DEBT, FIRM SIZE AND FINANCIAL SUSTAINABILITY OF MICRO AND SMALL ENTERPRISES IN KENYA

Abstract

This study aims to analyze the effect of debt financing on the financial sustainability of Micro and Small Enterprises (MSEs) in Kenya and to examine whether firm size moderates this relationship. This study employs a descriptive research design using secondary data obtained from the financial statements of MSEs that benefited from the National Agricultural and Rural Inclusive Growth Project (NARIGP) across 21 counties in Kenya during the 2018–2022 period. The sample was determined using the Yamane formula, resulting in 390 MSEs with 1,950 firm-year observations. Debt financing was measured using bank loans, firm size was measured using the natural logarithm of total assets, and financial sustainability was measured using the net profit margin ratio and current ratio. Data were analyzed using panel data regression with EViews 12. The results indicate that debt financing has a positive and significant effect on the financial sustainability of MSEs in Kenya (β = 4.78E-06; p < 0.01). However, firm size does not significantly moderate the relationship between debt financing and financial sustainability (β = 1.29E-06; t = 0.742; p ≈ 0.458). These findings indicate that bank loans can provide resources for working capital, investment, and continuity of business operations, thereby contributing to financial sustainability, while firm size does not significantly alter this relationship. The practical implication is that financial institutions should improve MSE access to appropriately structured bank credit, and MSE owners should direct borrowed funds toward productive and income-generating activities.