finance research project on impacts of financial innovations on the performance of sole proprietorships

ABSTRACT

Financial innovations are the improvements businesses adopt to make their transactions easier, faster and more efficient. They may be in form of product innovations, process innovations, technological innovations, risk innovations, market innovations or any other new, innovative and creative ways businesses may invent to improve their transactions and practices. More innovations are likely to be introduced in business environments with higher competition. Financial innovations are significant for both large and small businesses. Sole proprietors adopt financial innovations in order to satisfy consumer needs, enhance their competitiveness in the market as well as attract new customers. This study was mainly meant to find out the impact of financial innovations on performance of sole proprietorships at Gakoromone market. The objectives of the study sought to find out the significance of technological innovations on performance of sole proprietorships, to examine the extent to which product innovations are applied and how they influence the performance of sole proprietorships and to identify the process innovations applied by sole proprietors and how they influence performance of sole proprietorships. The literature was obtained from the relevant research journals, thesis and past research reports that had a bearing on financial innovations. Research shows that financial innovations have an impact on the performance of both large and small businesses but most sole proprietors have not yet adopted financial innovations. The study was carried out in Gakoromone market to try and find solutions to traders’ complains concerning low returns in their businesses. The population of the study included 250 sole proprietors who included 100 mitumba stall owners, 30 kiosk owners, 100 grocery stall owners and 20 cereal stall owners. The researcher used stratified random sampling to obtain a sample size of 50 respondents which comprised of 20 mitumba stall owners, 6 kiosk owners, 4 cereal shop owners and 20 grocery stall owners. Survey research design using descriptive approach was used whereby questionnaires for sole proprietors were used for collecting data. The questionnaires were checked for accuracy and consistency by carrying out a pilot study on 20 sole proprietors at Kianjai market. Corrections were done to ensure the questionnaires contained questions that would generate the required information from the respondents. Data was analyzed using descriptive statistics where tables, frequencies and percentages were used to enhance summarizing of the research findings. From the study, it was established that there is a significant relationship between product innovation, process innovation and technological innovation and performance of sole proprietorships in Gakoromone market. The study found out that some sole proprietors at the market have adopted financial innovations and these significantly affect the performance of the businesses in the market. Businesses that have adopted financial innovations indicated better profits, better customer satisfaction and increased customer loyalty. These make the businesses have a competitive advantage over other businesses in the market. There is need for the county government of Meru to foster innovation amongst sole proprietors through introduction of civic education to enlighten the business owners on the existing innovations they should adapt. The financial institutions in the area may also come up with customized technologies that fit the traders’ needs. The researcher recommends further research to be done on other factors that affect performance of sole proprietorships at Gakoromone market. Also, the researcher recommends research to include more variable than the three studied in this research topic

31

This chapter comprises of background to the study, statement of the problem, purpose of the study, study objectives and study questions. It also includes the scope of the study, limitations and delimitation, significance of the study and definition of operational terms.

Financial innovation refers to creating and then popularizing new financial instruments, technologies, institutions, markets, processes and business models, including the new application of existing ideas in a different market context. It is the advances over time in the financial instruments and payment system used in the lending and borrowing of funds. These advances include innovations in technologies, risk transfers and credit and equity generation. (Sanderson Abel, 2014).

Financial innovations enhance sustainability of institutions and their outreach to the poor. They are meant to provide ways of clearing and setting payment to facilitate trade, to provide mechanism for pooling of resources and for the subdividing of shares in various enterprises, to provide ways to transfer economics resources through time, across borders and among industries and provide ways of managing risks (Ross,1987).

With the economic transformation that has taken place in Zimbabwe over the last decade, it seems the financial services sectors and the stakeholders in the economy should embrace new innovations so that new economic structure such as Small Micro Enterprises (SMEs) and new farmers can access adequate funding through innovative financing mechanism, products and systems.

Process innovations cover the introduction of new business processes leading to increased efficiency, effectiveness, market expansion, customer loyalty and increased customer satisfaction leading to improved performance of business. It involves a business coming up with new processes not familiar to those of other businesses giving it a competitive advantage in the market place. A good example of this is the Japanese Just In Times (JIT) process that increases efficiency giving Japan a competitive advantage over other countries.

Product innovations involves the introduction of credit deposit that have not been in existence, hire purchase, leasing, and other financial products.These products are introduced to respond better to changes in market demand or to improve efficiency in the market. Ross (1987) developed a model in which new financial product must overcome marketing and distribution costs. According to Merton (1986), in the recent times, German firms that engaged in higher levels of product innovation were proving to be more profitable in the market.Aron and Lazeur (1990) presented a model in which new firms pursue risk averse strategies and are hence more likely to undertake more radical new research programmes and to introduce new products. Prusa and Schmite (1994) tested these theories by examining the introduction of new software products. The authors suggested that new firms appear to be more effective at creating new software categories, while established firms have comparative advantage in extending existing products lines.

Technological innovation refers to financial innovations that are driven by improvements in computer and telecommunication technology. For most people, the creation of ATM was a great financial innovation than asset backed securitization. Other types of financial innovations affecting the payment system include credit and debit cards and online systems like PayPal. The types of innovations are notable because they reduce transaction costs. Silber, (1975).

Risk innovation refers to the introductions of new ways and products to minimize business risks. Businesses come up with different ways to minimize risk for example, trading in different financial derivatives. Insurances firms also develop different products that assist firms minimize their risks.

The significance of financial innovations is widely recognized. Many leading scholars, including Miller (1986), have highlighted the importance of new product services in the financial arena. Empirically, Tafuno (1989) showed that of all public offerings in 1987, 18% consisted of security that had not been in existence in 1974. The innovations are not only vital for firms in the financial services industry, but also affect other companies; for example, enabling them to raise capital in larger amount and at lower cost than they could otherwise.

Every firm, whether big or small, is likely to benefit from financial innovation. Most large businesses have applied financial innovations and greatly benefitted as a result of minimizing costs as well as countering competition. Managers of these firms are committed to research, development and continued improvement of financial innovation to improve performance of their firms.

Despite this great progress in financial innovation by many firms in the economy, small and single individual owned businesses have been left out. Many single business owners are still ignorant of the possibility of applying financial innovations in their small businesses and benefitting from them. The researcher wanted to find out financial innovations appropriate for single individual owned businesses and their impact on the performance of these businesses and give recommendations thereafter.

The purpose of this study was to enlighten sole proprietors in small businesses on the existence and importance of financial innovation on their businesses. It was also meant to enable them understand that financial innovations are not only meant for big businesses but are important even to their small enterprises.

The study objectives are:-

1. To find out the significance of technological innovations on performance of sole proprietorships at Gakoromone market.

2. To examine the extent to which product innovations are applied and how they influence the performance of sole proprietorships at Gakoromone market.

3. To identify the process innovations applied by sole proprietors and how they influence performance of sole proprietorships at Gakoromone market.

The study questions are:-

1. How do technological innovations influence the performance of sole proprietorships at Gakoromone market?

2. To what extent do product innovations influence the performance of sole proprietorships at Gakoromone market?

3. What process innovations are applied by sole proprietors at Gakoromone market and how do they influence performance of those businesses?

This study was conducted at Gakoromone market. It was meant to examine the impact of financial innovations on the performance of single individual owned businesses. The target population was the sole proprietors of individual owned shops, cereal shops, groceries and mitumba stalls in Gakoromone market.

The researcher encountered problems when collecting data for this study. One challenge was language barrier since most of the owners of these single owned businesses are local people with low literacy levels. The researcher was therefore accompanied by a fellow student from the University who well understands the local language and is fluent in English language for reliable interpretation. Insecurity at Gakoromone market was also a challenge. The researcher disguised self to look like the locals to avoid being easily noticed.

This study focused only on the financial innovations for single individual owned businesses of shop owners, groceries, cereal shops and mitumba stalls sellers. Though there are other small businesses in the market, the focus of this research was only limited to single individual owned businesses discriminating the rest.

The findings of this study are likely to be of great benefit to small business owners, banks and investment marketers. This is because they are likely to bring awareness of other possible financial innovations that can be introduced in the market as well as bring about awareness to single individual owned business owners of existing and other financial innovations suitable for their businesses. The findings are also likely to trigger creativity and innovations of business owners as they try to think of innovations that can improve the performance of their businesses.

Business premise: This phrase is used to refer to the single owned businesses at Gakoromone market i.e. small kiosks, groceries, cereal shops and mitumba stalls that are present during the period of the study.

Product line: this phrase is used to refer to the channels of distribution of items from single owned businesses in Gakoromone from the time they leave the business premises to the time they reach the final customer.

Sole proprietor: This phrase will be used to refer to individuals who own small businesses existing at Gakoromone market during the period of the study.

Sole proprietorships: this phrase is used in this project to refer to small businesses in Gakoromone market owned by one person during the period of the study.

CHAPTER THREE

This chapter focuses on the research methodology used for the study .It entails the study of design, study site, study population, sample techniques and sample size research instruments and piloting. It’s also covers data collection procedures and logistical ethical issues.

The study used survey research design using descriptive approach. Survey research has 3 distinguishing features used in the qualitative aspect of a given population which involves examining the relationship among variables, is subjective and uses a selected portion of the population which can be generalized. The approach was therefore appropriate for the study for it determines the relationship between the study dependent and independent variables hence it was possible to collect data from a large population and in cost effective way. The fact that this research design is subjective and uses a selected portion of the population which can be generalized enabled collection of data from a relatively large population acquiring the desired information in a cost effective way.

This study was conducted at Gakoromone market at Meru town. The researcher decided to conduct the study at this site after getting information on Daily Nation of sole proprietors complaining about low business returns. The County Government of Meru County also raised concerns of the need for civic education on how sole proprietors can improve their returns. These problems led to the researcher’s choice of this location.

The targeted population of this study was heterogeneous and comprised of 250 sole proprietors who own kiosks, cereal shops, mitumba and grocery stalls at Gakoromone market.

Table 3.1 Study Population

Source: - Meru County Council register of traders

A stratified sampling technique was used in the study where population was divided into homogenous strata in order to get number of each category of individual owned businesses. Proportionate samples were acquired using the following formula:

(n / N) * R

Where n represented the size of strata, N represented the total population and R represented the required sample size.

Source: modified from Mwangi (2014)

Table 3.2 Sample size

Source: - Meru County Council register of traders

The study used questionnaire to collect data and this questionnaire was used as follows:

3.6 Piloting

A pre-test was carried out at Kianjai market to enhance adequacy and consistency of the questionnaire. After the pre-test, the questionnaire was refined, adding more relevant questions to incorporate needed data hence making them more functional.

Validity refers to the extent to which an instrument tests that which it is meant to measure (Mugenda and Mugenda, 2003).The validity of the questionnaires was established in order to make sure that they reflected the content of the study. The researcher went through the questionnaires and compared it with the set objectives to ensure it contained all the information that would answer the set questions and address the objectives. The supervisor’s and expert’s opinions were also consulted to scrutinize the relevance of the questionnaire to the study.

The researcher made copies of questionnaires and ensured they matched the targeted population. The researcher then travelled to Gakoromone market and issued questionnaires personally to the targeted respondents. Each respondent was issued with an envelope to protect the instruments from dirt and tear. After the respondents filled the questionnaires, the researcher collected them and counted them to ensure their reliability.

First the raw data was checked to ensure completeness during analysis. Data was analyzed using descriptive statistics where tables, frequencies and percentages were used to enhance summarizing of the research findings in an understandable and meaningful way.

The researcher applied voluntary consent where the respondents were encouraged to participate in the study willingly and without coersion and undue influence. Those who participanted in the research were informed of all features of the research that are reasonably accepted to influence their willingness to participate voluntarily. The researcher also responded to any enquiries the participants made about the research.

CHAPTER FOUR

4.1 Introduction

This study was about impact of financial innovations on the performance of sole proprietorships. It was carried out at Gakoromone market to find out if small business owners have adopted financial innovations and if these innovations have impacts on the performance of their businesses. The researcher carried out the research after finding out that small business owners were constantly complaining about poor returns in their businesses.

The researcher distributed a total of 50 questionnaires. They were distributed as follows; mitumba stalls 20, kiosks 6, cereal shops 4 and groceries 20. The researcher obtained 88% of the questionnaires distributed due to the nature of small proprietorships where some businesses were indefinitely closed due to depletion of stock or other personal preferences of the sole entrepreneurs. The researcher distributed out the questionnaires to the respondents at noon and collected in the afternoon the same day. The following was the rate for questionnaire return:

Table 4.1: Rate of Questionnaire Return

Source: Fieldwork, February 2016.

Table 4.2 Type of Business

Source: Fieldwork, February 2016.

The statistics show that of the questionnaires returned, 36.4% of the population includes mitumba stall owners, 13.6% includes kiosk owners, 40.9% includes cereal stall owners and 40.9% includes cereal stall owners.

Table 4.3 Age of Respondents

Source: Fieldwork, February 2016.

The research shows that majority of the respondents i.e. 45.5% are in the age bracket of 36-45years.22.7% are between 20-35 years. Another 22.7% of the respondents are between 45-60years.only 9.1% of the respondents did not fit in any of the age brackets given. Further analysis of the questionnaires indicated that most of those who actively use financial innovations in their businesses are in the age bracket of 20-35years.

Table 4.4 Respondents’ Level of Education

Source: Fieldwork, February 2016.

The statistics show that 56.8% have primary education, 31.8% have secondary education and 11.4% have tertiary education.

Table 4.5 Length of Operation in the Market

Source: Fieldwork, February 2016.

The research shows that 43.2% of the respondents have been in the market for more than five years, 31.4% for between 3-5 years and 22.7% for less than three years. Analysis of the questionnaires shows that those who have been in the market for longer periods have adopted financial innovations more.

The researcher sought to identify the effects of technological innovations in business and obtained the findings as shown in tables 4.6, 4.7, 4.8 and 4.9.

Table 4.6 Technology Adopted by the Respondents

Source: Fieldwork, February 2016.

The researcher sought to establish the types of technology adopted in Gakoromone market. The results obtained as shown in table 4.6 indicate that 15.9% of the respondents use M-banking, 22.7% use Lipa na M-pesa, 38.2% use both and 22.7% use none of the two.

Table 4.7 Mode of Receiving Payments

Source: Fieldwork, Feb 2016.

The findings show that 68.2% of the respondents receive payments through cash, 13.6% had adopted mobile banking, 18.2% use Lipa na M-pesa and 77.3% indicated that they use any of the three modes of payment.

Table 4.8 Mode of Making Payments

Source: Fieldwork, Feb 2016.

The researcher sought to establish the modes of payments respondents use in their transactions. 22.7% of the respondents indicated that they only use cash, 68.2% use Lipa na M-pesa and 9.1% use mobile banking in making payments. The respondents attributed high use of technology in making payments to the demands of their suppliers.

Regarding to how the respondents learnt about the technological innovations they apply in their bus

inesses, 50% of the respondents indicated that they learnt it thru media, 22.7% from their friends and relatives while 27.3% learnt it through promotion.

An analysis of the rate of customers’ response to technology was done. 86.4% of the respondents rated it as good, 11.4% of the respondents rated it as fair while only 2.2% considered it poor.this is shown on table 4.9

Table 4.9 Rate of Customers’ Response to Technology

Source; fieldwork, February 2016

On enquiring if technology has positive or negative impacts on performance of businesses in the market, 97.7% agreed that technology has positive effects while only 2.3% disagreed.

Data regarding process innovations in Gakoromone market was obtained through questionnaires and findings illustrated as shown in tables 4.10, 4.11 and 4.12.

Table 4.10 Services Offered by Traders

Source; fieldwork, February 2016

11.4% of the respondents offer delivery services, 68.2% offer packaging services and 22.7% indicated to offer both delivery and packaging services.

4.4.1 Effect of Process Innovations on Business Performance

The researcher intended to find out if these business innovations have an impact on the performance of businesses in the market

Table 4.11 Effect of Process Innovations on Business Performance

Source; fieldwork, February 2016

97.7% of the respondents that customers are influenced by these services while only 2.3% disagreed. Regarding profit differences when these services are offered and when they are not offered, 95.5% indicated that there are differences in profits in the two instances while only 4.5% disagreed. Thus, majority of the respondents noted that process innovations have an impact on the performance of sole proprietorships.

Table 4.12 Hindrances to Business Process Innovations

Source; fieldwork, February 2016

On analyzing the factors that hinder adoption of business process innovations in the market, 95.4% attributed it to lack of resources, 2.3% to lack of ideas and 2.3% to fear of loss this shows that majority of the sole proprietors are aware of the benefits of introduction of business process innovations and they will be willing to adopt them with availability of resources.

4.5 Product Innovations and Business Performance

Using questionnaires, the data on product innovations was obtained from the respondents’ responses and illustrated in tables 4.13, 4.14 and 4.15.

The researcher wanted to know how often the sole proprietors introduce new products in their lines of business. 45.5% of the respondents indicated that they introduce new products more than once a year, 31.8% indicated they do it annually and 22.7% stated that they have never introduced new products in their businesses. This is illustrated in table 4.13

Table 4.13 Frequency of Introduction of new Products

Source; fieldwork, February 2016

Table 4.14 Effects of Product Innovations in Business

Source; fieldwork, February 2016

86.4% of the respondents agreed that new products have a competitive advantage over the common goods in the market. Only 11.4% of the respondents thought otherwise.

95.6% of the respondents indicated that new products earn traders more profit in the marketonly 2.2% disagreed. This shows that introduction of new products has an impact on the performance of s ole proprietorships.

4.5.2 Hindrances to Introduction of new Products

On analyzing the factors that might be hindering product innovations 95.4% of the respondents attributed it to lack of capital, 2.3% to fear of loss and 2.3% to lack of ideas as shown in table 4.15

Table 4.15 Hindrances to Introduction of new Products

Source; fieldwork, February 2016

Majority of the respondents said that they were planning to introduce new products in their lines of business in future to cater for the changes in market demand. This shows that the respondents agree that product innovations have an impact on the financial performance of sole proprietorships.

CHAPTER FIVE

The study was about the impact of financial innovations on the performance of sole proprietorships in Gakoromone market. The objectives of the study focused on finding out the significance of technological innovations on the performance of sole proprietorships at Gakoromone market, examining the extent to which product innovations are applied and how they influence the performance of sole proprietorships in the market. The objectives also sought to identify the process innovations applied by the traders and how they influence performance of sole proprietorships at Gakoromone market.

The study endeavored to find out the significance of technological innovations on performance of sole proprietorships at Gakoromone market. The study found out that the common types of technology used by traders in this market include mobile banking and Lipa na M-pesa. These types of technology are used both in making and receiving payments. Respondents indicated that they learnt about the technology they use mostly through media, friends or relatives and through promotion. When technology is adopted in a business, 86.4% of the respondents rated customers’ response as good, 11.4% rated it as fair and only 2.2% described it as poor. 97.7% of the respondents agreed that technology has positive effects on performance of sole proprietorships in the market while only 2.3% disagreed.

Regarding the extent to which product innovations are applied and how they influence the performance of sole proprietorships, the study found out that 45.5% of the respondents introduce new products in their business lines once per year, 31.8% do it annually while 22.7% have never introduced new products in their businesses. On analyzing factors that hinder product innovations, majority of the respondents i.e. 95.4% attributed it to lack of capital. This shows that the traders are aware of the benefits of product innovations. This was further supported by 86.4% of the respondents who agreed that new products have a competitive advantage over the common goods in the market. Also, 95.5%of the respondents indicated that new products earn traders more profits in the market.

The research also sought to identify the process innovations applied by traders at Gakoromone market and how they influence performance of their businesses. The study found ut that delivery and packaging services are offered by majority of the traders. 97.7% of the respondents indicated that customers are influenced by these business services. 95.5% agreed that there are differences in profits when these services are offered and when they are not offered. Thus, majority of the respondents agreed that business process innovations have an impact on the performance of sole proprietorships at Gakoromone market.

There is a clear significance of technological innovations on the performance of sole proprietorships at Gakoromone market. Use of technological innovations significantly influences business performance by increasing profits, customer satisfaction and improves customer loyalty.

Product innovations are used by sole proprietors though not to the extent that would yield maximum benefits. Product innovations when applied in a business have positive impact on the performance of the business.

The business processes used in Gakoromone market include delivery and packaging services. If these services are maximally applied by all the sole proprietors, they will improve the performance of these small businesses significantly.

From the findings , the study recommends that the county government of Meru should introduce civic education to enlighten the business owners on the importance of adopting different financial innovations in their businesses. The business owners also need to be guided on the different existing ways of securing finances to acquire capital to introduce financial innovations in their businesses. Different banks operating within the area should come up with customized technologies that fit the needs of these sole proprietors and at fair transaction costs. This will increase use of financial innovations and hence improve performance of businesses at Gakoromone market.

5.5 Recommendations for Further Research

The researcher suggests that further research be done considering other factors other than financial innovations that could influence the performance of sole proprietorships at Gakoromone market.

The researcher also suggests that the study should be developed to include more variables rather than the three included in this study and analyze how they influence performance of sole proprietorships at Gakoromone markets or in other markets.

REFERENCES

Akello, M.J. (2011). Determinants of Financial Innovation and their Impact on the Performance of Microfinance Institutions in Kenya. Unpublished MBA project : University of Nairobi.

APPENDICES

This questionnaire is meant to collect information relating to financial innovations for sole proprietorships in Gakoromone market. The information provided will be used for academic purposes only and will be treated with utmost confidentiality.

Instructions

1. Please tick (√) appropriately in the spaces provided.

2. Answer all questions.

Introduction

1. What type of business do you own?

a) Mtumba stall [ ] b) kiosk [ ] c) cereal stall [ ] d) grocery [ ]

2. When did you start your business?

a) Less than 3years ago [ ] b) 3-5 years ago [ ] c) more than 5years ago [ ]

3. Select your age bracket.

a) 18-35 years [ ] b) 36-45 years [ ] c) above 45years [ ] d) others [ ]

4. Select your highest level of education.

a) Primary [ ] b) secondary [ ] c) tertiary [ ]

…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

Technological Advancements in Business

6. What type of technology have you used in your business?

a) M-banking [ ] b) Lipa na M-pesa [ ] c) Both [ ] d) None [ ]

7. How do you receive payments from your customers?

a) Cash [ ] b) Lipa na M-pesa [ ] c) M-banking [ ] d) Others [ ] (specify)……………………………..

8. Through which mode of payment do you pay your suppliers?

b) a) Cash [ ] b) Lipa na M-pesa [ ] c) m-banking [ ] d) others [ ] (specify)…………………………….

9. If familiar with any technological mode of payment, how did you learn about it?

a) Media [ ] b) Friend/relative [ ] c) Promotion [ ]

10. How would you rate customers’ response to adoption of technology in payment?

a) Poor [ ] b) Fair [ ] c) Good [ ]

11. Do you think advancements in technology affect performance of businesses in the market?

a) Yes [ ] b) No [ ]

If yes, do they affect the performance positively or negatively?

a) Positively [ ] b) Negatively [ ]

12. How have technological advancements impacted on your business?

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

Product Innovations in the Market

13. How often do you introduce new products into your line of business?

a) more than once per year [ ] b) annually [ ]

c) Never [ ]

14. Do new products have a competitive advantage over the common ones when introduced in the market?

a) Yes [ ] b) No [ ]

15. Have you experienced any of your customers enquire for products or services not provided within the market?

a) Yes [ ] b) No [ ]

16. Does introduction of new products or services into the market earn traders more profit?

a) Yes [ ] b) No [ ]

17. What do you think hinders traders from introducing new products into the market?

a) Lack of capital [ ] b) Fear of loss [ ] c) Lack of ideas [ ] d) Other [ ] (specify)……………..

18. How are you planning to cater for changes in market demand?

…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

Innovations and Business Processes in the Market

19. What special services do you offer to ensure increased customer satisfaction?

a) Delivery services [ ] b) Packaging services [ ] c) None [ ] d) Others [ ] (specify)………………

20. Are customers influenced in any way by these extra services?

a) Yes [ ] b) No [ ]

21. Is there a difference in profits between when you offer such services and when you don’t?

a) Yes [ ] b) No [ ]

22. What do you think hinders traders in this market from introducing new unique business processes? a) Lack of capital [ ] b) Fear of loss [ ] c) Lack of ideas [ ] d) other [ ] (specify)……………..

23. Highlight any notable changes in business performance you experience when you offer these services to your customers …………………………………………………………………………………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………………………………………………………………………………………