Influence of the Cost of Capital on the Financial Performance of SMEs in Turkana Central, Kenya.

Abstract

The purpose of the study was to examine the impact of the cost of capital on the financial performance of SMEs in Turkana central, Kenya. The research was anchored in the Static Trade-off Theory and the Pecking Order Theory, Both of which provided a theoretical ground for understanding the balance between equity and debt financing behavior and the firm's financing decisions. A mixed-methods research design was employed to examine the relationship between financial performance and the cost of capital, enabling the study to explain financial decisions among SME owners. The study population comprises 2,500 SMEs operating within five administrative wards in Turkana Central. Utilising Taro Yamane’s (1967) sampling formula, a representative sample of 345 SMEs was selected through simple random sampling to ensure every business had an equal chance of selection. Primary data was collected using a structured questionnaire, which was pretested in a pilot study to assess validity and reliability, while supplementary qualitative data was collected through an interview schedule with selected SMEs respondents. The analysis incorporated both descriptive and inferential statistics to examine the influence of cost of capital on the financial performance of SMEs. The findings showed that, the regression model was statistically significant (linear regression, F (1322), and that the cost of capital influences financial performance (β = 0.237, P = 0.001). The study recommended that, SMEs should be encouraged to maintain comprehensive financial records. The study provided financial institutions, policymakers, and SME owners with ways to improve access to affordable credit for SMEs in Turkana Central.