DIGITAL BANKING SERVICES AND INVESTMENT DECISIONS OF FEMALE-OWNED SMALL AND MEDIUM ENTERPRISES IN NAIROBI CITY COUNTY, KENYA

ABSTRACT

In Kenya, … introduction of the abstract. This study sought to determine the effect of digital banking services on investment decisions of female-owned small and medium enterprises in Nairobi City County. The specific variables of the study were: to assess the effect of digital credit service on the investment decisions of female-owned small and medium enterprises in Nairobi City County, Kenya, to evaluate the effect of digital savings service on the investment decisions of female-owned small and medium enterprises in Nairobi City County, Kenya, to establish the effect of insuretech service on the investment decisions of female-owned small and medium enterprises in Nairobi City County, Kenya, and to determine the effect of robo-advisory service on the investment decisions of female-owned small and medium enterprises in Nairobi City County, Kenya.

The study was guided by four theories namely:……. A descriptive survey design was employed using primary data collection through structured questionnaires. The study used sample size of 329 respondents out  counties determined using Taro Yamane’s formula, ensuring a representative proportionate stratified random sample. Data was analyzed using Statistical Package for Social Sciences (SPSS) version 29, in which regression analysis tested the hypothesized relationships. The significance of this study lies in its potential to inform policy, management practices, offering insights for scholars and practitioners aiming to ….

CHAPTER ONE

 INTRODUCTION

1.1 Background of the Study

The access to banking services has been transformed by the incorporation of digital technology into financial services, especially for small and medium-sized businesses (SMEs). Businesses may now function more effectively and competitively in an increasingly digital market thanks to these developments, which provide affordable, data-driven alternatives to traditional banking (Klapper & Singer, 2021).

Globally, digital banking services, such as digital credit, savings platforms, robo-advisory tools, and insurtech, are transforming how SMEs plan investments, manage money, and reduce risks in both developed and emerging economies (World Bank, 2020; OECD, 2022). In particular, the emergence of digital financial services has benefited female entrepreneurs, who play a critical role in inclusive economic growth. Long-standing gender-specific barriers like financial literacy, high transaction costs, and a lack of collateral are addressed by digital platforms (UN Female, 2021). Female-owned SMEs are increasingly acquiring the resources they need to make better investment decisions and enhance business sustainability through mobile-based lending facilities, automated financial advising, and microinsurance products (Findexable, 2023; AfDB, 2022)

In the African region, due to fintech innovation and the extensive use of mobile phones, digital banking has grown rapidly. Currently, female in informal markets have much easier access to finance as a result of platforms like M-Pesa, M-Shwari, Tala, and Fuliza (Demirgüç-Kunt et al., 2018; CBK, 2020). Although they are still in their early stages, robo-advisory and insurtech services are starting to offer customized financial advice and risk management solutions, assisting business owners in making difficult financial decisions (Ndung’u et al., 2024; Ndede et al., 2025).

Locally, as a result of the government’s support for financial innovation and a progressive regulatory framework, digital banking usage has accelerated across the country (Government of Kenya, 2020). Female-owned SMEs in Nairobi City County are increasingly adopting digital credit and savings services to reinvest in their enterprises and meet working capital needs (Kamau & Nduta, 2021; Gitonga & Njeru, 2023). Dependence on traditional and discriminatory banking models has decreased, leading to enhanced financial discipline and resilience.

Challenges still exist despite these developments. Limited access to specialized investment tools, low trust in digital platforms, and inadequate financial education are just a few of the obstacles that many female entrepreneurs face (Mwobobia, 2012; UN Female, 2021). The use of advanced digital financial services for strategic investment planning, especially robo-advisory and insurtech, is still low among female-owned SMEs, despite the broad acceptance of mobile money (Kamau, 2021; Ndung’u et al., 2024). Consequently, there is still limited empirical data regarding the specific influence of these digital banking services on investment decisions, particularly in Kenyan cities. Therefore, this study seeks to explore the influence of digital banking services on the investment decisions of female-owned SMEs in Nairobi City County. Specifically, it focuses on four key services: digital credit, digital savings, insurtech, and robo-advisory platforms, to assess their impact on investment decisions of female-owned small and medium enterprises in Nairobi City, County.

1.1.1 Digital Credit Services

Digital credit refers to the short-tenor, small-ticket loans delivered via mobile or app. It has in the recent present become a mainstream financing channel for micro and small enterprises globally. Studies show robo-scored, instant credit can ease liquidity constraints and smooth cash flows, but can also elevate risks around transparency, multiple borrowing and repayment stress if safeguards are weak (OECD, 2021; World Bank, 2024; FinRegLab, 2024). Evidence from recent global and crisis contexts indicates overdraft-style mobile credit surged during shocks, supporting working capital but also increasing defaults where pricing and collections were opaque (World Bank, 2022; FinRegLab, 2024). For female entrepreneurs, access benefits can be meaningful where collateral barriers persist, yet gender gaps in loan size and product suitability often remain (OECD, 2021; Data2X, 2022).

Across Sub-Saharan Africa, mobile-enabled credit has scaled on top of mobile money rails. Regional market reviews document rapid volume growth and widespread short-duration lending, with concerns about consumer protection and repeat borrowing (GSMA, 2024; CAK & IPA, 2021). In East Africa, overdraft products attached to mobile wallets became dominant by 2020–2021, outpacing stand-alone lending apps and shaping micro-enterprise cash management cycles (CAK & IPA, 2021; McKinsey, 2022).

Kenya is a bellwether: at least six million adults had taken a digital loan by 2019, with strong uptake among traders and micro-enterprise owners for inventory and bill smoothing (FSD Kenya, 2019; FSD Kenya, 2024). Fuliza-type overdrafts expanded sharply from 2019, leading regulators to introduce the CBK (Amendment) Act, 2021 and the 2022 Digital Credit Providers Regulations to license and supervise providers (CAK & IPA, 2021; FinRegLab, 2024). FinAccess 2021 confirms widespread digital borrowing with mixed welfare outcomes, highlighting the need for transparent pricing and responsible collections—issues that particularly affect women-owned SMEs juggling household and business obligations (CBK et al., 2021; KIPPRA, 2023).

1.1.2 Digital Saving Services

Globally, digital savings (mobile wallets, lock-savings, goal-based apps) have broadened formal saving, especially for first-time users and micro-entrepreneurs who value low fees, liquidity control and automated nudges (Global Findex, 2022; OECD, 2021). Randomized and quasi-experimental evidence suggests that digital saving tools help users accumulate buffers and fund productive investment, although persistence depends on design features like goal framing and soft commitment (Global Findex, 2022; IPA, 2020).

Regionally, Africa’s mobile money ecosystems support simple and goal-based savings functionalities embedded in wallets and super-apps. Sector reports document rising stored-value balances and increasing use of savings features by micro-merchants and self-employed women, aided by behavioral prompts and group-based digitalization (GSMA, 2024; UNCDF, 2020; Global Communities, 2020). Digitizing savings groups has improved record-keeping, security, and linkage to formal accounts, with positive spillovers on women’s investment decisions in their enterprises (Global Communities, 2020; UNCDF, 2020).

In Kenya, products like M-Shwari and KCB M-Pesa combine savings and instant credit, enabling goal-based “lock savings” and on-demand liquidity (Safaricom/NCBA, 2022; Safaricom, 2024). FinAccess 2021 shows high usage of mobile-based savings, though women’s savings balances were hit during COVID-19 and recovered unevenly (CBK et al., 2021; Data2X, 2022). FSD Kenya documents county-level and project evidence of women reviving savings groups and adopting digital tools, strengthening working capital buffers and enabling small capital expenditures—key antecedents to investment among female-owned SMEs (FSD Kenya, 2021; FSD Kenya, 2020).

1.1.3 Insurtech Services

Internationally, insurtech refers to a digital distribution, parametric products, usage-based cover. Insurtech has lowered acquisition costs and enabled micro-priced policies for small firms and self-employed women (OECD, 2023; GSMA, 2021). Evidence from agricultural and health microinsurance shows improved resilience and reduced income volatility, with business continuity benefits when shocks hit inventory, health, or weather-exposed operations (GSMA, 2021; Pula, 2022).

Across Africa, mobile-enabled microinsurance has grown via partnerships with MNOs, banks and platforms, bundling cover with payments or credit (GSMA, 2021; AKI, 2023). Studies of digitally distributed health and life products indicate higher take-up when premiums are bite-sized and claims are fast, both salient for women-run SMEs balancing household and enterprise risk (GSMA, 2021; AKI, 2023).

Kenya’s market has seen active insurtech models (e.g., Turaco, Pula) and rising digital channels. The Insurance Regulatory Authority reports expanding microinsurance reach, with digital distribution improving affordability and claim turnaround (IRA, 2023; AKI, 2023). Impact evaluations around agriculture risk products show stabilized cash flows and enhanced investment capacity among smallholders and micro-traders—mechanisms relevant to female-owned SMEs in Nairobi facing health and income shocks (Pula, 2022; GSMA, 2021). Local implementations by Turaco and partners illustrate premium-collection via mobile money and embedded cover for MSME workers, reducing the downside risk that deters business reinvestment (AKI, 2023; IRA, 2023).

1.1.4 Robo-Advisory Services

Globally, robo-advisors offer automated portfolio construction, rebalancing and goal-based planning at lower costs, which can lower barriers to entry for underserved investors, including women entrepreneurs (OECD, 2021; Better Finance, 2021). Experimental and quasi-experimental studies find that access to robo-advice can increase invested amounts, improve diversification, and mitigate some behavioral biases—though effects vary with interface design and risk-profiling quality (Brière et al., 2021; Jung et al., 2023; POMS, 2023). Recent reviews emphasize that robo-advisors complement rather than fully replace human advice, and outcomes depend on financial literacy and trust (Frontiers, 2024; ScienceDirect SLR, 2024).

Regionally, African wealthtech is emerging, with regulators using sandboxes and guidance to test digital advisory models (FSCA/OECD, 2021; EU/OECD dialogues, 2023). While penetration remains modest relative to payments and credit, policy interest centers on widening retail market access, fee transparency, and suitability for first-time investors, including SME owners (OECD, 2021; Eurofi, 2023).

In Kenya, the Capital Markets Authority’s regulatory sandbox has admitted robo-advisory and wealthtech models, and firms like Ndovu have exited the sandbox to offer regulated robo-advisory and unit trust solutions (CMA, 2022; Business Daily via Ndovu Media, 2022). Such tools can translate surplus cash from digital sales into diversified, goal-based portfolios, potentially professionalizing investment decisions among female-owned SMEs that previously held idle balances in mobile wallets (CMA, 2022; OECD, 2021). As local platforms mature, key questions for Nairobi’s women entrepreneurs include fee structures, risk-profiling accuracy, and integration with mobile payments to automate small, frequent investments (Ndovu Media, 2022; OECD, 2021).

1.1.5 Investment Decisions

The process by which people or businesses commit financial resources to profitable endeavors or assets in the hope of earning returns later on is referred to as investment decisions. Globally, access to digital tools, advisory services, and real-time financial information is having an increasing impact on investment decisions. These resources enhance the promptness and quality of decision-making (OECD, 2022). Digital investment platforms and robo-advisory tools have democratized the process of making investment decisions in industrialized nations, allowing female and other small-scale businesses to engage in financial markets and make data-driven investment decisions (Klapper & Singer, 2021). According to the World Bank (2020), these digital advances have improved risk assessment, increased portfolio diversification, and drastically reduced entry barriers.

Regionally, Small and medium-sized businesses’ (SMEs’) decision to invest is still heavily impacted by several factors, including perceived risk, market knowledge, financial literacy, and access to financing (AfDB, 2022). Due to limited credit accessibility, gendered financial constraints, and insufficient advisory support, female entrepreneurs in Sub-Saharan Africa frequently encounter particular difficulties when it comes to making well-informed investment decisions (UN Female, 2021). However, the increasing use of digital banking services in Africa, such as digital savings, mobile credit, and fintech-based investment platforms, is progressively enhancing female-owned businesses’ ability to make investments (Findexable, 2023). These technologies boost confidence and strategic planning in investment decisions by offering real-time insights and alternative funding options (Demirgüç-Kunt et al., 2018).

Locally in Kenya, female-owned SMEs’ decision-making about investments has drawn attention as a major factor in the expansion of their businesses and the empowerment of their economies. However, rather than using organized and data-driven methodologies, many female entrepreneurs in Nairobi City County still base their investment decisions on gut feelings, unofficial counsel, or immediate necessities (Gitonga & Njeru, 2023). Systemic gender inequalities in the loan market, a lack of financial education, and inadequate access to formal financial services are frequently the causes of this tendency (Kamau & Nduta, 2021).

By providing easily available and customized financial tools that facilitate more informed investment decisions, the growing availability of digital banking services like mobile credit, robo-advisors, and insurtech has started to alter these trends (Ndung’u et al., 2024). For example, digital platforms such as M-Shwari, Jumo, and digital financial dashboards from local financial technology firms now aid female entrepreneurs to assess investment risks, track cash flows, and make strategic plans. Notwithstanding these positive advancements, there is a significant knowledge gap regarding how digital banking services impact the investment decisions of Kenyan female entrepreneurs, especially in Nairobi City County. In order to promote inclusive economic growth, lessen gender gaps in financial decision-making, and assist the sustainability of female-led SMEs, a greater comprehension of this relationship is essential.

1.1.6 Digital Banking Services and Investment Decisions

At the global level, digital banking services have evolved beyond simple online transactions to include all-inclusive financial solutions, including integrated savings tools, mobile lending platforms, automated advising services, and insurtech products (OECD, 2022). By providing real-time access to financial data, forecasting and budgeting tools, and automated investment planning platforms, these services have helped people and businesses, particularly small businesses run by female, make more strategic and data-driven investment decisions (Klapper & Singer, 2021; World Bank, 2020). In addition to increasing convenience, digital banking lowers transaction costs and increases financial accessibility, which are the two enablers for prudent investing decisions.

Regionally, digital banking has been a driving force behind financial inclusion and the empowerment of entrepreneurs. Since mobile money platforms and fintech services have become so popular, more female-led SMEs are able to access previously unattainable lending, savings, and insurance products (AfDB, 2022). These resources have been especially crucial in enabling female to plan for long-term growth, reduce business risks, and make wiser financial choices. Accessible channels for managing capital, executing commercial transactions, and assessing investment prospects are offered via platforms like EcoCash in Zimbabwe and M-Pesa in Kenya (Demirgüç-Kunt et al., 2018; Findexable, 2023). Additionally, new insurtech technologies and digital advisory services are progressively being adapted to the demands of marginalized groups, such as female entrepreneurs, enabling investment support and individualized financial planning.

Locally in Kenya, digital banking services have significantly influenced the investment decisions made by female-owned SMEs. Thanks to innovations like M-Shwari, KCB M-Pesa, Tala, and Equity’s EazzyBiz, female entrepreneurs have been using mobile and digital financial platforms more frequently, especially in Nairobi City County (CBK, 2020; Ndung’u et al., 2024). These platforms help female better plan and carry out business investments by offering them fast credit, savings alternatives, insurance products, and financial management tools. The availability of digital financial services in Nairobi has enhanced cash flow management, promoted reinvestment, and boosted the confidence of female entrepreneurs in making long-term business decisions, according to research by Gitonga and Njeru (2023). However, the complete optimization of these services is currently hampered by obstacles including low digital literacy, high mobile loan interest rates, and underdeveloped robo-advisory ecosystems (UN Female, 2021; Ndede et al., 2025).

Notwithstanding these obstacles, the relationship between digital banking and investment decisions made by female-owned SMEs is becoming more widely acknowledged as a crucial topic for policy and study. In order to influence inclusive financial policies and advance fair economic development, it is essential to comprehend how digital tools impact the type, quality, timing, and magnitude of investments made by female entrepreneurs. Evaluating the relationship between digital financial services and investment behavior in female-led businesses is both pertinent and essential as Kenya continues to focus on digital transformation through programs like Vision 2030 and the Digital Economy Blueprint (Government of Kenya, 2020).

1.1.7 Female-Owned SMEs in Nairobi City County

Small and Medium Businesses (SMEs) are companies that keep their assets, income, or workforce below a specific level. SMEs are frequently defined differently by institutions and nations. SMEs are defined by the World Bank (2020) as businesses with fewer than 300 workers, yearly revenues under USD 15 million, and total assets under USD 15 million. According to the Micro and Small Enterprises Act (2012), small businesses in Kenya are defined as those that employ 10-49 people and have an annual revenue between KES 500,000 and KES 5 million, while medium-sized businesses employ 50-99 people and have an annual revenue between KES 5 million and KES 800 million.

Particularly in emerging nations, SMEs are acknowledged as essential engines of economic expansion, job creation, and poverty reduction (OECD, 2020). They are important players in both urban and rural development because of their adaptability, inventiveness, and GDP contribution (KNBS, 2022). Small and medium-sized businesses, or SMEs, are widely recognized as key drivers of innovation, employment, and economic progress. In particular, SMEs run by female are crucial for enhancing household incomes, reducing poverty, and promoting inclusive development (OECD, 2022). With the help of focused regulations, venture financing, and growing digital infrastructure, female entrepreneurs are becoming more dominant in industrialized nations in industries including technology, professional services, and retail (World Bank, 2020). Female-led SMEs still confront structural obstacles, such as limited access to markets, finances, and business support services, despite their increasing numbers (Klapper & Singer, 2021).

Female-led companies operating in industries such as trade, services, hospitality, and agri-processing are highly concentrated in Nairobi City County (Gitonga & Njeru, 2023). These businesses are essential to community growth, household welfare, and job generation. However, Nairobi’s female entrepreneurs frequently encounter particular obstacles like as limited access to funding, insufficient collateral, gender norms, and digital marginalization (Kamau & Nduta, 2021). The introduction of digital banking services and mobile money has enhanced financial inclusion for female, but access to strategic financial tools for business expansion and investment planning is still restricted (Ndung’u et al., 2024).

To improve female’s access to finances, digital tools, and business training, the Kenyan government and private sector have recently launched programs such as the Female Enterprise Fund (WEF), Ajira Digital Program, and fintech collaborations (Government of Kenya, 2020). However, more research is needed to understand the ways in which digital banking services affect the investment decisions made by Nairobi’s female SME owners. Supporting and growing female-owned SMEs continues to be a strategic focus as Kenya strives to achieve economic empowerment and gender equality in line with Vision 2030 and the Sustainable Development Goals (SDGs) (Ndede et al., 2025).

1.2 Statement of the problem

Research demonstrates that only about 31.4% of SMEs in Kenya are female-owned, even when females make up about 58% of self-employed people in Sub-Saharan Africa (African Development Bank [AfDB], 2022). They are disproportionately excluded from formal credit institutions and frequently work in low-profit industries. The capacity of female entrepreneurs to build their companies and make growth-oriented investment choices remains disadvantaged by the lack of specialized financial products and investment advisory services (UN Female, 2021). These female-owned SMEs in Nairobi City County face constrained investment decisions largely due to limited access to traditional finance. Digital financial services are increasingly mitigating this gap.

Although investment decisions of female-owned SMEs may be affected by digital banking services, there is a notably low level of uptake of digital banking services by these female-owned SMEs, at only 36% (Kenya National Bureau of Statistics, 2023). This financing gap hampers the ability of female-led SMEs to make strategic investment decisions and expand operations (Wanjiru & Mburu, 2023). Female-owned SMEs in Nairobi County therefore face limited investment capacity due to persistent credit constraints, collateral requirements, and inadequate access to affordable financing, which hinder business growth and sustainability (Mundia, 2020). These barriers often result in delayed or foregone strategic investments, reducing competitiveness in a rapidly evolving market (FSD Kenya, 2023). The effect of digital banking services on the investment decisions of female-owned SMEs in Nairobi City County remains unclear, with studies finding mixed reactions and thus the need for further research (Musa & Njeru, 2023).

Despite significant progress in regional initiatives to support female entrepreneurs, notably through digital platforms and microfinance programs, gaps remain in policy support, digital preparedness, and financial literacy (Findexable, 2023). The extent to which these innovations impact investment decisions among female-owned SMEs in Nairobi City County is still unclear and under-researched, even though digital savings platforms, digital credit services, insurtech services, and robo-advisory tools have transformed financial services delivery. The majority of research on digital finance in Kenya has been on the performance of SMEs generally and the use of mobile money, with little attention paid to how particular digital banking services influence the choices made by female-owned businesses regarding investments (Ndung’u, 2022; Okeyo & Gichuki, 2023). Given that female-owned SMEs play a major role in reducing poverty and job creation, it is important and timely to comprehend how digital banking tools affect their investment decisions (UN Female, 2023). This study aims to fill the current gaps by determining the effect of digital banking services on investment decisions of female-owned small and medium enterprises in Nairobi City County.

1.3 Objectives of the Study

1.3.1 Main Objective of the Study

The main objective is to determine the effect of digital banking services on investment decisions of female-owned small and medium enterprises in Nairobi City County.

1.3.2 Specific Objectives of the Study

The study will be guided by the following specific objectives

2. To assess the effect of digital credit service on the investment decisions of female-owned small and medium enterprises in Nairobi City County, Kenya

4. To evaluate the effect of digital savings service on the investment decisions of female-owned small and medium enterprises in Nairobi City County, Kenya

6. To establish the effect of insuretech service on the investment decisions of female-owned small and medium enterprises in Nairobi City County, Kenya

8. To determine the effect of robo-advisory service on the investment decisions of female-owned small and medium enterprises in Nairobi City County, Kenya.

1.4 Research Questions

In order to achieve the purpose for which the study is set in motion, the following specific study questions will be answered.

            i.           What is the effect of digital credit service on the investment decisions of female-owned small and medium enterprises in Nairobi City County, Kenya?

          ii.           What is the effect of digital savings service on the investment decisions of female-owned small and medium enterprises in Nairobi City County, Kenya?

         iii.           What is the effect of insuretech service on the investment decisions of female-owned small and medium enterprises in Nairobi City County, Kenya?

         iv.           What is the effect of robo-advisory service on the investment decisions of female-owned small and medium enterprises in Nairobi City County, Kenya?

1.5 Justification of the study

This research is important because it sheds light on how digital banking services affect the investment choices of female-owned SMEs in Nairobi City County. As digital banking solutions become more widely used in Kenya, there is a growing need to understand how tools like digital credit, digital savings, insurtech, and robo-advisory services affect the choices made by female entrepreneurs. On the other hand, the study will be beneficial to the following people and organizations as follows:

1.5.1 Female-Owned Enterprises.

The findings will be especially helpful to female entrepreneurs since they highlight the best digital financial services that promote wise investment choices, long-term company viability, and expansion. This will help companies make well-informed decisions about which digital platforms to use in order to increase their competitive edge and optimize capital use.

1.5.2 Digital banking services providers.

The report offers evidence-based suggestions for FinTech companies, commercial banks, and microfinance institutions about the financial products and digital technologies that best meet the needs of female-led enterprises. This can aid in the development of inclusive, customer-focused banking solutions that will increase female’s financial access and participation in the entrepreneurial ecosystem.

1.5.3 Policy makers and government agencies

The report may be used by government organizations and policymakers, such as the Ministry of Public Service, Gender, and Affirmative Action, to guide plans and initiatives aimed at empowering female entrepreneurs. In keeping with Vision 2030 and Sustainable Development Goal 5 (SDG 5) on gender equality, the findings will help shape gender-responsive financial policies that advance financial inclusion, economic equality, and sustainable development.

1.5.4 Academic community

 Lastly, this study will add to the growing body of knowledge on digital banking and female entrepreneurs in sub-Saharan Africa for the academic community. More research and scholarly discussion on enterprise development and digital inclusion will be made possible by this contextual understanding of how digital financial services impact the investment behavior of female-owned SMEs.

1.6 Scope of the Study

The following will be the scope addressed by the study.

1.6.1 Conceptual Scope

The study will focus on female who own registered small and medium-sized enterprises (SMEs) in Nairobi City County. It will investigate the relationship between the digital credit, savings, insurtech, and robo-advisory services their investment decisions.

1.6.2 Contextual Scope

In terms of context, this research will be confined among Nairobi City County in Kenya, which operates within the decentralized governance framework established by the 2010 Kenyan Constitution. The study will assess Nairobi city county and give a comprehensive view of the various issues and challenges they are encountering. It will focus on Kenya’s specific conditions to offer insights relevant to its unique political and economic situation. These findings might also apply to other areas with similar governance structures.

1.6.3 Methodological Scope

The collected primary data will be organized through cleaning and subjected to descriptive statistics and inferential statistics. Regression analysis will be carried out to explore relationships between main variables. This approach aims to show how digital banking services affects decision making of female owned SMEs in Nairobi city council in Nairobi

1.6.4 Theoretical scope

The theoretical scope underpinning the study will be based on four primary theories: The Unified Theory of Acceptance and Use of Technology (UTAUT), which explains mobile payment; the Human Capital Theory, which explains information technology training; the Diffusion of Innovation Theory, which explains e-government platform adoption; as well as the Risk Management Theory, which explains cyber security measures. These theories offer a solid way to study how IT adoption affects revenue collection among County governments.

CHAPTER TWO

 LITERATURE REVIEW

2.1 Introduction

The summary of the theories linked to the study’s topic, literature evidence from other scholars on the related topic of the study have been presented in this chapter. This chapter also presents the conceptual framework and a summary of literature review.

2.2 Theoretical Foundations of the Study

Theories linked to digital banking services adoption and use and investment decisions include Credit Rationing Theory, Life-Cycle Hypothesis, Risk Management Theory and Modern Portfolio Theory. These theories have been discussed below:

2.2.1 Digital Credit Services and Credit Rationing Theory

The Credit Rationing Theory was proposed by Stiglitz and Weiss (1981), positing that lenders ration credit due to information asymmetry, adverse selection, and moral hazard rather than lack of liquidity. Traditional lenders restrict access to small borrowers and SMEs because of perceived risk, leading to financial exclusion.

Critics have highlighted that while digital lending platforms reduce some asymmetries through alternative data, they still perpetuate issues such as algorithmic bias, predatory pricing, and over-indebtedness (Ozili, 2020; KIPPRA, 2023). FinRegLab (2024) further observed that despite big data innovations, thin-file clients—particularly women—remain underserved.

This theory is relevant to the present study as digital credit seeks to address rationing by leveraging mobile money transactions to score borrowers. For female-owned SMEs in Nairobi, digital credit potentially reduces financing barriers by enabling access without collateral, thus directly linking the theory to the study objectives

2.1.2 Digital Savings Services and Life-Cycle Hypothesis

The Life-Cycle Hypothesis (LCH), developed by Modigliani and Brumberg (1954), suggests that individuals save during their income-generating years and dissave during retirement to smooth consumption. Applied to SMEs, it implies that entrepreneurs save during profitable periods to invest in business expansion. Critiques of the LCH note that it underestimates constraints faced in low-income contexts. Thaler and Benartzi (2004) argued that present bias and weak self-control affect savings, while Global Findex (2022) highlighted that shocks disrupt saving patterns in developing countries.

The theory is relevant to this study since digital savings platforms, such as lock-savings accounts, provide commitment devices that help women entrepreneurs in Nairobi accumulate capital for investment. By addressing behavioral constraints, digital savings directly support investment decisions, aligning with the LCH proposition.

2.1.3 Insurtech Services and Risk Management Theory

Risk Management Theory, articulated by Arrow (1963), proposes that risk-averse individuals and firms are willing to pay a premium to transfer risk to insurers, thereby securing income stability and avoiding catastrophic losses. Critics argue that in developing markets, trust, affordability, and product complexity hinder insurance uptake (Churchill & Matul, 2012). More recent analyses (GSMA, 2021) caution that digital distribution lowers costs but risks oversimplifying products, potentially leaving clients underinsured.

The theory relates to this study as insurtech leverages mobile platforms to provide microinsurance to SMEs at lower costs. For women entrepreneurs in Nairobi, these products reduce risks from illness, theft, and other shocks, enabling them to reinvest confidently in their businesses.

2.1.4 Robo-Advisory Services and Modern Portfolio Theory

The Modern Portfolio Theory (MPT) by Markowitz (1952) asserts that investors maximize returns for a given level of risk through diversification. Rational allocation of assets enables optimal risk-return tradeoffs. Critics argue that MPT assumes rational decision-making and ignores biases such as overconfidence and loss aversion (Kahneman & Tversky, 1979). Jung et al. (2023) noted that while robo-advisors improve diversification, outcomes depend on financial literacy and user trust.

The theory is relevant to this study because robo-advisors use MPT-based algorithms to guide SMEs in portfolio selection. For female-owned SMEs in Nairobi, robo-advisory services transform surplus liquidity into structured investments, enhancing financial sustainability and business growth.

2.3 Empirical Review of Literature

Empirical review of literature provides a window in which the researcher can look into past studies related to the area of investigation. The researcher identifies inconsistencies, methodological challenges; theoretical gaps, conceptual gaps, and contextual gaps that the study intends to refine and fill. Empirical review sections mirror the variables of the study and are reviewed as such.

2.3.1 Digital Credit Services and Investment Decisions of Female-Owned SMEs

Several recent studies have highlighted the importance of digital credit in shaping investment decisions among small and medium enterprises. Globally, research indicated that digital lending platforms significantly improved access to working capital, allowing SMEs to reinvest in inventory and business expansion, which in turn enhanced profitability (Chen et al., 2021). At a regional level, studies in Sub-Saharan Africa revealed that digital credit promoted financial inclusion by enabling women entrepreneurs to overcome traditional collateral requirements, thereby empowering them to make more informed and timely investment decisions (Oketch & Njeru, 2022). Locally, investigations conducted in Nairobi demonstrated that female-owned SMEs increasingly relied on mobile-based credit facilities for short-term financing, which enhanced their ability to invest in productive assets despite higher default risks (Akinyi et al., 2023).

The reviewed studies consistently reported that digital credit provided flexibility in managing cash flows and making investment decisions. However, they also emphasized challenges such as high interest rates and the risk of over-indebtedness, which could limit the long-term sustainability of investments (Mwangi, 2020; Ochieng & Wanjiru, 2024). These findings pointed to a dual role of digital credit as both an enabler and a potential risk factor for female entrepreneurs in Nairobi City County.

2.3.2 Digital Savings Services and Investment Decisions of Female-Owned SMEs

Empirical evidence suggested that digital savings services were instrumental in influencing investment behaviors of women entrepreneurs. A global study reported that mobile-based savings products enhanced financial security for SMEs, leading to improved decision-making on long-term investments and reduced dependency on credit (Kim & Park, 2021). At a regional level, research within East Africa highlighted that digital savings groups facilitated resource pooling and collective investment opportunities for women, thus fostering resilience and sustainability in SMEs (Mwenda & Otieno, 2022). In Nairobi, recent findings showed that female-owned SMEs that adopted mobile savings platforms exhibited greater capital accumulation and stronger reinvestment patterns compared to their counterparts without such services (Muthoni et al., 2024).

The literature consistently reported that digital savings enhanced financial discipline and reduced vulnerability to shocks. Nonetheless, studies also indicated that inconsistent usage of these platforms, coupled with limited financial literacy, sometimes undermined the potential benefits (Ouma, 2020; Kariuki & Githinji, 2023). Overall, digital savings services were shown to support long-term investment planning among female entrepreneurs in Nairobi City County.

2.3.3 Insurtech Services and Investment Decisions of Female-Owned SMEs

Recent studies revealed that insuretech services played a growing role in safeguarding SME investments. Globally, researchers documented that access to technology-driven insurance products reduced exposure to risks and uncertainties, thereby encouraging entrepreneurs to commit more resources to productive investments (Brown & Lee, 2020). Regionally, evidence from East Africa demonstrated that insuretech innovations such as mobile-enabled microinsurance enhanced women entrepreneurs’ confidence in expanding their businesses, given the assurance of risk coverage (Mutua et al., 2021). Locally, investigations in Nairobi found that female-owned SMEs that embraced digital insurance platforms displayed higher levels of investment in assets and inventory due to improved risk management strategies (Wambui et al., 2024).

Studies consistently reported that insuretech services enhanced investment decisions by reducing financial losses linked to unforeseen events. However, barriers such as low awareness, limited customization of products, and affordability issues were highlighted as critical challenges that restricted adoption among women entrepreneurs (Omondi, 2022; Njenga & Chege, 2025). The evidence pointed to insuretech as a crucial enabler of sustainable investment practices for female-owned SMEs in Nairobi.

2.3.4 Robo-Advisory Services and Investment Decisions of Female-Owned SMEs

Empirical research indicated that robo-advisory services significantly influenced investment decision-making among entrepreneurs. Globally, scholars reported that algorithm-based advisory tools provided SMEs with cost-effective access to investment guidance, improving portfolio diversification and reducing behavioral biases (Singh & Patel, 2021). Regionally, studies in Africa showed that women entrepreneurs benefited from robo-advisory platforms that offered personalized financial insights, enabling them to align investment strategies with business growth objectives (Njoroge & Abdi, 2022). Locally, evidence from Nairobi revealed that female-owned SMEs that adopted robo-advisory services made more structured and data-driven investment decisions, ultimately enhancing business growth and sustainability (Otieno et al., 2024).

The reviewed studies consistently reported that robo-advisory platforms democratized access to professional investment advice. However, issues such as trust in automated systems, digital literacy gaps, and limited localization of services were identified as barriers that slowed down adoption among women entrepreneurs (Kiptoo, 2020; Mwikali & Karanja, 2023). Overall, robo-advisory services were observed to support evidence-based investment decisions among female-owned SMEs in Nairobi City County.

2.4 Conceptual Framework

The conceptual frame provides information on the understanding of a researcher on or about the variable adopted in the study and how this relates to one another. The conceptual framework is intended to articulate the concept being studied and explaining the supposed relationships between the concepts (Rocco, & Plakhotnik, 2009).