An Analysis Of The Effect Of Crowdfunding Platforms In Enhancing The Financing Sources For Micro, Small And Medium Enterprises (MSMEs) In Kenya

ABSTRACT

The Micro, Small and Medium Enterprise (MSME) sector plays a significant role in the Kenyan economy, offering opportunities for employment and innovation. However, there exist a financing gap due to limited personal finances, credit, grants, equity and other sources of finance that subsequently limits MSMEs access to funding. This further inhibits many entrepreneurs from sustaining and growing their enterprises. The crowdfunding platform phenomenon was first adopted in the developed world and has grown exponentially over the years with many entrepreneurs employing crowdfunding platforms to raise capital for the enterprises’ financial needs. Unfortunately, African countries lag behind in the adoption of crowdfunding with very few locally established crowdfunding platforms and a general lack of awareness of the use of crowdfunding platforms as source of finance for entrepreneurs’. The purpose of this study was to analyse the financing gap that exists in MSMEs in Kenya and the role that crowdfunding platforms play in enhancing their financing opportunities. This study was exploratory and it used both primary and secondary data in answering the research questions. Primary data was collected by targeting a population of 30 MSMEs that have accessed financing from the 48 crowdfunding platforms accessible to Kenyan.The study was able to achieve a response rate of 96.7%. Secondary data was collected from the World Bank and Central Bank of Kenya and used to analyse the average MSME financing gap at a national level. From the primary data, the average success rates of four different types of crowdfunding platforms was determined as percentage of amounts raised from the platform versus the target amounts the entrepreneurs’ were seeking from these platforms. The average success rate for each platform was then applied to national average financing gap to provide a recommendation on which platform could be an ideal contributor in narrowing the financing gap for MSMEs in Kenya. The study findings reveal that the mean success rate is highest for lending platforms (100%) followed by reward platforms (87%, donation platforms (46%) and finally equity platform (0%).From the secondary data the average financing gap is USD 7,545 per registered but underserved MSMEs. The extent to which the various challenges faced by MSMEs in accessing funding such as value and size of MSME network, human effort required, compatible payment systems, due diligence process required was analysed and discussed depending on the platform type. The highest contribution to the national average financing gap evidently came from the lending platforms and was the recommended platform as long as an entrepreneur is able to pass the due diligence required in order to access funds from these platforms. In the arena of academia, scholars can contribute towards this end by undertaking more studies to fill the knowledge gap particularly on the size of financing gap facing MSMEs in Kenya especially from a demand side.