swift; 2000, Carter and Jones-Evans, 2000). Much of the research conducted in the 1980s
identified business challenges specific to women entrepreneurs. Some of the difficulties
reported included obtaining start-up funds, financial management and development of
effective marketing and advertising (Hisrich et al., 2008). The root causes of limited

49
financial success were often attributed to early management practices of the women
entrepreneurs. Female owners tended to prefer internal to external sources of financing.
In addition, women used smaller amount of capital at the start-up phase and that they are
less likely to use financial instruments such as overdrafts, bank loans, and supplier credit.
Women were more likely to use their banks for a source of advice, but men were more
likely to respond to that advice (Republic of Kenya, 2005). Some studies show that
women-owned businesses are more likely to fail than men-owned (Langowitz, N. &
Minniti, M. (2007). Namusonge (2006), however, reported that women perform less well
on quantitative measures such as job creation, sales turnover and profitability since
women do not enter business for financial gain but to pursue intrinsic goals (for example,
independence, and the flexibility to run business and domestic lives)

Concerning the age of the firm owners and its influence on Performance of SMEs
in the CBD Bungoma County findings are presented in table 4.3.

Table 4.3 Ages of Respondents

Age Frequency Percentage (%)

<20 Yrs 27 13.5

21-30 Yrs 53 26.5

31-40 Yrs 89 44.5

40-50 Yrs 22 11.0

>50 Yrs 9 4.5

Total 200 100.0

The age of the respondents was sought to determine the influence of the age of the
SMEs owner/manager and 27 (13.5%) of the respondents were below 20 years, 53
(26.5%) were aged between 21-30 years, 89 (44.5%) were aged 31-40, 22 (11.0%) were
aged between 40-50 years and 9 (4.5%) were above 50 years. From Table 4.3, the
findings show that most of the respondents were between 31-40 years of age by 89

50
(44.5%) responses. Clearly, most micro and small enterprises are owned and mainly
run by people in their late 20s and early 30s which comprise of the youthful population.
These findings concur with other findings by Storey, 1994, Watkins et al. 2003) that
asserts available theoretical discussion explaining the influence of age of the
owner/manager advocates for the younger owner/manager; the argument here rests on the
fact that the younger owner/manager has the necessary motivation, energy and
commitment to work and is more inclined to take risks. The logic is that the older
owner/manager is likely to have reached his/her initial aspiration, (Reynolds et al. 2000)
found that individuals ranging from 25 to 44 years were the most entrepreneurially active.
Finding from another study in India by (Sinha, 1996) disclosed that successful
entrepreneur were relatively younger in age. In their study on Internet café entrepreneurs
in Indonesia, (Kristiansen, Furuholt, & Wahid, 2003) found a significant correlation
between age of the entrepreneur and business success. The population of youths in Africa
is estimated at 200 million with an approximately 30 per cent of the population (age
between 18-35 years) in Kenya (World Bank, 2009).

The study also sought to establish the Personality traits of the Respondents to
examine the entrepreneur characteristics of Small and Medium Enterprises influence the
Performance of SMEs in the CBD Bungoma County and the study results are as shown in
Table 4.4

51
Table 4.4 Personality traits of the Respondents

Description F %

Highest level of SMEs O-Level 99 49.5

Members
Education Diploma 59 29.5

Degree 25 12.5

Masters 15 7.5

PhD 2 1.0

Working < 1Year 40 20.0

SMEs
Experience Members 1-3 Years 35 17.5

3-5 Years 95 47.5

5-7 Year 25 12.5

Entrepreneurial SMEs Autonomy 56 28.0

orientation and Members
Innovativeness 61 30.5
readiness
Risk taking 101 50.5

Proactiveness 79 39.5

Competitive 57 28.5
aggressiveness

Findings shows 99 (49.5%) of the respondents had O-Level qualification, 59

(29.5%) had diplomas (25 (12.5%) had qualified with degrees, 15 (7.5%) possessed
Masters while only 2 (1.0%) of SMEs managers had PhDs as their highest level of
training. Education level of an SME owner is positively associated with the networking
of the SME and the types of networks an SME is engaged in. From the theory of
Resource Based of competitive advantage by Grant, R M, citing prominent examples of
the focus on Michael Porters analysis of industry structure and competitive positioning
and the empirical studies undertaken by the PIMS project, by contrast, the link between
strategy and the firm’s resources and skills has suffered comparative neglect.

52
 Concerning the duration of time business has been in operation, 40 (20.0%) of the
respondents said they had operated their businesses for a period < one year, 35 (17.5%)
of the respondents had only operated between 1-3 years. Between 3 and 5 years
constituted 95 (47.5%) of the respondents, while those who had been in operation for
more than 5 years were only 25 (12.5%) of the respondents. This is fair representation of
SME owner/managers in the business with experience to counter the increase of
globalization and technological advancements so that they face fewer problems in order
to remain solvent with an increase in expenditure in relation to their earnings.
The respondents were also asked about their personality traits that motivate them to gain
competitive advantage against their competitors and the responses were given towards
entrepreneurial orientation and readiness, 56 (28.0%) of the respondents operated
autonomously, 61 (30.5%) of the respondents were innovative in their line of business,
half 101 (50.5%) of the respondents only knew that their business is about risk taking
venture while 57 (28.5%) of the respondents cited to be competitively aggressive in
performance of their small and medium enterprises

As presented in Table 4.4 majority of the respondents 99 (49.5%) had O-Level

training as their highest level of education. Greve and Salaff, 2003, argue that an SME
owner with a better education background will also be more likely to network more than
an SME owner with less education background. (2004, MacGregor) finds that the
education level of an SME owner is positively associated with the networking of the
SME and the types of networks an SME is engaged in. Education and prior experience in
business have been seen as critical success factors for small firms (1995, Yusuf; 1996,
Wijewardena & Cooray). The youths are faced with insufficient vocational skills, social
capital and limited understanding of market dynamics. An estimated 67 per cent of
Kenyan youths lack vocational skills after dropping out of secondary school education,
and this has led to high youth unemployment that is posing a serious threat to Kenya’s
social and political fabric. This has jeopardized equitable economic growth and social
cohesion by denying the country a chance to reap from the potential benefits of her
growing youth population.
Concerning the duration of time business has been in operation, most of the
respondents cited to have a working experience between 3 and 5 years by 95 (47.5%)

53
responses. These findings are similar with other studies by Storey et al., 1989 who
generally found that SME owner/managers with more managerial, sector experience or
prior SME experience as owner/manager tend to correlate with greater growth. A study
carried out by Hall (2000), found that SME owner/managers in the UK with little
experience at the start-up phase could have problems remaining solvent with an increase
in expenditure in relation to their earnings.

When it comes to Entrepreneurial orientation and readiness, the respondents

averagely cited at 35.4% responses that success is driven by entrepreneurial orientation
and readiness. According to Lumpkin and Dess (2001), the concept of entrepreneurial
orientation consists of five dimensions: autonomy, innovativeness, risk taking,
proactiveness and competitive aggressiveness.

4.4 Influence of business characteristics on Performance of SMEs in the CBD

Bungoma County

The study sought to establish how business characteristics influence performance

of SMEs in the CBD Bungoma County. On a scale of Great extent (GE), some extent
(SE), little extent (LE) and virtually nothing (VN), the respondents were asked to state
their opinion that best described their responses and on whether business activity
contributes to Performance of SMEs in the CBD Bungoma County and Table 4.5 shows
the study findings.

Table 4.5 Business activity of SMEs

Business activity GE SE LE VN TOTAL

F % F % F % F % F %

Diverse Business 41 20.5 67 33.5 39 19.5 53 26.5 200 100

activity improve
Performance of SMEs

Employee level of 129 64.5 31 15.5 21 10.5 19 9.5 200 100

training and skills

54
 41 (20.5%) of the respondents agreed to great extent that diverse business activity
improved performance of SMEs, 67 (33.5%) to some extent, and 39 (19.5%) to little
extent while only 53 (26.5%) of SMEs managers indicated virtually nothing to the
statement. They also indicated that the employee level of training and skills upgrading as
a business activity had an influence on service delivery whereby 129 (64.5%) of the
respondents agreed to great extent, 31 (15.5%) to some extent, and 21 (10.5%) to little
extent while 19 (9.5%) of SMEs managers indicated virtually nothing to the statement.

From Table 4.5, Business Characteristics of SMEs had an influence on

Performance of SMEs where most of the respondents indicated to some extent by 67
(33.5%) responses that firm’s diverse business activity improved performance of SMEs
and strongly cited that employee level of training and skills upgrading indicated to great
extent by 129 (64.5%) of the respondents. This is clearly supported by other studies by
(1994, Storey; 1996, Barkham et al.) length of time in operation (age of the business)
may be associated with the learning curve. Old players most probably have learnt much
from their experiences than have done by new comers. Kristiansen, Furuholt and Wahid
(2003) found that the length of time in operation was significantly linked to business
success. Moussavi (1988) in his unpublished PhD thesis stated that experience on the part
of the owner/ manager factor contributing to the survival of the business.

The study also determined whether the size of business is positively related to
Performance of SMEs as a Business Characteristics of SMEs and Table 4.6 shows the
study findings.

55
Table 4.6 Size of business of SMEs

Size of business GE SE LE VN TOTAL

F % F % F % F % F %

Size of business is 30 15.0 96 48.0 42 21.0 32 16.0 200 100

affects Performance

Number of business 79 39.5 61 30.5 43 21.5 17 8.5 200 100

Finding shows that 30 (15.0%) of the respondents agreed to great extent, 96

(48.0%) to some extent, 42 (21.0%) said little extent whereas 32 (16.0%) reported
virtually nothing to the statement. It was further indicated that the Number of business
establishments influenced performance of SMEs by 79 (39.5%) of the respondents agreed
to great extent, 61 (30.5%) to some extent, and 43 (21.5%) said little extent while 17
(8.5%) reported virtually nothing. The size if the business enterprises in CBD Bungoma
influenced performance of SMEs.

From Table 4.6, size of business is positively related to performance of SMEs as a

Business Characteristics of SMEs enhanced performance of SMEs, 96 (48.0%) of the
respondents agreed to some extent. It was further indicated that the Number of business
establishments and its influence performance of SMEs, 79 (39.5%) of the respondents
agreed to great extent. These findings concur with other findings outlined in the literature
review by McMahon, (2001), who asserts that size of the SME reflects how large an
enterprise is in employment terms and therefore the enterprise size significantly linked to
better business performance. Larger enterprises were found to have a higher level of
success. Audretsch and Klepper (2000), Sutton (1997), Caves (1998), all note that a small
firm has a lower likelihood of survival. This is supported by Westhead (1995) in his study
of high technology firms in England, who found that larger firms have more propensities
for growth than their smaller counterparts.

56
 The respondents were asked to indicate their opinions concerning form of
business to establish if it contributes to Performance of SMEs in the CBD Bungoma
County and the study findings revealed in Table 4.7.

Table 4.7 Form of business of SMEs

Form of business GE SE LE VN TOTAL

F % F % F % F % F %

Business location and 39 19.5 71 35.5 49 24.5 41 20.5 200 100

security

Simple business
119 59.5 51 25.5 13 6.5 17 8.5 200 100
regulatory reforms

Findings shows that 39 (19.5%) of the respondents agreed to great extent that
business location and security had an influence on Performance of SMEs, 71 (35.5%) to
some extent, (49 (24.5%) said little extent while 41 (20.5%) reported virtually nothing.
The extent of security in an area is directly related to service delivery of SMEs. It was
also noted that simple business regulatory reforms have a positive outcomes in terms of
increasing business in performance of SMEs and 119 (59.5%) of the respondents asserted
to great extent, 51 (25.5%) to some extent, 13 (6.5%) said little extent while 17 (8.5%)
reported virtually nothing.

From Table 4.7, Business location and security had a bearing on performance of
SMEs and the study findings revealed that 71 (35.5%) of the respondents agreed to some
extent. These results are in agreement with other findings by Ayyagari et al. (2005) who
found that crime incidences and political instability negatively affect firm investment and
growth. The extent of security in an area is directly related to performance of SMEs. It
was also noted that simple business regulatory reforms have a positive outcomes in terms
of increasing performance of SMEs and 119 (59.5%) of the respondents asserted to great
extent. Various empirical studies have established that an adverse investment climate,

57
including weak property rights protection, stringent regulatory frameworks, poor
infrastructure and lack or limited access to credit, constrains MSME investment and
growth. A study by KIPPRA (KIPPRA and Ernst and Young, 2008) established that
being in an industrial location, access to electricity, lower incidences of insecurity, access
to bank loans and positive perceptions of the entrepreneur regarding the courts in terms of
affordability and fairness positively affect firm growth. The study used the MSME
Competitive Project Baseline Survey 2008 data collected by KIPPRA. The data set
comprised of 2,590 MSMEs in 19 counties, there is a positive correlation between sales
growth and access to electricity, bank loans and piped water. Insecurity and increase in
negative perception of the fairness, cost and efficiency of courts adversely affect MSME
growth. These findings suggest that policy efforts aimed at promoting a conducive
investment climate at county level are vital for MSME growth.

4.5 Information Communication Technology (ICT) adoption and its influence on

Performance of SMEs in the CBD Bungoma County

The study sought to determine how the adoption of Information Communication

Technology (ICT) influences the performance of SMEs in the CBD Bungoma County
under the following themes. On a scale of Great extent (GE), some extent (SE), little
extent (LE) and virtually nothing (VN), the respondents were asked to state their opinion
that best described their responses. Concerning the Extent and use of ICT in market
identification and access and its influence on Performance of SMEs in the CBD
Bungoma County, Table 4.8 depicts the study findings.

58
Table 4.8 Extent and use of ICT in market identification and access
Extent and use of ICT GE SE LE VN TOTAL
in market identification
F % F % F % F % F %
& access

what extent does your 25 12.5 80 40.0 75 37.5 20 10.0 200 100
enterprise possesses ICT

Searching markets has 4 2.0 82 41.0 113 56.6 1 0.5 200 100
been easy using ICT

business integrated use 30 15.0 56 28.0 76 38.0 38 19.0 200 100

of ICT on market
identification, access

The respondents reported the extent of firm’s possession with ICT on market
identification and access which improved Performance of SMEs in the CBD Bungoma
County and the findings showed that 25 (12.5%) of the respondents asserted to great
extent the enterprise possessed Computer, Telephone Computer and networks, 80
(40.0%) to some extent, 75 (37.5%) to little extent while 20 (10.0%) of the respondents
said virtually nothing to the statement. This was highly noted with cybercafés,
supermarkets, and some Pharmaceuticals and a few restaurants.

Concerning searching markets has been easy using ICT by the SMEs, 4 (2.0%) of the
respondents indicated to great extent, 82 (41.0%) to some extent, and 113 (56.5%) to
little extent while 1 (0.5%) said virtually nothing to the statement. On whether the
business enterprise integrated the use of ICT in market identification and market access;
25 (15.0%) of the respondents indicated to great extent, 56 (28.0%) to some extent, and
76 (38.0%) to little extent while 38 (19.0%) said virtually nothing to the statement. This
could be attributed to Kenyan youths lack vocational skills after dropping out of
secondary school education as most of the SMEs were owned by O-Level graduates.
From Table 4.8, 80 (40.0%) respondents indicated to some extent that firms
possessed ICT such as Computer, Telephone Computer and networks followed by 75
(37.5%) to little extent. This is clearly supported by other studies by Houghton and

59
Winklhofer, (2004), Dawn et al. (2002) and Lawson et al. (2003). Despite the
importance of ICT and emphasis by various governments to encourage SMEs to adopt
ICT, it has been reported that SMEs have been slow in adopting ICT for various reasons.
SMEs have limited financial and human resources to adopt ICT, (Duan et al. 2002)
Identified lack of ICT skills and knowledge in SMEs as one of the major challenges faced
by all European countries, particularly in the UK, Poland and Portugal, in their study.
(Houghton and Winklhofer, 2004) have reported a slow response of SMEs relating to
adoption of ICT, (Shiels et al. 2003) found that characteristics of the firm and industry
sector are contributory factors to the adoption and exploitation of ICTs by SMEs,
Kapurubandara et al. (2006) have categorized internal and external barriers that impede
adoption of ICT by SMEs in a developing country. Statistics indicate computer usage in
Kenya has increased over the years, 77% SMEs indicating they own a computer (Kiveu,
2008). However, majority use computers for basic applications like automation and
communication.

Concerning searching markets being easy using ICT by the SMEs, more than half
113 (56.5%) of the of the respondents indicated to little extent while 76 (38.0%) of the
respondents asserted to little extent that their business enterprise integrated the use of ICT
in market identification and market access. This is supported from other studies by
Kiveu, 2008, in a study on ICT adoption and use by SMEs, only 28% of interviewed
SMEs had Websites and 24% indicated they used ICT for product marketing and e-
commerce. The Government of Kenya in the Private Sector Development Strategy
(PSDS) report which cited lack of access to markets and finance as the major constraints
facing MSMEs. Market access in developing countries is a major challenge to small
businesses due to market imperfections that can be attributed to lack of market
information, lack of linkages between the actors in the supply chain, distortions or
absence of input and output markets, high transaction cost and high presence of trade
intermediaries. Different strategies exist for improving market access of which the use of
ICT is one. Strategies that enhance market access greatly impacts on the performance of
small enterprises (Shepherd, 2007) and the resource-based view (RBV) theory argues that
firms possess resources, a subset of which enables them to achieve competitive
advantage, and a subset of those that lead to superior long-term performance.

60
 The respondents were asked to state whether ICT was integrated in promotion of
Goods and Services of the firm for improved Performance of SMEs in the CBD
Bungoma County and Table 4.9 demonstrates the study findings.

Table 4.9 Adoption of ICT in promotion of Goods and Services

Use of ICT in GE SE LE VN TOTAL

promotion of Goods
F % F % F % F % F %
and Services

Products are advertised 36 18.0 49 24.5 100 50.0 15 7.5 200 100
online using ICT

ICT has reduced 124 62.0 51 25.5 25 12.5 0 0.0 200 100
transaction cost

Findings showed that 36 (18.0%) of the respondents asserted to great extent that
the Enterprise products were advertised online using ICT i.e. use of Radio/TV, Mobile
phone Sms, websites, 49 (24.5%) to some extent, 100 (50.0%) to little extent while 15
(7.5%) of the respondents said virtually nothing to the statement. This is low in far as ICT
integration in sales promotion. They further indicated that integration of ICT has reduced
transaction cost i.e. online registration and obtaining licenses where 124 (62.0%) of the
respondents indicated to great extent, 51 (25.5%) to some extent, and 25 (12.5%) to little
extent while no respondent said virtually nothing to the statement. This is a relative
increase in the number of firms that have been operating informally to being formally
registered as a requirement of the Companies Act.

As presented in Table 4.9, the study established that there is low ICT integration
in sales promotion whereby half 100 (50.0%) of the respondents asserted to little extent
that the Enterprise products were advertised online using ICT i.e. use of Radio/TV,
Mobile phone Sms, websites. From the theory of Resource based of competitive
advantage, at the business strategy level, explorations of the relationships between
resources, competition and profitability include the analysis of competitive limitation, the

61
appropriability of returns to innovations, the role of imperfect information in creating
profitability differences between competing firms, and the means by which the process of
resource accumulation can sustain competitive advantage. ICT can significantly impact
the market –oriented dimensions of products and services (Ritchie & Bridley, 2005).
Market –oriented ICT include websites which display the goods, services and information
of a firm on the world wide-web (WWW). It can also integrate the e-commerce
functionality, such as offering the ability to place orders. The www is a powerful
platform for expanding and reaching new markets for SMEs while the Internet is critical
in enhancing a firm's market reach and operational efficiency. In addition, ICT facilitates
remote access to knowledge, suppliers and a borderless environment, offering SMEs the
ability to deliver products and services on a different platform that is easily accessible.
ICT can be used to reduce barriers of entry into different market segments exposing
SMEs to a wider customer base (Lloyd & Kroeze, 2008). Mutula & Van Brakel (2006)
noted that ICTs, especially the internet, have a significant impact on the operations of
SMEs by facilitating their access to global markets, enabling them to sell to international
customers, and to compete favourably with large corporations. ICT can enable SMEs to
participate in the regional and international markets which are strategic for
competitiveness, growth and further development (Ramsey et. al., 2003).

However, the use of ICT in registration has significantly reduced the transaction
costs where majority of the respondents asserted to great extent by 124 (62.0%)
responses. Registration of business has improved using ICT when compared to study by
KIPPRA, 2008 which established that 72 per cent of the over 2,500 firms sampled were
not registered; of those that were registered, only 8 per cent of sampled firms were
formally registered as limited companies with the Registrar of Companies. Strategic use
of ICTs is viewed as near solutions to firm’s problems e.g. ICT has the potential to
reduce the impacts of distance, reduce transaction costs, be used in information gathering
and dissemination, inventory control, and quality control. The study also established that
the low level of business registration is due to the many registration requirements, the
long period it takes, and the long distance to be covered to register hence ICT integration
has reduced the costs.

62
 The study sought to determine the adoption of ICT in Accounting Information
Systems (AIS) in order to generate the firm’s reports, data retrieval and sharing and
decision making on Performance of SMEs in the CBD Bungoma County. Table 4.10
presents the study findings.

Table 4.10 Adoption of ICT in Accounting Information Systems (AIS) by SMEs

Adoption of ICT in GE SE LE VN TOTAL

Accounting Information
F % F % F % F % F %
Systems (AIS)

Information system 40 20.0 66 33.0 52 26.0 42 21.0 200 100

members are keen to gather
information that
recognizes the external
environment and
competitors

ICT provide data in the 95 47.5 70 35.0 30 15.0 5 2.5 200 100
system that is available and
quickly retrievable

Enterprise customers are 35 17.5 58 29.0 72 36.0 35 17.5 200 100

able to access the different
types of reports generated
by AIS on time

Reports produced
communicates many
nonfinancial measures of 91 45.5 47 23.5 40 20.0 12 6.0 200 100
performance i.e.
operational data such as
units produced and sold by
product type

ICT use automated AIS

that contribute to make
the information outputs 116 58.0 64 32.0 16 8.0 4 2.0 200 100
more suitable for
Decision-makers

63
 Findings showed that 40 (20.0%) of the respondents asserted to great extent that
the Enterprise Information system members are keen to gather the information that
recognizes the external environment and competitors, 66 (33.0%) to some extent, 52
(26.0%) to little extent while 42 (21.0%) of the respondents said virtually nothing to the
statement. This indicates low level of ICT integration in Accounting Information Systems
(AIS) to generate reports for the SMEs in CBD Bungoma County.

Concerning AIS in data retrieval, 95 (47.5%) of the respondents asserted to great

extent that ICT provide data in the system that is available and quickly retrievable, 70
(35.0%) to some extent and 30 (15.0%) to little extent while 5 (2.5%) of the respondents
said virtually nothing to the statement. This is fair in terms of AIS in data retrieval by
SMEs. On whether the Enterprise customers were able to access the different types of
reports generated by AIS on time, 35 (17.5%) agreed to great extent, 58 (29.0%) to some
extent and 72 (36.0%) indicated little extent while 35 (17.5%) said virtually nothing to
the statement. There is low use of AIS in data sharing between the firms and their
customers.

The SMEs managers were also asked to indicate whether reports produced AIS
communicates many nonfinancial measures of performance i.e. operational data such as
units produced and sold by product type and 91 (45.5%) agreed to great extent, 47
(23.5%) to some extent and 40 (20.0%) indicated little extent while 12 (6.0%) said
virtually nothing to the statement. They were also asked whether firm’s ICT use
automated AIS that contribute to make the information outputs more suitable for
Decision-makers and 116 (58.0%) agreed to great extent, 64 (32.0%) to some extent and
16 (8.0%) indicated little extent while 4 (2.0%) said virtually nothing to the statement.
AIS generate reports on the performance of the business for decision making.

From Table 4.10, Findings showed that 66 (33.0%) of the respondents asserted to
some extent that the Enterprise Information system members are keen to gather the
information that recognizes the external environment and competitors. This is clearly
supported by other studies by Chang (2001) asserts that accounting information plays a
significant role in enhancing organizational effectiveness in a global competitive

64
environment. Doms, Jarmin and Klimek (2004) say that financial statements still remain
the most important source of externally feasible information on companies.

Concerning AIS in data retrieval, 95 (47.5%) of the respondents asserted to great

extent that ICT provide data in the system that is available and quickly retrievable.
Information technologies have been paramount in recent decades and have been leading
developments in the globalization and societies. Information technology plays a vital role
in the accounting profession. It can be a strategic weapon to support the objective and
strategy of the organization. This empirical evidence is highly supported by the Theory
of Resource based of competitive advantage by Grant R, M.

The Enterprise customers were able to access the different types of reports
generated by AIS on time, 72 (36.0%) of the respondents indicated little extent.
According to world development report (1999), for leading countries in the world
economy, the balance between knowledge and resources has shifted so far towards the
former that knowledge has become perhaps the most important factor determining the
standard of living more than land, tools, and labor. Today’s most technologically
advanced economies are truly knowledge based. Countries in the world are moving from
an industrial economy to a knowledge economy in which economic growth is dependent
on a country’s ability to create, accumulate and disseminate knowledge. Wolf, S. (2001)
found that in most African countries, small and medium enterprise (SME) account for a
significant share of production and employment and is therefore directly connected to
poverty alleviation. Especially in developing countries SMEs are challenged by the
globalization of production and the shift in the importance of various determinants of
competiveness. In spite of their widespread use and continuing advance, there is some
concern that accounting practice has not kept pace with rapid economic and high
technology changes which invariably affects the value relevance of accounting
information.

The SMEs managers indicated that reports produced AIS communicates many
nonfinancial measures of performance i.e. operational data such as units produced and
sold by product type by 91 (45.5%) of the respondents agreed to great extent so that most
organizations get competitive advantage by use of new information system. In the view

65
of this fact, the key to organization's survival is the continuous improvement of its
performance. The need to integrate these often diverse systems led to the accountant's
appreciation of shared databases that provide a picture of the organization's data,
eliminating duplications and reducing data conflicts (Moscove et al., 1999). The study
further affirms by 116 (58.0%) to great extent that firm’s ICT use automated AIS that
contribute in making the information outputs more suitable for Decision-makers.

Automatic generation of a stream of accounting reports is of momentous

importance to any organisation if it is to achieve sound financial success. Therefore, most
organizations focus on developing information systems in order to support decision
making, communication, knowledge management, as well as many others. The key part
of information system needed for decision making in organization is accounting
information system. Accounting information systems (AIS) is one of information systems
that produce many amounts of data for use by decision makers both within and outside
organizations.

Generally, the adoption of ICT in Accounting information systems (AIS) has been
low by the SMEs in the CBD Bungoma County. This is heavily supported by Houghton
and Winklhofer, 2004, Smallbone et al. 2001, Dawn et al. 2002) and Lawson et al. 2003
that despite the importance of ICT and emphasis by various governments to encourage
SMEs to adopt ICT, it has been reported that SMEs have been slow in adopting ICT for
various reasons. SMEs have limited financial and human resources to adopt ICT, (2002,
Duan et al.) Identified lack of ICT skills and knowledge in SMEs as one of the major
challenges faced by all European countries, particularly in the UK, Poland and Portugal,
in their study. (2004, Houghton and Winklhofer) have reported a slow response of SMEs
relating to adoption of ICT, (2003, Shiels et al.) found that characteristics of the firm and
industry sector are contributory factors to the adoption and exploitation of ICTs by
SMEs, (2006, Kapurubandara et al.) have categorized internal and external barriers that
impede adoption of ICT by SMEs in a developing country. The internal barriers include
owner manager characteristics, firm characteristics, cost and return on investment, and
external barriers include: infrastructure, social, cultural, political, legal and regulatory.
However it is not the investment in the technology alone but the combination with other

66
technologies and especially relevant skills that make ICT work. Most organizations have
continued to increase spending on information system and their budgets continue to rise.
Moreover, economic conditions and competition create pressures about costs of
information. Generally, information system is developed using information technology to
aid individuals in performing their jobs.

4.6 Availability of finance and the Performance of SMEs in the CBD Bungoma
County

The study sought to assess how the availability of finance by Small Medium
Enterprises influences the improvement of service delivery in the Central Business
District Bungoma County under the following themes. On a scale of Great extent (GE),
some extent (SE), little extent (LE) and virtually nothing (VN), the respondents were
asked to state their opinion that best described their responses the availability of finance
and its influence on Performance of SMEs in the CBD Bungoma County and Table 4.11
depicts the study findings.

Table 4.11 Availability of finance by SMEs

Sources of finance GE SE LE VN TOTAL

F % F % F % F % F %

Bulk of funds raised 147 73.5 49 24.5 4 2.0 0 0.0 200 100
yearly by internal
means

There limited external 133 66.5 31 15.5 21 10.5 15 7.5 200 100
funding opportunities

Findings showed that 147 (73.5%) of the respondents agreed to great extent to
which Businesses raise bulk of funding they need yearly by internal means as a source of
finance by SMEs limits performance of SMEs, 49 (24.5%) to some extent, and 4 (2.0%)
to little extent while no manager indicated virtually nothing to the statement. They also

67
indicated that there was limited external funding opportunities had an influence on
Performance of SMEs whereby 133 (66.5%) of the respondents agreed to great extent, 31
(15.5%) to some extent, and 21 (10.5%) to little extent while 15 (7.5%) of SMEs
managers indicated virtually nothing to the statement.

From Table 4.11, the findings showed that most of the respondents 147 (73.5%)
agreed to great extent to which Businesses raise bulk of funding they need yearly by
internal means as a source of finance by SMEs limit performance of SMEs. They also
indicated that there were limited external funding opportunities which had an influence
on Performance of SMEs by 133 (66.5%) of the respondents agreed to great extent.
Business raise money either externally from investors or creditors or internally by
retaining operating cash flows and therefore from study, most businesses raise the bulk of
funding they need yearly by internal means.

Access to external financing influences the form of business. Sole proprietors

and partnerships for instance face limited external funding opportunities as compared to
companies which have access. Some companies decide to form corporations to enhance
their capital base. Corporations can raise capital either by selling an ownership interest or
by borrowing from creditors. In business terms, an ownership interest of for example
security such as stocks is called equity and money borrowed from creditors is termed as
debt and when corporations sell securities to investors the raise capital in a primary
market transaction. In such a transaction, money flows from investors to firms and firms
then invest the money to exploit investment opportunities. Investors who hold a firm’s
securities can trade them with other investors. Such secondary market trade transactions
(trade between investors) generate no cash for the firm but the existence of an active
secondary market makes the firm’s securities more attractive to investors (Jonathan,
2005). To avoid bankruptcy which may expose firms to compulsory winding up or
liquidation, the businesses should analyze the various funding sources and go for those
that are suitable for their needs and finance availability by SMEs was inclined towards
improved Performance of SMEs in the CBD Bungoma County.

68
 Concerning the influence of access to finance by SMEs and how it inclined
towards improved Performance of SMEs in the CBD Bungoma County, study findings
are illustrated in 4.12.

Table 4.12 Access to finance by SMEs

Access to finance GE SE LE VN TOTAL

F % F % F % F % F %

Lack of access to credit 151 75.5 41 20.5 5 2.5 3 1.5 200 100
hamper growth of
business

High cost of credit, high 179 89.5 11 5.5 10 5.0 0 0.0 200 100
bank charges and fees
limit credit access

Findings showed that 151 (75.5%) of the respondents agreed to great extent that
lack of access to credit hamper growth of business, 41 (20.5%) to some extent, and 5
(2.5%) said little extent whereas 3 (1.5%) reported virtually nothing to the statement. It
was further indicated that high cost of credit, high bank charges and fees limit credit
access and influenced Performance of SMEs by 179 (89.5%) of the respondents
unanimously agreed to great extent, 11 (5.5%) to some extent, and 10 (5.0%) said little
extent while no one reported virtually nothing.

From Table 4.12, access to finance had a bearing on Performance of SMEs

whereby 151 (75.5%) of the respondents agreed to great extent that lack of access to
credit hamper growth of business. There is every indication that high cost of credit, high
bank charges and fees limit credit access and influenced Performance of SMEs by 179
(89.5%) of the respondents unanimously agreed to great extent. These findings are clearly
supported by other studies by Wanjohi and Mugure, 2008). Lack of access to credit is
almost universally indicated as a key problem for SME’s. This affects technology choice
by limiting the number of alternatives that can be considered. Many SME’s may use an

69
inappropriate technology because it is the only one they can afford. In some cases, even
where credit is available, the entrepreneur may lack freedom of choice because the
lending conditions may force the purchase of heavy, immovable equipment that can serve
as collateral for the loan. Credit constraints operate in variety of ways in Kenya where
undeveloped capital market forces entrepreneurs to rely on self-financing or borrowing
from friends or relatives.

Lack of access to long-term credit for small enterprises forces them to rely on
high cost short term finance. There are various other financial challenges that face small
enterprises. They include the high cost of credit, high bank charges and fees. The
scenario witnessed in Kenya particularly during the climaxing period of the year 2008
testifies the need for credit among the common and low earning entrepreneurs. Numerous
money lenders in the name of Pyramid schemes came up, promising hope among the
‘little investors,’ which they can make it to the financial freedom through soft borrowing.
The rationale behind turning to these schemes among a good number of entrepreneurs is
mainly to seek alternatives and soft credit with low interest rates while making profits.
Financial constraint remains a major challenge facing SME’s in Kenya. Investment
climate indicators, including access to bank credit, piped water, electricity, crime
incidences and negative perception of the courts in dealing with business disputes vary
across counties and positively affect MSME growth. These results are consistent with the
larger literature on the importance of access to bank credit, quality institutions and
infrastructure for firm investment and growth.

Finally the respondents were asked to state their opinion on capital requirements
by SMEs to examine its influence on improved Performance of SMEs in the CBD
Bungoma County and Table 4.12 illustrates the study findings.

70
Table 4.13 Capital requirements by SMEs

Capital requirements GE SE LE VN TOTAL

F % F % F % F % F %

The issue of collateral is 129 64.5 71 35.5 0 0.0 0 0.0 200 100
required

Low capital to support 119 59.5 51 25.5 13 6.5 17 8.5 200 100
SMEs operations

Findings showed that 129 (64.5%) of the respondents agreed to great extent that
the issue of collateral is required in raising capital, 71 (35.5%) to some extent while no
SMEs respondent reported little extent and virtually nothing. It was also noted that low
capital to support SMEs operations and investment limit their Performance and 119
(59.5%) of the respondents asserted to great extent, 51 (25.5%) to some extent, 13 (6.5%)
said little extent while 17 (8.5%) reported virtually nothing.

Table 4.13 indicate that Capital requirements had an influence on Performance of

SMEs whereby 129 (64.5%) of the respondents agreed to great extent that the issue of
collateral is required in raising capital. It was also noted that low capital to support SMEs
operations and investment limit their performance and 119 (59.5%) of the respondents
asserted to great extent. These results are in agreement with other findings by Hirschland,
(2005) who found that In lending agreements, collateral is a borrower's pledge of specific
property to a lender, to secure repayment of a loan. The collateral serves as protection for
a lender against a borrower's default - that is, any borrower failing to pay the principal
and interest under the terms of a loan obligation. If a borrower does default on a loan (due
to insolvency or other event), that borrower forfeits (gives up) the property pledged as
collateral - and the lender then becomes the owner of the collateral. In a typical mortgage
loan transaction, for instance, the real estate being acquired with the help of the loan
serves as collateral.

71
 CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction

This chapter dealt with summary of findings of the study, conclusions and
recommendations for further research. In the, descriptive statistics were used to discuss
the responses from each set of the independent variables of the study. The section
presents summary analysis of the percentage of responses of the specific objectives of the
study as provided by the respondents in the questionnaires and interview schedule.

5.2 Summary of findings

The purpose of the study was to investigate the factors influencing Performance
of SMEs in the CBD Bungoma County. In this sub section the research outlines summary
of findings based on objectives of the study.

The study sought to determine how entrepreneur characteristics influence the

Performance of Small and Medium Enterprises in the Central Business District Bungoma
County. The findings from Table 4.2 portrayed that 74.5% of the respondents were male
and 25.5% were female. The result shows that men were more involved in Small and
Medium Enterprises in the Central Business District Bungoma County. These research
findings are similar to other studies by Mazzarol et al. 1999; who found out that female
were generally less likely to be founders of new business than male. Similarly, (1996,
Kolvereid) found that males had significantly higher entrepreneurial intentions than
females.

The age of the respondents was sought since its findings would assist the study
categorize respondents based on age whereby 13.5% of the respondents were below 20
years, 26.5% were aged between 21-30 years, 44.5% were aged 31-40, 11.0% were aged
between 40-50 years and 4.5% were above 50 years.

On establishment of Personality traits of the Respondents to examine the

entrepreneur characteristics influence the improvement Performance of SMEs in the CBD
Bungoma County and the study findings shows 49.5% of the respondents had O-Level

72
qualification, 29.5% had diplomas 12.5% had qualified with degrees, 7.5% possessed
Masters while only 1.0% of SMEs managers had PhDs as their highest level of training.
Education level of an SME owner is positively associated with the networking of the
SME and the types of networks an SME is engaged in.

Concerning the duration of time business has been in operation, 20.0% of the
respondents said they had operated their businesses for a period < one year, 17.5% of the
respondents had only operated between 1-3 years. Between 3 and 5 years constituted
47.5% of the respondents, while those who had been in operation for more than 5 years
were only 12.5% of the respondents. This is fair representation of SME owner/managers
in the business with experience to counter the increase of globalization and technological
advancements so that they face fewer problems in order to remain solvent with an
increase in expenditure in relation to their earnings.

The respondents were also asked about their personality traits that motivate them
to gain competitive advantage against their competitors and the responses were given
towards entrepreneurial orientation and readiness, 28.0% of the respondents operated
autonomously, 30.5% of the respondents were innovative in their line of business, half
50.5% of the respondents only knew that their business is about risk taking venture while
28.5% of the respondents cited to be competitively aggressive Performance of SMEs.

The study sought to establish how business characteristics influence performance

of SMEs in the CBD Bungoma County. The findings showed that 20.5% of the
respondents agreed to great extent that diverse business activity improved Performance of
SMEs, 33.5% to some extent, and 19.5% to little extent while only 26.5% of SMEs
managers indicated virtually nothing to the statement. They also indicated that the
employee level of training and skills upgrading as a business activity had an influence on
Performance of SMEs whereby 64.5% of the respondents agreed to great extent, 15.5% to
some extent, and 10.5% to little extent while 9.5% of SMEs managers indicated virtually
nothing to the statement.

On whether the size of business is positively related to Performance of SMEs as a

Business Characteristics, 15.0% of the respondents agreed to great extent, 48.0% to some

73
extent, 21.0% said little extent whereas 16.0% reported virtually nothing to the statement.
It was further indicated that the Number of business establishments influenced
Performance of SMEs by 39.5% of the respondents agreed to great extent, 30.5% to some
extent, and 21.5% said little extent while 8.5% reported virtually nothing. The size if the
business enterprises in CBD Bungoma influenced their performance.

The study also determined whether Business location and security had an
influence on Performance of SMEs and the study findings revealed that 19.5% of the
respondents agreed to great extent, 35.5% to some extent, 24.5% said little extent while
20.5% reported virtually nothing. The extent of security in an area is directly related to
service delivery of SMEs. It was also noted that simple business regulatory reforms have
a positive outcomes in terms of increasing business Performance of SMEs and 59.5% of
the respondents asserted to great extent, 25.5% to some extent, 6.5% said little extent
while 8.5% reported virtually nothing.

The study sought to determine how the adoption of Information Communication

Technology (ICT) influences the Performance of SMEs in the CBD Bungoma County
under the following themes. The findings showed that 12.5% of the respondents asserted
to great extent the enterprise possessed Computer, Telephone Computer and networks,
40.0% to some extent, 37.5% to little extent while 10.0% of the respondents said virtually
nothing to the statement. This was highly noted with cybercafés, supermarkets, and some
chemists and a few restaurants.

Concerning searching markets has been easy using ICT by the SMEs, 2.0% of the
respondents indicated to great extent, 41.0% to some extent, and 56.5% to little extent
while 0.5% said virtually nothing to the statement. On whether the business enterprise
integrated the use of ICT in market identification and market access; 15.0% of the
respondents indicated to great extent, 28.0% to some extent, and 38.0% to little extent
while 19.0% said virtually nothing to the statement. This could be attributed to Kenyan
youths lack vocational skills after dropping out of secondary school education as most of
the SMEs were owned by O-Level graduates.

74
 The respondents were asked to state whether ICT was integrated in promotion of
Goods and Services of the firm for improved performance of SMEs in the CBD Bungoma
County and the findings showed that 18.0% of the respondents asserted to great extent
that the Enterprise products were advertised online using ICT i.e. use of Radio/TV,
Mobile phone Sms, websites, 24.5% to some extent, 50.0% to little extent while 7.5% of
the respondents said virtually nothing to the statement. This is low in far as ICT
integration in sales promotion. They further indicated that integration of ICT has reduced
transaction cost i.e. online registration and obtaining licenses where 62.0% of the
respondents indicated to great extent, 25.5% to some extent, and 12.5% to little extent
while no respondent said virtually nothing. This is a relative increase in the number of
firms that have been operating informally to being formally registered as a requirement of
the Companies Act.

The study sought to determine the use of ICT in Accounting Information Systems
(AIS) in order to generate the firm’s reports, data retrieval and sharing and decision
making. Findings showed that 20.0% of the respondents asserted to great extent that the
Enterprise Information system members are keen to gather the information that
recognizes the external environment and competitors, 33.0% to some extent, 26.0% to
little extent while 21.0% of the respondents said virtually nothing to the statement. This
indicates low level of ICT integration in Accounting Information Systems (AIS) to
generate reports for the SMEs in CBD Bungoma County.

Concerning AIS in data retrieval, 47.5% of the respondents asserted to great

extent that ICT provide data in the system that is available and quickly retrievable, 35.0%
to some extent and 15.0% to little extent while 2.5% of the respondents said virtually
nothing to the statement. This is fair in terms of AIS in data retrieval by SMEs. On
whether the Enterprise customers were able to access the different types of reports
generated by AIS on time, 17.5% agreed to great extent, 29.0% to some extent and 36.0%
indicated little extent while 17.5% said virtually nothing to the statement. There is low
use of AIS in data sharing between the firms and their customers.

The SMEs managers were also asked to indicate whether reports produced AIS
communicates many nonfinancial measures of performance i.e. operational data such as

75
units produced and sold by product type and 45.5% agreed to great extent, 23.5% to some
extent and 20.0% indicated little extent while 6.0% said virtually nothing to the
statement. They were also asked whether firm’s ICT use automated AIS that contribute to
make the information outputs more suitable for Decision-makers and 58.0% agreed to
great extent, 32.0% to some extent and 8.0% indicated little extent while 2.0% said
virtually nothing to the statement. AIS generate reports on the performance of the
business for decision making.

Finally the study sought to assess how the availability of finance influenced the
Performance of SMEs in the Central Business District Bungoma County under the
following themes. The findings showed that 73.5% of the respondents agreed to great
extent to which Businesses raise bulk of funding they need yearly by internal means as a
source of finance by SMEs limit Performance, 24.5% to some extent, and 2.0% to little
extent while no manager indicated virtually nothing to the statement. They also indicated
that there was limited external funding opportunities had an influence on Performance of
SMEs whereby 66.5% of the respondents agreed to great extent, 15.5% to some extent,
and 10.5% to little extent while 7.5% of SMEs managers indicated virtually nothing.

On whether access to finance had a bearing on Performance of SMEs and 75.5%

of the respondents agreed to great extent that lack of access to credit hamper growth of
business, 20.5% to some extent, and 2.5% said little extent whereas 1.5% reported
virtually nothing to the statement. It was further indicated that high cost of credit, high
bank charges and fees limit credit access and therefore influenced Performance of SMEs
by 89.5% of the respondents unanimously agreed to great extent, 5.5% to some extent,
and 5.0% said little extent while no one reported virtually nothing.

The study also determined whether Capital requirements had an influence on

Performance of SMEs and the study findings revealed that 64.5% of the respondents
agreed to great extent that the issue of collateral is required in raising capital, 35.5% to
some extent while no SMEs respondent reported little extent and virtually nothing. It was
also noted that low capital to support SMEs operations and investment limit their
Performance and 59.5% of the respondents asserted to great extent, 25.5% to some
extent, 6.5% said little extent while 8.5% reported virtually nothing.

76
5.3 Conclusion

The purpose of the study was to investigate the factors influencing Performance
of SMEs in the CBD Bungoma County and the conclusion of the study is analyzed as per
objectives in subsections highlighted as follows:

Result shows that men were more involved in Small and Medium Enterprises in
the Central Business District Bungoma County. Female were generally less likely to be
founders of new business than male. Therefore males had significantly higher
entrepreneurial intentions than females. Reasons for these gender disparities in SMEs
include limited access to finance, stringent collateral requirements, Women’s double
duties. The root causes of limited financial success were often attributed to early
management practices of the women entrepreneurs. Female owners tended to prefer
internal to external sources of financing. In addition, women used smaller amount of
capital at the start-up phase and that they are less likely to use financial instruments such
as overdrafts, bank loans, and supplier credit.

The findings show that most of the respondents were between 31-40 years of age
which clearly indicate that most micro and small enterprises are owned and mainly run by
people in their late 20s and early 30s which comprise of the youthful population. The
influence of the age of the owner/manager advocates for the younger owner/manager; the
argument here rests on the fact that the younger owner/manager has the necessary
motivation, energy and commitment to work and is more inclined to take risks and more
entrepreneurially active hence improved Performance of SMEs. The logic is that the
older owner/manager is likely to have reached his/her initial aspiration. Therefore there is
a significant correlation between age of the entrepreneur and business success.

Majority of the respondents had O-Level training as their highest level of

education. The low education background SME owners’ limited networking hence the
education level of an SME owner is positively associated with the networking of the
SME and the types of networks an SME is engaged in. The youths are faced with
insufficient vocational skills, social capital and limited understanding of market
dynamics. An estimated 67 per cent of Kenyan youths lack vocational skills after

77
dropping out of secondary school education, and this has led to low service delivery in
the CBD Bungoma County. Most of the SMEs had duration of time business in operation
between 3 and 5 years working experience. Sector experience or prior SME experience as
owner/manager tends to correlate with greater growth.

When it comes to Entrepreneurial orientation and readiness, the respondents

averagely cited at 35.4% responses that success is driven by entrepreneurial orientation
and readiness. This has jeopardized equitable economic growth and social cohesion by
denying the country a chance to reap from the potential benefits of her growing youth
population because of low Entrepreneurial orientation and readiness.

Business Characteristics of SMEs had an influence on Performance of SMEs

where most of the respondents indicated to some extent that firm’s diverse business
activity improved service delivery and strongly cited that employee level of training and
skills upgrading in operation of SMEs influenced performance of SMEs in the CBD
Bungoma County. The experience on the part of the owner/ manager is a factor
contributing to the survival of the business. Size of business is positively related to
Performance as a Business Characteristics of SMEs enhanced Performance of SMEs

It was further indicated that the Number of business establishments inclined

towards performance of SMEs. Business location and security had a bearing on
performance of SMEs and the study findings revealed that most of the respondents
agreed to some extent. Crime incidences and political instability negatively affect firm
investment and growth. The extent of security in an area is directly related to
Performance of SMEs. It was also noted that simple business regulatory reforms have a
positive outcomes in terms of increasing business performance of SMEs.

A few firms to some extent that possessed ICT equipments such as Computer,
Telephone Computer and networks and this is, however, low adoption rate of ICT by
SMEs despite the importance of ICT and emphasis by various governments to encourage
SMEs to adopt ICT. SMEs have limited financial and human resources to adopt ICT.
Lack of ICT skills and knowledge in SMEs is one of the major challenges. Moreover,
those firms such as cybercafés, supermarkets, Pharmaceuticals that adopted Technology

78
employed ICT for product marketing and e-commerce. This is supported by Government
of Kenya in the Private Sector Development Strategy (PSDS) report which cited lack of
access to markets and finance as the major constraints facing MSMEs. Findings also
showed that there is some extent in integration of ICT in Accounting Information
Systems (AIS) in reports generation, data retrieval and sharing and decision making for
those that possessed ICT.

However, very few Enterprise customers were able to access the different types of
reports generated by AIS on time. In spite of their widespread use and continuing
advance, there is some concern that accounting practice has not kept pace with rapid
economic and high technology changes which invariably affects the value relevance of
accounting information. Moreover, economic conditions and competition create pressures
about costs of information. Generally, information system is developed using information
technology to aid individuals in performing their jobs.

The findings showed that most businesses raise bulk of funding they need yearly by
internal means as a source of finance by SMEs which were limited. The external funding
opportunities had an influence on Performance of SMEs. Access to external financing
influences the form of business. Access to finance had a bearing on Performance of
SMEs where by majority of the respondents agreed to great extent that lack of access to
credit hamper growth of business. There is every indication that high cost of credit, high
bank charges and fees limit credit access and influenced Performance of SMEs. Lack of
access to credit is almost universally indicated as a key problem for SME’s. This affects
technology choice by limiting the number of alternatives that can be considered.

Many SME’s may use an inappropriate technology because it is the only one they
can afford. In some cases, even where credit is available, the entrepreneur may lack
freedom of choice because the lending conditions may force the purchase of heavy,
immovable equipment that can serve as collateral for the loan. Lack of access to long-
term credit for small enterprises forces them to rely on high cost short term finance.
Finally the study also determined whether Capital requirements had an influence on
Performance of SMEs where the issue of collateral is required in raising capital. It was

79
also noted that low capital to support SMEs operations and investment limit their
Performance.

5.4 Recommendations

On the basis of the findings and conclusions above, this section presents the
recommendations of the study as follows:

1. Increase programmes for SMEs empowerment especially female gender and also
enhances adequate business skills mainly attributed to low levels of education.

2. The County Government to facilitate training and skills upgrading in operation of

SMEs to achieve service delivery in the CBD Bungoma County. Improve security
and simple business regulatory reforms that have positive outcomes in terms of
increasing business service delivery.

3. Increased rates of ICT adoption for accounting practice in market identification

and access, promotion of goods and services and Accounting Information
Systems (AIS) which has not kept pace with rapid economic and high technology
changes which invariably affects the value relevance of accounting information.

4. Increased access to finance for youth in improving the SMEs sector.

5.5 Recommendation for future research

Due to limited time, we recommend other studies to be carried on the following areas:

1. Other similar studies to be carried out in other counties to compare and generalize
the study findings.

2. Influence of Accounting Information Systems (AIS) on Performance of SMEs.

3. Perception of ICT adoption by SMEs and its Performance.

80
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 APPENDICES

APPENDIX I: Transmittal Letter

The Respondents

Dear Respondent,

RE: FILLING OF THE QUESTIONNAIRE

I am a postgraduate student at University of Nairobi carrying out a Research

Project on the FACTORS INFLUENCING PERFORMANCE OF SMEs IN CENTRAL
BUSINESS DISTRICT BUNGOMA COUNTY, KENYA. Your business has been sampled
for the study and therefore I humbly request you to kindly respond to the questions asked
as sincerely and accurately. The ultimate goal of the study is to provide insights into the
aspect of SMEs on service delivery. I am assuring you that the information you will give
will be treated with utmost confidentiality and will only be used for the purpose of this
study. To assist in concealing your identity I request you do not write your name or
anything that can lead to the revelation of your identity.

I will be very grateful for your co-operation and thank you in advance.

Yours Faithfully,

Jacqueline Nabutola

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 APPENDIX I: QUESTIONNAIRE AND INTERVIEW SCHEDULE

APPENDIX I: QUESTIONNAIRE FOR MICRO-ENTREPRENEURS

Dear Respondent,

I am a student from the University of Nairobi. Kindly take some time to fill this
questionnaire. The questionnaire is to facilitate a research on “Factors influencing
performance of SMEs in Central Business District Bungoma County, Kenya” The
research findings will be used for informing policy makers, educationists and
stakeholders on impact of SMEs on economic development of Kenya

Please respond by ticking in the brackets provided and fill in the blank spaces
where necessary
SECTION A: In what ways do entrepreneur characteristics influence the
Performance of SMEs in the CBD Bungoma County?
1. Name of institution ……………………………………………………………...…
2. Designation………………………………… Gender………………………………
3. Please indicate the highest level of your academic qualification.
O- Level [ ] Diploma [ ] Degree [ ] Masters Degree [ ] Doctorate [ ] Other-
specify[…………………………………………………………………... ]
4. Please indicate your age bracket
< 20 Yrs [ ] 21-30 Yrs [ ] 31-40 Yrs [ ] 41-50 Yrs [ ] 51-60 Yrs [ ] > 60 Yrs [ ]
5. Please indicate the Number of years in business
< 5 years [ ] 5-10 years [ ] 10-15 years [ ] >15 years [ ]
Indicate the extent to which you believe the following entrepreneur factors affect
performance of the enterprise. Please, put a tick in the appropriate cell that most
adequately reflects your view in relation to the given statement. Each statement is rated
on a 4 point scale as shown below. GE: To a great extent, SE: To some extent, LE: little,
VN: Virtually nothing

Entrepreneur characteristics and its influence on To a To Little Virtually

Performance of SMEs in the CBD Bungoma County great some extent nothing
extent extent

6. Gender

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7. Education Level

8. Personality

SECTION B: How do business characteristics influence the Performance of SMEs

in the CBD Bungoma County?
9. Name of Business………………………………………………………………
10. Location/Stall No……………………………………………………………
11. Type of Economic Activity
Retail [ ] Boutique and Hair salon [ ] Hotel & Restaurant [ ] Cyber cafe [ ]
Chemists [ ] Workshops [ ] Supermarkets [ ] Agri-business/Agro-vets [ ]
Construction & Research [ ] Others [ ]
12. Number of employees excluding owner
None [ ] 1-10 [ ] 10-50 [ ] Above 50 [ ]
13. For how long has the current business been operating?
Under 6 months [ ] Under 1 year [ ] 2 years [ ] Over 2 years [ ]
Indicate the extent to which you believe the following business factors affect on the
Performance of SMEs. Please, put a tick in the appropriate cell that most adequately
reflects your view in relation to the given statement. Each statement is rated on a 4 point
scale as shown below. GE: To a great extent, SE: To some extent, L: little, VN:
Virtually nothing

Business characteristics and its influence on Performance To a To Little Virtually

of SMEs in the CBD Bungoma County great some extent nothing
extent extent

14. Diverse Business activity improve SMEs Performance

15 Size of business is positively related to Performance

16. Number of establishments improves SMEs Performance

17. Business location and security affects growth of SMEs

18. Simple business regulatory reforms

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 SECTION C: How does the adoption of Information Communication Technology
influence Performance of SMEs in the CBD Bungoma County?

This section seeks to find out the extent to which the adoption of Information
Communication Technology (ICT) influences the Performance of SMEs in the CBD
Bungoma County?

19. Have you heard about electronic commerce?

YES [ ] NO [ ]
20. Where did you get information about electronic commerce?
Radio, TV [ ] Newspapers [ ] other traders [ ] Sales representatives [ ]
21. What is your level of awareness on the type of services provided by electronic
commerce?
Very Low [ ] Low [ ] Medium [ ] Very High [ ]
22. Do you think electronic commerce applications are assisting small- scale traders?
YES [ ] NO [ ]
23. Has your enterprise incorporated the use of ICT in service delivery?
YES [ ] NO [ ]
If YES, Kindly respond to the following statements each rated on a 4 point scale as
shown below. GE: To a great extent, SE: To some extent, LE: little, VN: Virtually
nothing

Integration of ICT on Performance of SMEs in the CBD To a To Little Virtually

Bungoma County great some extent nothing
extent extent

24. To what extent does your enterprise possesses

Computer, Telephone Computer networks

25. Has the business integrated the use of ICT on market

identification, market access and promotion of Goods
and Services?

26. The use of ICT has lead to reduction in transaction cost

such as online registration, and obtaining of licenses

27. Searching markets has been easy using ICT

28. The enterprise products and services are advertised

online using ICT i.e. use of Radio/TV, Mobile phone

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 Sms, websites

29. Information system members are keen to gather

the information that recognizes the external
environment and competitors

30. The enterprise customers are able to access the different

types of reports generated by AIS on time

31. Reports produced communicates many nonfinancial

measures of performance particularly operational data
such as units produced and sold by product type

32. ICT provide data in the system that is available and

quickly retrievable

33. ICT use automated accounting information systems that

contribute in make the information outputs more
suitable for Decision-makers.

SECTION D: To what extent does the availability of finance influence the

Performance of SMEs in the CBD Bungoma County?
This section seeks to find out the extent to which the availability of finance influence the
Performance of SMEs in the CBD Bungoma County. Please, put a tick in the appropriate
cell that most adequately reflects your view in relation to the given statement and some
statements are rated on a 5 point scale as shown below. SA: Strongly Agree, A: Agree
N: Neutral, D: Disagree, SD: Strongly Disagree

34. Have you ever tried to obtain credit from microfinance or financial institutions?
Yes [ ] No [ ]
35. Did you encounter any obstacles while trying to obtain credit from them?
Yes [ ] No [ ]
36. If the answer above is yes, give details of the problem encountered
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………

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Indicate with a tick the extent to which you agree to each of the following statements
on financing small and medium enterprises

S/NO. Objectives of finance on Performance of SMEs in the CBD SA A N D SD

Bungoma County

37. Loans should only be given to individuals who are members of a

recognized group of at least 5 persons

38. One must have saved some money within the group for a period of
time to qualify for a loan

39. Lenders to review collateral requirements for loans

40. Have the balance sheets and Profit and Loss have changed over time

Thank you for your time and input

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INTERVIEW SCHEDULE

1) Bio data information

• Gender
• Designation
• Qualification
Research Questions
2) In what ways do entrepreneur characteristics of Small and Medium Enterprises
influence the improvement of service delivery in the CBD Bungoma County?
3) How do business characteristics of SMEs influence the improvement of service
delivery in the CBD Bungoma County?
4) How does the use of Information Communication Technology (ICT) by SMEs
influence the improvement of service delivery in the CBD Bungoma County?
5) To what extent does the availability of finance to Small and Medium Enterprises
influence the improvement of service delivery in the CBD Bungoma County?
6) To what extent does your enterprise possesses Computer, Telephone and Computer
networks
7) Has the business integrated the use of ICT on market identification, market access and
promotion of Goods and Services?
8) What aspect of ICT that has lead to reduction in transaction costs?
9) Has the business integrated ICT inform of Accounting Information System (AIS) for reports
generation, decision making and data retrieval and sharing for competitive advantage?
10) How does the enterprise raise capital to support business operations and investment?
11) To what extent does the balance sheets and Profit and Loss have changed over time?
12) On a scale of 1-5 [1-Very good, 2-Good, 3-Fair, 4-Poor, 5-Very poor] how would you

94
13) rate the influence of SMEs on improvement of service delivery in the CBD Bungoma
County.

95