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

Abstract

The purpose of the study is to examine the impact of the cost of capital on the financial performance of SMEs in Turkana Central. The research was anchored in the Static Trade-off Theory and the Pecking Order Theory, both of which provide theoretical grounding for understanding the balance between equity and debt financing behaviour 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 were collected using a structured questionnaire, which was pretested in a pilot study to assess validity and reliability, while supplementary qualitative data were collected through an interview schedule with selected SME 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 show 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 recommends that SMEs be encouraged to maintain comprehensive financial records, diversify their capital sources, and adopt sound financial management practices to strengthen overall financial performance. The study provided financial institutions, policymakers, and SME owners with ways to improve access to affordable credit for SMEs in Turkana Central.