Influence of Alternative Financing on the Relationship between Operational Characteristics and Efficiency of Small and Medium Enterprises in Kenya

Firm operational characteristics have long been used as management tools as well as systems for defining, identifying, measuring and ensuring continuous improvement in firms. Efficient firm operations are geared towards attaining and sustaining competitive advantage. Sustained competitive advantage assures survival and thrive of the firm through owner/manager action. The operational characteristics - efficiency nexus has received extensive theoretical, conceptual and scholarly attention globally, continuously accumulating a wealth of knowledge. While SMEs remain the core engine to development and economic growth globally, recent increased momentum of economic growth exacerbates credit services, necessitating Alternative Finance (AF). However, scholarly endeavours to explore the impact of alternative finance on operational characteristics - efficiency nexus has received little attention, more so for Small and medium-size enterprises (SMEs) who have unique financial needs. To counter this conundrum, a closer study of AF for SMEs is vital, to help close the credit gap and sustain efficiency growth momentum. The purpose of this study was to explore the influence of alternative finance on the relationship between operational characteistics and efficiency of SMEs in the manufacturing sector in Kenya. The study was guided by firm size, firm age and managerial competency as independent variables. Alternative finance as determined by level of alternative finance in an SME was the moderator, while the dependent variable was efficiency as measured by various inputs and outputs with the aid of the DEA model. The study used a cross-sectional research design. This study employed a mixed approach where qualitative and quantitative research approaches were used. The target population were SMEs registered with Kenya Association of Manufacturers (KAM). The accessible population was 136 Kenya Association of Manufacturers SMEs owner/managers who were using alternative finance in their firm’s capital mix. The study used a self-administered semi structured questionnaire to collect primary and secondary data. The questionnaire was tested for reliability with Cronbach Alpha scores results within the 0.70 threshold. A pilot study was conducted using twenty-one firms randomly selected from the manufacturing sec- tor. This study used descriptive statistics to analyse qualitative data using tables, figures and graphs and interpretations. Multiple Regression modelling was used to analyse the measurement model and test the hypothesized relationship in this study. This study used hierarchical moderated multiple regression analysis to test the moderating effect of AF on operational characteristics - efficiency nexus. For the overall model, the study found out that firm age, firm size and managerial competency are significant positive predictors of SME efficiency. The study further found out that AF moderates SME characteristics – efficiency relationship, with an R- square increase of 19.7%. Over and above the predictive power of SME characteristics on efficiency, the inclusion of AF enhanced the variance by 19.7%. To counter credit scarcity and related costs, information opacity and adverse selection, innovative potential intermediators in conjunction with, government, KAM and SMEs should open on-line hybrid bank microfinance credit facilities for SMEs, to close the credit gap and inspire sustained efficiency growth momentum and support economic growth in Kenya.