Analysis of Digital Financial Inclusion and Financial Performance of Small and Medium Enterprises in West Pokot County, Kenya

Abstract

Small and medium enterprises (SMEs) play a critical role in Kenya’s economy through employment creation, poverty reduction and economic growth. However, their performance is constrained by inadequate digital financial inclusion, particularly in marginalized areas. This study examined the influence of digital financial inclusion on the financial performance of SMEs in West Pokot County, Kenya. Specifically, it assessed the effects of digital credit, digital saving culture and digital payments on SME financial performance and investigated the moderating effect of digital financial literacy on the relationship between digital financial inclusion and financial performance. The study was anchored on the Vulnerable Group Theory of Financial Inclusion, Financial Literacy Theory and Resource-Based View Theory. A descriptive research design was adopted. The target population comprised 804 licensed SMEs in West Pokot County, from which a sample of 267 respondents was determined using Yamane’s formula and selected through simple random sampling. Data were collected using questionnaires pre-tested on 27 SME owners. Data were analyzed using descriptive and inferential statistics, including multiple and hierarchical regression analysis. Diagnostic tests for normality, multicollinearity and heteroscedasticity were conducted, while hypotheses were tested at the 5% significance level. The findings established that digital credit had a positive and statistically significant effect on SME financial performance (β = 0.539, p < 0.001). Digital saving culture also had a positive and significant effect (β = 0.400, p < 0.001), while digital payments positively and significantly influenced financial performance (β = 0.426, p < 0.001). The moderation analysis showed that digital financial inclusion and digital financial literacy jointly explained 46.7% of the variation in SME financial performance. Introducing the interaction term increased R² from 0.467 to 0.501, representing a significant additional 3.4% explanatory power. The interaction between digital financial inclusion and digital financial literacy was negative and statistically significant (β = -1.361, p < 0.001), confirming a significant moderating effect. The study concludes that digital credit, digital savings and digital payments are important determinants of SME financial performance, while the benefits associated with digital financial inclusion vary with the level of digital financial literacy. The study recommends expanding affordable digital financial services, improving digital infrastructure and strengthening practical digital financial literacy programmes to enable SME owners to use digital products effectively and securely, thereby enhancing profitability, sales growth and long-term sustainability in rural settings.