Digital Lending and Financial Performance of Small Retail Businesses in Nairobi Central Business District, Kenya

Abstract

Digital lending has become a central feature of the global financial system, driven by fintech innovation, mobile technology, and expanded digital access. In Kenya, the rapid growth of digital lending platforms has provided an alternative source of financing for small retail businesses, particularly those operating in Nairobi Central Business District (CBD), where access to traditional bank credit remains limited. Despite high adoption rates, empirical evidence on the effect of digital lending on firm‑level financial performance remains limited, especially among urban retail enterprises. This study examined the relationship between digital lending and the financial performance of small retail businesses in Nairobi CBD, Kenya. The study focused on digital loan accessibility, loan usage in business operations, and the cost of digital lending, and their influence on profitability, liquidity, and sales growth. A positivist research paradigm and descriptive research design were adopted. The target population comprised approximately 3,500 small retail businesses, from which a simple random sample of 400 businesses was selected. Primary data were collected using structured questionnaires, yielding 360 valid responses. Data were analyzed using descriptive statistics, correlation analysis, and multiple regression analysis with the aid of SPSS. Correlation results revealed that digital loan accessibility exhibited a moderate to strong positive relationship with financial performance (r = 0.56, p < 0.01), while loan usage in business operations also showed a positive and statistically significant relationship (r = 0.41, p < 0.01). Conversely, the cost of digital lending was negatively and significantly correlated with financial performance (r = −0.48, p < 0.01). Regression analysis further established that digital loan accessibility and loan usage had positive and significant effects on financial performance, whereas the cost of digital lending had a negative and significant effect. The digital lending variables explained approximately 50 percent of the variation in financial performance. The study concludes that digital lending plays a significant role in enhancing the financial performance and operational sustainability of small retail businesses in Nairobi CBD. However, high borrowing costs substantially limit these benefits. The study recommends stronger regulation of digital lending platforms, improved pricing transparency, and prudent borrowing practices among small retail business owners.