The Effects of Relationship Banking and Entrepreneurial Orientation on Financial Performance of Manufacturing Firms in Kenya

Abstract

Despite the acknowledge importance of small and medium enterprises (SMEs) they operate under an environment of harsh credit constraints due to perceived higher credit risk and the resulting unwillingness of banks to offer credit. Relationship banking has been heralded as being key in helping SMEs access bank credit. Further, although credit is important to SMEs, entrepreneurial orientation is key as it determines the success or failure of an enterprise. There is little research that has been done to determine if entrepreneurial orientation (EO) moderates the relationship between relationship banking and financial performance in Kenya. The study was guided by relationship lending, relationship monitoring, relationship risk sharing and bundle of products being the independent variables while financial performance was the dependent variable with entrepreneurial orientation being the moderating variable. This approach essentially integrates the theoretical perspectives of entrepreneurship and links relationship banking, financial performance and entrepreneurial orientation under strategic entrepreneurship domain. The study adopted a cross-sectional research design with the population being 620 manufacturing SMEs who have had a relationship banking arrangement with commercial banks in Kenya. Stratified random sampling was employed to pick a sample of 138 manufacturing SMEs with the respondents being the owner/ managers of the sampled SMEs. These respondents were appropriate for this study because they were considered to have sufficient knowledge about their firm’s banking relationships and strategy including EO adoption in their firms. A semi structured questionnaire was used for data collection. The data was analyzed using both qualitative and quantitative techniques like exploratory factor analysis, confirmatory factor analysis and Structural equation modeling. Moderated multiple regression was also employed to test for the moderating effect of EO. The study revealed that EO moderates the relationship between relationship banking and financial performance of manufacturing SMEs in Kenya. Further the research established that each of the independent variables in the study that is, relationship lending, relationship monitoring, bundle of products and risk sharing positively influences financial performance of manufacturing SMEs. The study concluded that relationship banking and financial performance have a positive relationship and that EO moderates this relationship. By forging strategic links with the banks, manufacturing SMEs would be able to access funding which is key to their growth and survival. This study makes a contribution to the field of strategic entrepreneurship by demonstrating that relationship banking is an important management tool that any SME should embrace to enable them exploit entrepreneurial opportunities and gain competitive advantage.