Effect of Capital Structure on the Financial Performance of Small and Medium Enterprises in the ICT Sector, Kenya A Case of Selected SMEs in Nairobi County, Kenya

Abstract

This study sought to assess the effect of capital structure on financial performance of small and medium enterprises (SMEs) in the ICT sector, Nairobi County. The objectives were to; identify the proportion of debt and equity employed by ICT sector SMEs, assess how performance was measured, and determine the effect of capital structure on performance of ICT sector SMEs. The study employed three theories, namely, the pecking order theory, trade off theory, and agency theory. The study adopted a descriptive research design and a targeted population of 1048 ICT sector SMEs located in Nairobi’s CBD. Purposive sampling technique was used to select a sample size of 91 respondents. Data was collected using questionnaires. Quantitative data was analyzed using Statistical Package for Social Sciences (SPSS) version 25, while qualitative data was analyzed using thematic approach. The study found out that capital structure played a major role in the financial performance of SMEs in the ICT sector operating in Nairobi CBD at 72(96%), whereby 37(49.3%) SMEs were financed through short-term debt, 30(40%) through long-term debt, 38(50.7%) through short-term equity while 60(80%) were financed through long-term equity. Consequently, the findings show that 45(60%) of the SMEs were financed through a mix of debt and equity. A total of 72(96.0%) and 69(92%) SMEs measured financial performance in terms of profitability and return on assets. A majority of SMEs at 67(89%) confirmed that there was link between capital structure and financial performance. The study concluded that capital structure is very critical in the financial performance of ICT sector SMEs and hence they need to make informed decisions on how to balance between debt and equity capital sources. The study recommended that the government and other regulatory institutions should ensure that SMEs operate in a financial friendly environment where there is easy access to sources of SMEs financing.