Effect of Digital Financial Innovation on the Financial Performance of Small and Medium Enterprises in Nairobi City Centre, Kenya

The study's objective is to determine how digital financial innovation has affected financial performance of SMEs in Nairobi City Centre, Kenya. The research was focused on evaluating the effect of digital payment systems, mobile banking, and online lending on SMEs' financial performance. The research was grounded on Technology Acceptance Model (TAM), Schumpeter's Theory of Innovation, and Diffusion of Innovation (DOI) theories to provide a conceptual framework for understanding the effect of digital financial innovation on SMEs performance. A descriptive research design was employed to analyze the data gathered from the target population, which consisted of SME owners in the retail industry located in Nairobi City Centre. The sample size was 300 SMEs, selected through a simple random sampling technique to ensure a representative representation of businesses based on their size and industry. The primary research instrument used will be a questionnaire, which allows the collection of quantitative and qualitative data on SMEs' utilization and experiences with digital financial innovations. The results revealed that digital payment systems, mobile banking, and agent banking did not have statistically significant relationships with SMEs' financial performance, as evidenced by their respective p-values (0.773, 0.090, and 0.405). These findings suggest that the adoption and utilization of these digital financial services alone do not significantly influence SMEs' financial outcomes. In contrast, online lending was found to have a positive and statistically significant effect on financial performance, with a p-value of 0.042. This implies that SMEs in the retail sector in Nairobi City Centre can potentially improve their financial performance by actively engaging in online lending activities. However, it is important to note that the overall model's R-squared value was low at 5.2%, indicating that the independent variables collectively explained only a small proportion of the variance in financial performance. The F-statistic (1.231) was statistically insignificant with a p-value of 0.303, suggesting that the predictors had an insignificant combined effect on explaining financial performance. In conclusion, while online lending shows promise as a means to enhance financial performance, SMEs should adopt a comprehensive financial management approach that considers various factors beyond just digital financial services to achieve sustained improvements in their financial outcomes.