EFFECTS OF THE ADOPTION OF E-COMMERCE ON THE FINANCIAL

PERFORMANCE OF SMES IN MOMBASA COUNTY

CHAPTER ONE

INTRODUCTION
1.1 Background of the Study
Economic globalization is having a profound impact across all industries worldwide. However,
the process of globalization is not uniform, and there are large differences in the extent to which
industries are being integrated into a single global market. In this context, economic globalization
is putting increasing pressure upon manufacturing companies, specially manufacturing Small and
Medium Enterprises (SMEs) which must today compete globally (Raymond et al., 2005; Soto-
Acosta et al., 2015). In this context, brought by the advent and development of Internet
technologies, among other factors, manufacturing companies are adopting e-business technologies
to increase productivity and quality, lower operating costs, and respond faster to customers' and
business partners' needs (Jardim-Goncalves et al.,2012). As a result, effective adoption and use of
e-business technologies have become major management concerns (Popa et al., 2016; Soto-Acosta
and Meroño-Cerdan, 2008).

Furthermore, the majority of the existing e-business literature still relies on studies conducted in
large companies, to a great extent, with very few recent studies analyzing SMEs (e.g. Chan et al.,
2012; Chong et al., 2009; Lopez-Nicolas and Soto-Acosta, 2010). Moreover, although the
literature suggests that actual technology use is an important link to business value and that such
link has been found to be especially lacking in SMEs (Devaraj and Kohli, 2003), it is even less
common to find studies analyzing e-business use in manufacturing SMEs (Raymond et al., 2005;
Soto-Acosta et al., 2015). In addition, much of the existing research focuses on a single view of e-
business, how these technologies support specific business processes (Gu et al., 2012; Palacios-
Marqués et al., 2015; Soto-Acosta et al., 2014), with very few studies examining the use of e-
business along the whole value chain in manufacturing SMEs (Soto-Acosta et al., 2015). However,
according to the conceptual e-business frameworks, this is the level of adoption and integration of
e-business that produces the best opportunities for business value creation (Martin and Matlay,
2001; Teo and Pian, 2004). Another issue is that most of the investigation on e-business
adoption/use has focused on high e-business intensity countries (e.g. USA, Canada and
Scandinavian countries) (Kongaut & Bohlin, 2016). However, the international growth of e-
business has shown the need to extend this research to other less studied countries of the South
Europe (Spain, Portugal, Greece), with potential for growth but different cultures (Hernández et
al., 2010).

Equally important is to analyze the effects of e-business use on the performance of SMEs. Firm
performance in the e-business literature has been fundamentally measured by using subjective
measures (Devaraj et al., 2007; Lucia-Palacios et al., 2014; Soto-Acosta and Meroño-Cerdan,
2008; Soto-Acosta et al., 2015; Tallon et al., 2000), with few works employing objective measures
(Loukis et al., 2013; Meroño-Cerdan and Soto-Acosta, 2005, 2007; Zhu, 2004). In addition, most
of the studies have analyzed the direct relationship between business and firm performance, while
very little work has been undertaken to identify variables that mediate this relationship. Thus, there
is a need to develop more comprehensive research models capable of being used to analyze the
link between e-business use, intermediate outcomes or mediators and firm performance.

E-commerce has great potential to become a significant part of the economic activity of countries
throughout Africa. Increasing digital literacy and unprecedented new demand are occurring at the
same time as breakthrough developments in infrastructure and technology. News of successful
investment rounds for local e-commerce platforms, the increasing adoption of mobile money, and
the reach of Internet connectivity to a significant percentage of the population all suggest a
dynamic continent that is developing new ways of conducting business digitally. Innovations
abound as African entrepreneurs devise solutions to low consumer trust and limited access to
formal banking (Jan, Lu, & Tzu-Chuan , 2014).

Kenya’s population of around 43 million is the seventh largest in Africa. The population growth
rate in 2010 was estimated at 2.6% per annum, among the world’s highest, and as a result about
45% of Kenyans are aged 16 and under (Souter & Kerretts-Makau, 2012). While e-commerce is
expected to directly and indirectly create new jobs as well as lead to job losses, according to a
United Nations report (UN) (2012) the net effect will be positive.

E-commerce holds great potential in providing massive employment opportunity for the youth in
Kenya especially those with higher skills. Internet companies particularly pose a great advantage
in terms of low setup costs as compared to the traditional brick and mortar business models Souter
& Kerretts-Makau (2012). This means youth entrepreneurs can launch their business ventures from
their bedrooms and grow them from there.

E-commerce in Kenya has immense growth potential, as the internet population had grown to an
estimated 37.7 million users in June 2016 from 12.5 million in 2011. Moreover, there has been a
surge in e-commerce activity with mobile money services and applications coming into the market
and online purchase-based enquiries in Kenya increasing by 33% in 2015 according to Google
Consumer Barometer. The upward trend has been aided by the increasing number of young people
who prefer to access information via their mobile phones, coupled with the declining prices of
internet connectivity costs as well as the high uptake of mobile payment services, proving the
opportunity for online trading platforms such as N-Soko, OLX, Jumia and Rupu, among others. In
spite of these positive developments, there is a concern that e-commerce industry growth in Kenya
is being hampered by the relatively slow uptake and continued use of e-commerce services by
online users, more so when it comes to online retailing services. These two elements deprive the
e-commerce firms of a critical mass of people that are required to make their services profitable,
thus leading to closure of a number of online retailing services over the years. (Baker, 2014).

According to McKinsey (2017), the internet sector contributed 2.9% of Kenya’s GDP in 2016.
However, this figure should be treated with some caution as accurate statistics of ICTs contribution
to GDP in Kenya are hard to come by since ICT (and e-commerce in particular) is not yet
considered as a sector in the yearly economic survey reports. Instead, it is classified under
‘Transport, Storage and Communications’. It therefore becomes very difficult to track the
contribution of ICT to development as a single sector unlike in many countries where ICT is
defined as a stand-alone sector. For this reason, the new Kenya National ICT Master Plan for
2013/14 - 2017/18 recommends that ICT be set up as a stand-alone sector and comprehensive ICT
indicators be used to monitor the growth of the sector.

In Kenya, the SME sector is considered as one of the key contributors to the economy by providing
income and employment to a major proportion of the population (Ngugi & Bwisa, 2017). The
Kenya Economic Survey report (GoK, 2017) revealed that the SME sector contributed 79.8% of
new jobs created in Kenya in year 2017. In 2016 the SME sector contributed over 80% of the
country’s employment with majority of new jobs being created in that segment (430,000 out of
503,000 new jobs created in 2016) and donates about 70% to the country’s GDP (GoK, 2015).
The government of Kenya has acknowledged entrepreneurship development as a major policy
drive to attain economic development. The foremost reason of this concern is the growing basic
for entrepreneurs who quicken economic development through generating new ideas and
converting them into profitable ventures (Mungai, 2016), The Small Medium Enterprise (SME)
sector has been identified as a substantial strategic sector in the overall policy objectives of the
Government of Kenya (GOSKE) and it is seen as a driver of change for wide-ranging economic
growth, regional development, employment generation and poverty reduction. SME sector is
predicted to contribute to transmute lagging regions into emerging regions of fortune.

According to National Report Review (2016), the percentage of educated unemployment remains
proportionally higher than the rate for less-educated workers in Mombasa County. Mombasa
county government is facing a serious issue of providing employment opportunities for the public.
The development and growth of SMEs in Mombasa County offers a clarification to this problem.
County Government of Mombasa identifies SMEs in Mombasa County as the backbone of the
economy, as it accounts for more than 75% of the total number of enterprises, provides 45% of the
employment and donates to 52% of the Gross Domestic Production (GDP) of the country.

According to Kurako et al. (2017), the goal of SME owners can be measured through accurate
application of adoption of e-commerce which will eventually lead to financial return. Financial
return includes to earn as much profit as possible, to have as much disposable income as possible,
to attain financial security, to build family wealth for the future. Effective adoption of e-commerce
is essential to the growth of a small business.

1.2 Statement of the Problem

The e-commerce space is new in the Kenyan market. Many firms are now considering going into
the e-commerce space. Be it supermarket chains like Nakumatt and Uchumi or even other
multinationals like Hot point and Samsung. Others are opening shops online the likes of Purpink,
Mamamike, and Zawadimoja among others. To support the success of these businesses, it is
paramount to maintain communication among all the stakeholders. As it is e-commerce, the only
lead form of communication among the stakeholders is through the internet. The consumers need
it to access what is being offered and the sellers need it to put their offerings available for sell
(Barney, 2015).
Some researchers argue that they are many downsides of e-commerce. Fox (2018) argues that in
the face of the fiercely competitive e-commerce environment, new customer acquisition is an
expensive affair for SMEs, especially those that are joining later. He points out that a research by
McKinsey & Co. (2018) suggested that online customer acquisition cost can be as much as 4 times
as high as offline. Fox further cautions that with e-commerce one is more or less global by default
and must therefore focus on building a global internet brand that can serve a global market if one
hopes to remain competitive. Marshall & Mckay (2016) had some disconcerting findings with
SMEs in which the interviewees were somewhat disappointed with outcomes from their e-
commerce intiatives. The researchers noted that there might have been a correlation though
between this results and the apparent lack of planning, evaluation and proactive management of
benefits with respect to their e-commerce activities.

There is a considerable number of studies that have been carried out to analyse varying aspects of
e-commerce in developing countries including Kenya. There is an emerging gap in the studies that
have been conducted in the past. Most of them have focused on factors influencing the adoption
of e-commerce in SMEs (Kinyanjui & Mccormick, 2016; Hunaiti, Masa’deh, Mansour, & Al-
Nawafleh, 2015; Shemi, 2012; Wanjau et al., 2012; Mutua et al., 2013; Ochola, 2013) and
barriers/obstacles facing SMEs (Kinuthia & Akinnusi, 2014).Other researchers have focused on
the impact of e-commerce in commercial banks in Keny (Magutu, Ongeri & Mwangi, 2014).

As earlier mentioned it is apparent that most researchers have concentrated mostly on adoption
and barriers of e-commerce in banks only, however, research on factors affecting development of
e-commerce seems to be lacking. This study will contribute new insights on the actual performance
of existing SMEs operating in Mombasa County by establishing the effect of internet marketing,
mobile banking and ICT skill on the financial performance of SMEs in Mombasa County.

1.3 Objectives of the Study

1.3.1 General Objective

The purpose of this study will be to to establish effects of the adoption of e-commerce on the
financial performance of SMEs in Mombasa County.

1.3.2 Specific objectives

 1. To establish the effect of internet marketing on the financial performance of SMEs in
Mombasa County

2. To determine the effect of mobile banking on the financial performance of SMEs in Mombasa
County

3. To examine the effect of electronic funds transfer on the financial performance of SMEs in
Mombasa County

1.4 Research questions

1. What is the effect of internet marketing on the financial performance of SMEs in Mombasa
County?

2. What is the effect of mobile banking on the financial performance of SMEs in Mombasa
County?

3. What is the effect of electronic funds transfer on the financial performance of SMEs in
Mombasa County?

1.5 Significance of the Study

This study is important to existing SMEs, as it will act as a reminder of what has been their drivers
for success. It will inform them of what they have done right and should continue doing right to
continue being successful. Through this they can create competitive advantages by focusing and
what they do best and achieve success.

This study will also be very interesting to any other individuals who have an interest in e-commerce
either as a shopper or as a researcher in the subject.

The research study will act as a future reference to other researchers who will be undertaking their
study in the related field of study for the purpose of partial fulfilment of the award of degree in
Bachelor in Business and Information Technology
The research will also add value to the body of knowledge and understanding the adoption of e-
commerce among businesses in Mombasa County. This will be beneficial to researchers who may
want to research more in this area.

1.6 Scope of the Study

The focus of the study will be of SMEs in Mombasa County. This study will target employees of
of SMEs in Mombasa County. The study will be expected to take a total of three months in order
for it to be completed.
 CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction
This chapter is divided into two main parts namely theoretical literature review and empirical

review. Theoretical review explains different theories written by different scholars on the study

variables. Definition and discussion on key terms had been covered, on the other hand, empirical

review attempts to explain the gaps identified from different studies done on similar subject and

hence try to bridge those gaps. Conceptual framework, on which the study is based, also had been

developed.

2.2 Theoretical Review

Theories are analytical tools for understanding, explaining, and making predictions about a given

subject matter (Zimaman, 2011)

2.2.1 Technology Acceptance Model

To understand, predict and explain why people accept or reject information systems; researchers

have developed and used various models to understand the acceptance of users of the information

systems. The technology acceptance model (TAM) that was introduced by Davis, Bagozzi, and

Warshaw (1989) is one of the most cited models that researchers used to study underlying factors Commented [E21]: Old citations

that motivate users to accept and adopt a new information system (Al Shibly, 2011).

The primary goal of TAM is to provide an explanation of factors affecting computer applications'

acceptance in general. In addition, this model helps researchers and practitioners to identify why

a particular system is unacceptable (Davis, 1989). Davis suggested that using an information Commented [E22]: old

system is directly determined by the behavioral intention to use it, which is in turn influenced by
the users' attitudes toward using the system and the perceived usefulness of the system. Attitude

and perceived usefulness are also affected by the perceived ease of use.

2.2.2 Theory of Planned Behavior

The theory of planned behavior (TPB) suggested that human behavior is determined by intention

to perform the behavior, which is affected jointly by attitude toward behavior, subjective norm and

perceived behavioral control (Ajzen, 1991, 2002). Attitude (ATT) is the general feeling of people

about the desirability or undesirability of a specific behavior. Subjective norm (SN) expresses the

perceived organizational or social pressure of a person who intends to perform a particular

behavior. Perceived behavioral control (PBC) reflects a person's perception of the ease or difficulty

of implementing a particular behavior.

The ability of TBP in providing a useful theoretical framework for understanding and predicting

the acceptance of new information systems is demonstrated (Ajzen, 2002). Armitage and Conner

(2001) analysed previous studies using the TBP in a meta-analysis study. The major conclusion

was support for the efficacy of the TPB and the suggestion that more work on new variables is

needed to increase the predictability of the model.

2.2.3 Social Construction Theory

Another theory relevant for the analyzing electronic banking and perhaps the most relevant is

Trevor Pinch and WiebeBijker’s social construction of technology theory. This theory argues that

technology does not determine how people receive and use mobile technology but that people

determine how and in what ways technology is used. The theory posits that the use of a technology

cannot be understood without understanding how it is socially integrated within society. Within

different social contexts, technology can take different meanings and adoption depends on how

society views the technology.

Under this theory, the adoption of a technology is not only due to its technical superiority but due

to social factors as well. In the context of this study, mobile phone technology and specifically

mobile phone financial services having been driven by both business factors and social networks

related to business and family. The decomposition theories of planned behavior not only keep the

theory of planned behavior principles but also add important value of the original theory, as it adds

a bigger number of beliefs and constructs to the models (Vankatesh, Davis and Morris, 2016). The
2.3 Conceptual framework
A conceptual framework can be defined as a set of broad ideas and principles taken from relevant

fields of enquiry and used to structure a subsequent presentation (Reichel and Ramey, 2013). The

schematic diagrams below will not only guide the study but will also show the interrelatedness

among the key variables in the study as illustrated in Figure 1.0.

Independent Variables Dependent Variable

Internet Marketing
 blogs
 convenience

Mobile Baking
Performance of Financial
 Assets management Performance of
 Saving
 ROE
 ROI

Electronic Funds Transfer

 Electronic Money
 Adoption of M-banking

Figure 2.1 conceptual framework

2.4 Review of Study Variables

2.4.1 Internet Marketing

According to Amit K. Mairra (2014), internet marketing is the use of internet to advertise and sell

goods and services. It is also called I-marketing, web marketing, online marketing or E-marketing.

It includes paper click advertising, e-mail marketing, affiliate marketing, interactive advertising

article marketing( including search engine optimization and blog marketing) is the strategies and

techniques applied in internet to support the company’s overall online objectives.

Kotler and Pfoertsch (2014) describe E marketing as a company’s efforts to inform buyers,

communicate, promote and sell its products and services over the Internet. If a company does its

e-mail campaign right, not only will it build customer relationships but also reap additional profits.

It includes both direct response marketing and indirect marketing elements and uses a range of

technologies to help connect businesses to their customers. By such a definition, E-marketing

encompasses all the activities a business conducts via the worldwide web with the aim of attracting

new business, retaining current business and developing its brand identity. Ball and Duval (2013)

stated that the Internet and other technologies have been catalysts in propelling the world forward

into new ways of doing business and in the process empowering the customer.

Mckintyrye (2012) noted that the use of e-marketing by organizations has allowed cheaper

marketing of its products, a greater customer base and a more personal interaction in the marketing.

This has enabled a better research of the customer needs and has allowed the provision for these

needs easier at a reduced cost. The evolution of internet marketing has led to better supply chain

systems allowing the delivery of online goods to the customer allowing convenience to the

customer while guaranteeing a sale for the firm. This system has allowed accountability to be more

effective as compared to the traditional selling.

Tiessen and Wright (2014) confirm that internet marketing has allowed firms the access of new

market niches as well increase opportunities beyond geographical boundaries curbing international

entry barriers. Early adopters of internet marketing have gained a competitive advantage and

established customer loyalty programs that have enabled them retain and gain new clients (Sparkes

and Thomas, 2014)

2.4.2 Mobile Baking

In recent years, a growing range of developing countries at the side of Republic of Kenya have

commenced on reforming and freeing their monetary systems, remodelling their establishments

into effective intermediaries and lengthening viable monetary services on a property basis to any

or all segments of the population (Seibel, 2015). By step by step increasing the reaching of their

monetary establishments, some developing countries have significantly alleviated the condition by

initiating a framework and infrastructure to encourage loaning through public and personal credit

reference bureaus, institutional methods to spur economic development like the vision 2030 in

Republic of Kenya and monetary systems approaches that embody alternatives to collaterals so as

to access credit (Pagano & Jappelli, 2015).

Within the method, a brand new world of finance has emerged that is demand-led and savings

driven and conforms to sound criteria of effective monetary intervention. There is currently early

expertise with the flourishing integration of small finance methods into micro policies that makes

banking the small economy (Miller, 2015). According to Proch now (2015), credit allocation is

that the method of granting credit or loan to a receiver for a given economic enterprise. Mobile

banking has created this to be achieved once analysis of the borrower’s credit goodness supported

the bank’s loaning policy, credit standards, credit terms, the credit assortment terms and credit
reference reportage (Greuning & Bratanovic, 2015). A comprehensive methodology of credit

allocation is applicable equally to a standard bank (Iqbal & Mirakhor, 2016).

The method of credit allocation may be a two-step process. The primary is to judge the credit

allocation that is to spot the leading variables influencing credit allocation. The second is to plan

ways to quantify the credit using mathematical models, to know the profile of the instrument. Once

a general framework of credit allocation and management is developed, the techniques are often

applied to completely different things, products, instruments and establishments. Greuning &

Iqbal, 2016 argue that mobile banking is crucial for SMEs to possess comprehensive credit

allocation management framework, as there is growing realization among governments that

property growth critically depends on the event of a comprehensive credit allocation management

framework. A study into credit management framework will facilitate SMEs to cut back their

exposure to borrowers, and enhance their ability to view tin the market (Iqbal & Mirakhor, 2016).

A discount in every institution’s exposure can cut back the general within the monetary sector yet.

Industrial SMEs whereas within the method of providing monetary services, assume varied types

of monetary risks. Hence, it's necessary that SMEs have in situ a comprehensive management and

reportage method to spot, measure, monitor, manage, report and management completely different

classes of borrowers (Stieglitz & Weiss, 2011). Traditionally, bank loaning and loans to trade and

trade has been thought of as a vital supply of finance. The bank as a supplier of credit plays a vital

role within the economy. The role of the bank as a financier has undergone an ocean of amendment

over the years. The bulk of the SMEs‟ customers need mobile banking short-term finance to

conduct the day-to-day business that funds the present assets of the business. One amongst the

ways of loaning that SMEs like is to use the client’s record and compute the assets gap, that is,

total current assets less current liabilities aside from bank borrowings to get most permissible bank
finance trusted the set down credit policy and so finance a given proportion. However, there are

activities performed by banking corporations that do not have direct record implications. These

services embody agency and consolatory activities like trust and investment management, personal

and public placements through intermediaries or facilitating contracts, normal under-writing, or

the packaging, securitizing, distributing and coupling of loans within the areas of client and land

debt management (Preshow, 2011).

2.4.3 Electronic Funds Transfer

In 2015, Mari conducted a study on adoption of Electronic Funds Transfer in European nation.

The study conducted a survey of 2015 customers of SMEs placed in land. The data inside the

empirical study were collected by suggests that of a type armoured to banking customers. The

results from the study indicated that certain attributes of Electronic Funds Transfer influence its

usage. The attributes include; relative advantage, compatibility, communication and tradability.

The investigation of quality and risk of pattern Electronic Funds Transfer yielded no support as

being barriers to adoption. The finding collectively disclosed that, technology perception and

certain demographical variables of the customers have a serious impact on adoption. In a very

completely different study titled “An empirical investigation of mobile banking adoption”, the

results indicated that perceived relative advantage, simple use, compatibility, ability and integrity

significantly influence perspective .The perspective then ends up in activity intention to adopt

Electronic Funds Transfer (Lin, 2015)

In 2015 Dr. Shams her Singh, prof, Banarsidas Chandiwala Institute of skilled Studies, New Delhi,

Republic of India conducted a survey of two hundred customers of SMEs and the way funds are

transmitted situated in city. The study examined the factors touching the adoption of Electronic

Funds Transfer by client of various SMEs situated in city. The study surveyed the opinion of two
hundred customers of SMEs situated in city. Analysis of Variance (ANOVA) and correlation

analysis were used for having insights within the mobile banking services provided by the various

SMEs.

The population studied was urban population that was thought of as representative of banking

customers in city. The findings supported the correlation analysis of the info found four clear

factors touching the adoption of Electronic Funds Transfer. These four factors are labelled as

“Security/Privacy, dependability, Efficiency, and Responsiveness” .This is on the premise of

understanding of customer’s perception concerning the mobile banking. Additionally the results

supported the Analysis of Variance (ANOVA); found that the demographic factors will have

important impact on the client perception on the adoption of Electronic Funds Transfer (Shamsher,

2015).

In 2016Porteous, conducted a survey commissioned by each Fin Mark Trust and Department for

International Development (DFID) on the factors influencing the adoption of mobile banking

services at Washington DC concentrating on a population of three hundred found that, most

unbanked people were unbanked primarily for “economic reasons”, that relates partly to their work

standing and partly to their perception that formal employment was a requirement for gap a

checking account. He additionally found that, adolescents tend to not have bank accounts and see

less would like for them. Identical study additionally discovered that Electronic Funds Transfer

users normally have the next financial gain, are additional possible to measure in urban areas and

in formal employment, yet as slightly older as banked people with mobile phones do. Porteous

argues that, the first adopters profile seems to correlate additional with the required practicality

than with issue that imply risk tolerance like age. Additionally, a high proportion of the banked
population either does not perceive Electronic Funds Transfer as an alternative has not detected

concerning it.

Despite these high levels of cognitive content concerning Electronic Funds Transfer, banked

people still have robust unfavourable angle, with around one in 5peopleskeptical its trustiness

(Porteoust, 2016) Cheah, Teo, et al, (2011) conducted associate degree empirical analysis on

factors touching Malaysian Mobile banking adoption. Correlational analysis was accustomed have

insights within the mobile banking services provided by the various SMEs in Asian nation. Within

the study, factors like PU, PEOU, relative advantage (RA) and private originality (PI) were found

to be completely connected with the intention to adopt mobile banking services. However, social

norms (SN) were the sole factors to be insignificant and perceived risk (PR) were negatively

related to the mobile banking adoption.

2.5 Empirical Review

Kegan. (2015) in their study on internet banking and performance of community SMEs examined

the impact of online banking applications on community SMEs performance in America. The

study used a structural equation model to create an online banking index and an econometric model

to evaluate bank performance. A survey of ten community SMEs was conducted. Once the pilot

study was considered acceptable, all community SMEs with total assets less than One billion

United States Dollars operating in Iowa, Minnesota, Montana, North Dakota and South Dakota

were identified and using the structural equation model to evaluate the various variables identified

and used to examine whether the index explains differences in community bank performance. The

results indicated that SMEs that provide extensive online banking services tend to perform better

than those who lag behind. In addition, online banking helps community SMEs improve their
earnings ability as measured by return on equity and improve asset quality. Since the study was

conducted in a highly technologically advanced economy this study sought to find out how the

counterparts in developing countries like Kenya do perform.

Siam (2015) investigated the role of electronic banking services on the profits of Jordanian SMEs.

He investigated the reasons behind providing electronic banking services through the internet and

their impact on banking services in general and SMEs profitability. The study was done in 20

commercial SMEs operating in Jordan. The sample period was between 2011 to 2015 and they

interviewed 98 managers. Accounting data was used to measure SMEs performance using

regression analysis. He concluded that the effect of electronic banking services on SMEs

profitability is negative in the short run because of costs and the investments the bank carry in

order to have the technical and electronic infrastructure in place, training the employees to be

skilled and competent but will be positive on the long run. Jordanian people are conservative as

opposed to Kenyans who are widely known to be technology savvy It would therefore be important

to investigate whether many of the innovations in e-commerce adopted by commercial SMEs in

Kenya has an effect in their financial performance.

Njuguna et al. (2013) conducted a study on internet banking adoption in Nairobi County, Kenya

between 2013 and 2014. The purpose of the study was to establish the factors that influence

adoption of internet banking among the individuals who have accounts with commercial SMEs in

Nairobi County; Kenya. Only 24.82% of the respondents use Internet banking services. This is

despite the high rate of internet access recorded. They concluded that internet banking is still at its

nascent stages as demonstrated by the length of usage response. The results also revealed that

perceived usefulness, perceived ease of use, self-efficacy, relative advantage, compatibility, and

result demonstrability have a significant association with intention to use internet banking, while
risk, visibility and trialability are not significant. It would be good to find out if there has been any

change with the increase uptake and usage of smart phones and tablets by Kenyans.

Gikandi and Bloor (2013) investigated adoption and effectiveness of electronic banking in Kenya.

The results showed that there was a drastic shift in the importance attached to some e-commerce

drivers between years 2015 and 2014. In the 2015 survey, the number of other retail SMEs

adopting e-commerce was considered as a driver of medium importance by 70% of the SMEs,

however, in the 2015 survey it was ranked among the extremely important drivers by a 100% of

the SMEs. Similar observations were made in the case of competitive forces. Internet security was

identified as the most important future challenge in e-commerce while customer trust, privacy and

awareness were recognized as challenges of great importance. The study concluded that cost

reduction and customer related factors have emerged as the main drivers of e-commerce adoption

in Kenya. Mobile banking growth is expected to continue. Commented [E23]: 2.6 critique of existing literature

2.6 Research Gaps

Financial establishments in Kenya have adopted mobile services i.e. Mobile banking to provide

crucial banking services. Although M-banking is a profitable retail-banking product and has been

the cornerstone of financial institution operation over the last ten years in Kenya, its adoption has

been facing growing difficulties because of certain perceptions that bank customers have. (FSD

Annual report 2017; Mas and Radcliffe, 2017) indicated that Electronic Funds Transfer growth in

Kenya and the usage (adoption) of Electronic Funds Transfer has been growing at a slow rate. This

was further reinforced by the Central Bank of Kenya (CBK, 2017) report on growth of Electronic

Funds Transfer usage in relation to Kenya population that is estimated to be 40 million peoples (

Kenya bureau of statistics). Majority of people in Kenya don’t use Electronic Funds Transfer as a
payment system as per Steadman Group report of January, 2017 hence it is evident that Electronic

Funds Transfer adoption is growing at a slower pace in comparison to the population that is eligible

to have them (Ochieng, 2017).

2.7 Summary of Literature Review

Information technology generates fundamental changes in the nature and application of technology

in business. Information Communication Technologies (E banking) can provide powerful strategic

and tactical tools for organizations including SMEs, which, if properly applied and used, could

bring great advantages in promoting and strengthening their competitiveness. The proliferation of

the different e banking tools like Internet, is a main stream communication media and as an

infrastructure for business transactions has generated a wide range of strategic implications for

businesses in general as well as for the banking industries in particular.

 CHAPTER THREE

RESEARCH METHODOLOGY

3.1Introduction
This chapter shows how the research will be conducted in order to achieve the stated objectives. It

outlines the research design, population, sampling procedures to be used, the methodology of data

collection and instruments, how data is to be analysed and the expected output of the study, data

validity and reliability.

3.2 Research design

Research design set to be employed will be a descriptive quantitative study based on obtaining

relevant information with the aid of questionnaires. Questionnaires are free from the bias of the

respondents who are not easily approachable: can be reached conveniently and as is appropriate

for this study considering the target population.

Malhotra (2014) says that descriptive research is conducted to achieve different goals such as

describe the characteristics of relevant groups, estimate the percentage of units in a specific

population, determine the perceptions, determine the degree to which such variables are associated

and finally to make specific predictions. This research process is also termed as statistical research

as it provides information and data about population being examined of the concerned subject. It

describes the "who, what, when, where and how" of a situation, but not what it causes it. Thus this

research design is employed to describe the situation of adoption of e-commerce in SMEs in

Mombasa County as well as how they affects the financial performance of these enterprises.
3.3 Target population
The target population of the study will include small and medium enterprise tax payers in

Mombasa County in Marikiti market. This population aimed to give detailed information that will

be relevant for analysis and interpretation of the data. For the study to be successful both owners

and workers of privately owned (SMEs) and those registered at county level which is 150 and are

the essential groups for the study.

Table 3.1 Target Population

Category Population

Size Commented [E24]: Draw APA table

shops 50

Minimarkets 20

Saloon 20 Commented [E25]: The population is misleading

Hotel 30

Restaurants 30

Total 150

Source: Mombasa County, 2020

3.4 Sample size

A sample of 45 respondents will be taken from owners of small businesses of the one hundred and

fifty selected (SMEs) in Mombasa County.

Table 3.2 Sample size

Category Population Size Sample % Sample

shops 50 30 15

Minimarkets 20 30 6

Saloon 20 30 6

Hotel 30 30 9

Restaurants 30 30 9

Total 150 45

According to Mugenda and Mugenda (2013) a sample size of 30% is considered a sufficient

sample size hence the researcher used 30% as the sample size and computed the same on each

management category as follows;

Sample size of Shops was

(50/100) * 30 = 15

Sample size of Minimarkets was

(20/100) * 30 = 6

Sample size of Saloon was

(20/100) *30 = 6

Sample size of Hotels was

(30/100) *30 = 9

Sample size of Restaurants was

(30/100) * 30 = 9

3.5 Sampling procedure

According to Grazino and Raulin, (2007) it is not possible to collect and gain data from all

available sources to solve research problems and to find the solutions. Sampling techniques

provide methods that help to reduce the amount of data needed to collect by considering only data

from a sub-group rather than all possible cases or elements Saunders et al, (2014). There are a

number of ways to choose a sample for case studies. The sample selection process is continued

until the required sample has been reached Tin, (2014).

Simple random sampling procedure is set to be used in this research study. Random sampling

ensured that each member of the target population has an equal chance and independent chance of

being selected OsoandOnen, (2015). The selection of (SMEs) under the above method is to achieve

a desired representation from the various departments in the population.

3.6 Data collection Instruments

Methods of data collection that will be used are both primary and secondary data. Primary data

will be derived from questionnaires distributed to those targeted in this study. The questionnaires

had closed-ended questions and covered all the issues relating to establish effects of the adoption

of e-commerce on the financial performance of SMEs in Mombasa County.

The researcher will personally administer the questionnaires to the respondents, purposefully

selected respondents would be asked to fill the questionnaires. Secondary data will be gathered

from library material, tax compliance and non-compliance journals and reports, media publications
and various Internet search engines covering the effects of adoption of e-commerce on financial

performance of Small Scale business enterprises.

3.7 Pilot Study

Kumar (2014) cites that a researcher should do a pre-test on the instrument prior to a research; this

is preliminary test in order to identify and eliminate errors. The pilot test will be carried out to

ensure that the questions are relevant, clearly understandable and makes sense. The pilot study

aimed at determining the reliability of the questionnaires including the wording, structure and

sequence of the questions (Mugenda&Mugenda, 2013).The pilot study will involve 3 respondents

in the target population, the respondents will be conveniently selected (Cooper & Schindler, 2016),

since the purpose is to refine the questionnaires so that the respondents in the major study wouldn’t

have problems in answering the questions.

3.5.1 Validity

According to Zikmund (2013) validity tests involve ascertaining the accuracy of the instrument by

establishing whether the instrument focuses on the information they are intended to collect. For

this study, to ascertain face validity, the instruments will be constructed and passed over to

supervisor for constructive criticism and later will be revised according to his comments. On the

other hand content validity will be achieved by subjecting the data collection instruments to an

evaluation by a group of experts who will be expected to provide their comments on the relevance

of each item on the instruments. The results of their responses will be analyzed to establish the

percentage representation using the content validity index.

3.5.2 Reliability

Reliability test is very important as it shows the extent to which a scale produces consistent results

if measurements are made repeatedly. This study reliability will be done by determining the

association in between scores obtained from different administrations of the scale. Cronbach’s

alpha will be employed to determine the internal reliability of the questionnaire to be used in this

study. According to Fraenkel and Wallen (2010) as cited by Wanyoike (2013), reliability should

be at least 0.70. A Cronbach Coefficient Alpha which is above 0.7 indicates the instrument used

is reliable and acceptable for administration since the alpha is above the recommended value.

3.8Data Processing, Analysis and Presentation

This study will use both primary and secondary data and also use quantitative and non-quantitative

methods to conduct the analysis of the results.

The data analysis procedure will involve the use of quantitative techniques whereby the

information to be dealt with will be derived from the questionnaires. The Quantitative techniques

will be used in employing statistical methods such as the ones listed below:

The following techniques of analysis and interpreting data will be used: Tabulation, Bar graphs,

Pie charts and Percentage.

The tool of analysis was statistical package for social science (SPSS) software version

The regression model for the study will be;

Y = β0 + β1X1 + β2X2 + β3X3 + ε

Y= Financial Performance

X1= internet marketing

X2= mobile banking

X3= electronic funds transfer

β0 = constant (y intercept)

ε = error term