Influence of Capital Structure on Financial Performance of Craft Micro Enterprises in Kenya

Abstract

Craft industry contributes immensely to Kenyan economy. It is also a major source of income for not only micro enterprises but also small and medium enterprises. It has been observed that in spite of their vital contribution to the growth of the economy, the individual micro enterprises usually experience slow growth or not at all. It has also been observed that as a result of this inadequate capital, some of these craft micro enterprises have resulted to seeking additional capital from various sources so as to top up the deficit, hence resulting to various capital structures. The main objective of the study was to determine the influence of capital structure on financial performance of craft micro enterprises in Kenya. The specific objectives were to determine the influence of internal equity financing on financial performance of craft micro enterprises in Kenya, to establish the influence of debt financing on financial performance of craft micro enterprises in Kenya, to determine the influence of retained earnings on financial performance of craft micro enterprises in Kenya and to establish the moderating effect of level of education on the relationship between capital structure and financial performance of craft micro enterprises in Kenya. The study only covered the soapstone micro enterprises registered by Tabaka Town Council and the woodcarving micro enterprises registered by Wote Town Council. The study was a survey of soapstone micro enterprises in Tabaka Town and the woodcarving micro enterprises in Wamunyu Location. The target population for the study constituted all the 2334 craft micro enterprises. The sample frame constituted all the soapstone micro enterprises operating within Tabaka Town and all the woodcarving micro enterprises registered by Wote Town Council. The study used a sample of 330 craft micro enterprises drawn using stratified sampling technique. Data were gathered data using a semi-structured questionnaire and then analyzed by use of descriptive and inferential type of statistics. The ANOVA and multiple regression analysis were used to analyze the data. The results were summarized in tables, charts and graphs. The findings of the study revealed that, internal equity financing, debt financing and retained earnings have significant influence on the financial performance of craft microenterprises; and that level of education has a positive moderating influence on the relationship between capital structure and financial performance of craft microenterprises. The study recommended that the proprietors of the craft micro enterprises should be encouraged to use the three sources of finance because they have significant influence on the financial performance of craft microenterprises and that they should be sensitized on the importance of using retained earnings as a source of finance. The study will help to expose the effect of the various attributes of financing on financial performance of craft micro enterprises and also inform craft micro enterprise owners on the best financing to adopt so as to promote the financial performance. Those people who anticipate starting craft micro enterprises will also benefit from the study by knowing the best sources of finance from which to get capital so as to achieve faster financial performance. It will also help relevant financing institutions like commercial banks to know the effect that the loan they advance to craft micro enterprises have on the financial performance of craft micro enterprises.