Impact Of Microfinance Institutions On Smes In Kenya

Published Date: 02 Nov 2017

EVIDENCE FROM MFI’S IN NAIROBI COUNTY

BY

ANTHONY KENNEDY GITAU

UNITED STATES INTERNATIONAL UNIVERSITY

SPRING 2013

IMPACT OF MICROFINANCE INSTITUTIONS ON SME’S IN KENYA

EVIDENCE FROM MFI’S IN NAIROBI COUNTY

BY

ANTHONY KENNEDY GITAU

A Research Proposal Submitted in Partial Fulfillment of the Requirements for the Award of a Bachelors Degree in International Business Administration to the United States International University

SPRING 2013

ABSTRACT

This study seeks to identify the impact of Microfinance institutions on Kenyan Small and Medium Sized enterprises. Specifically, this study proposes to establish the impact of MFI’s on Kenyan Small and Medium Enterprises, to establish the products offered by MFI’s to Kenyan small and medium enterprises and to establish why some customers are dropping off MFI’s.

This study will adopt a cross sectional census study that includes all the MFI’s in Nairobi County. In addition, the study will adopt a quantitative research approach using questionnaires as the primary data collection instrument. The study will utilize primary data as the source of its findings. The population of the study includes all the MFI’s in Nairobi. The total sampling frame of the study will be 21 MFI’s who are registered with the Central Bank of Kenya. This includes 15 microfinance institutions and 6 licensed deposit taking MFI’s. Since this study will be a census study, the population will be used as the sample. Data collected using the questionnaire will be edited for errors and keyed into SPSS for data analysis. Analysis of the data will be done using statistical measures of centrality which include means and modes. Further analysis will be done using statistical measures of variances especially the variance and the standard deviation. Data analyzed will be presented in Tables and figures. The findings of the research and knowledge gained will be communicated to the population through a research report to be compiled by the researcher and presented to the United States International University.

DECLARATION

This research proposal is my original work and has not been submitted to any other institution or examination body and no part of this research should be reproduced without my consent or that of United States International University.

Signature…………………………………..… Date…………….…………

Anthony Kennedy Gitau Student Id No.

DEDICATION

This research proposal is dedicated to my family without whose support, sacrifice and interest it would not really be possible. This is a sign of my appreciation for your support and encouragement.

TABLE OF CONTENTS

ABSTRACT iii

DECLARATION iv

DEDICATION v

TABLE OF CONTENTS vi

CHAPTER ONE viii

1. INTRODUCTION viii

2. Statement of the Problem x

3. General Research Objective xi

4. Specific Research Objectives xi

5. Importance of the Study xii

6. Scope of the Study xiii

7. Limitations of the Study xiv

8. Definition of Terms xv

9. Chapter Summary xv

CHAPTER TWO xvii

2.0LITERATURE REVIEW xvii

2.1 Impact of MFI’s xvii

2.2 Products Offered by MFI’s xx

2.3 Customers change from MFI’s xxiii

2.4 Chapter Summary xxviii

CHAPTER THREE xxx

3.0 RESEARCH DESIGN AND METHODOLOGY xxx

3.1 Introduction xxx

3.2 Research Design xxx

3.3 Population and Sample xxxi

3.3.1 Population xxxi

3.3.2 Sampling Design xxxi

3.3.2.1 Sampling Frame xxxi

3.3.4 Sampling Technique and Sample Size xxxii

3.4 Data Collection xxxii

3.5 Research Procedures xxxii

3.6 Data Analysis xxxiii

3.7 Chapter Summary xxxiii

REFERENCES xxxiv

CHAPTER ONE

INTRODUCTION

Microfinance entails the provision of financial products and services to small and micro businesses (Asiama, 2007). The concept of microfinance though not new, is gaining grounded as a preferred mode of financing by small and micro businesses which are excluded from the mainstream financial intermediation systems.

Microfinance institutions provide credit services and other financial services to millions of populations across the globe. According to Harris (2002), microfinance lending, savings and financial services, provide the poor with an effective way to move out of poverty build income, create wealth and asset their mortgage risks. Microfinance includes the provision of a broad range of financial services to the lower income class in the society. Microfinance entails the provision of retail financial services including, savings, credit, cash transfer, financial management, insurance and other financial services to the poor.

Microfinance involves the provision of financial services to clients in the low income segments of the society including, small scale traders, vendors in the streets, farmers and other small scale business people e.g. artisans and producers (Ledgerwood, 1999). According to a publication Microfinance vital to economic growth (2005), microfinance is a facility or special instrument vehicle that helps the poor people with focus to acquire small credit facilities for business startups, acquire loans for school fees, acquire houses or receive medical attention. Ledgerwood (1999), noted that there are different provides of microfinance services. He identified institutions such as NGO’s, cooperatives, credit unions, government banks, commercial banks and non bank financial institutions.

Existing statistics from the United Nations Development Program (UNDP), show that there are over one billion poor people or ‘economically active people’ in the world who have no access to financial services especially in developing countries like Kenya. This has led to this critical group languishing in poverty and being excluded from the financial intermediation process and with it the opportunities for growth (Otero et al, 1994).

Universally, microfinance has been acclaimed as an important tool for poverty eradication especially in the developing economies (Armandariz and Morduch, 2005, Johnson and Rogaly, 1997, Gibbons and Meehan, 2002). In fact the World Bank, United Nations and other International Development bodies have identified microfinance as a major tool in the fight of poverty and the attainment of the Millennium Development Goals (MDG’s) by the year 2015. In a 2005 publication, the United Nations noted that, microfinance has changed the lives of thousands of people and revitalized communities since the inception of trade (United Nations, 2005). In fact, the year 2005 was declared the year of micro-credit (Microfinance vital to economic growth, 2005). The declaration of the year of micro credit was aimed at creating awareness and attention to the efforts of Microfinance in poverty eradication through modern communication channels of radio, print press, TV’s and case studies (United Nations, 2005).

In Kenya, there exist several microfinance institutions and firms that are providing financial services of savings and credit to micro and small businesses. Some of the institutions that are actively on the ground include; Faulu Kenya, K-rep Bank, Rafiki Deposit taking microfinance, Kenya Women Finance Trust and a host of other small and medium sized microfinance institutions. However, as at 31st December 2011, there were fifteen micro finance institutions and 6 licensed deposit taking micro finance institutions licensed by the Central Bank of Kenya (CBK, 2012).

Kenya has also developed in the growth of Microfinance institutions with the country boasting of an Association of Microfinance Institutions in Kenya (AMFI), an institution registered in the year 1999 under the societies of Act of Kenya. The role of the institution is to act as a lobby group and build capacity for the microfinance industry in Kenya. Currently, AMFI-K has a membership of 53 serving an estimated population of 6.5 million drawn mainly form the poor and middle class in Kenya. According to statistics held by AMFI, the current loan portfolio of the members stands at over Kshs. 30 billion. The membership of AMFI- K is drawn from the mainstream banking institutions and microfinance institutions.

According to Harris (2002), the microfinance industry has greatly grown in the last two decades. In the Asian, African and Latin America continents, non governmental organizations and other development agencies have established thousands of microfinance institutions to provide microloans using the group lending model and individual lending systems. However, this is not to mean that microfinance has grown without challenges. Indeed, in the 1990’s, several microfinance startups by NGO’s failed due to lack of volume or failure to achieve commercial viability in terms of numbers (Harris, 2002). None the less, Microfinance has grown partly due to the efforts of international development organizations to eradicate poverty and the presence of a commercially viable population. According to the World Bank (2010), in developing countries, poor people of the female gender have proved to be excellent borrowers who provide a ready market for effective and responsive loan products at commercial rates.

SME’s is the short form of Small and Medium sized enterprises. According to existing literature, SME’s have been noted to be the drivers and anchors of major economies in the world. In fact according to the World Bank (2010), SME’s are the anchors and catalysts of growth in most developing economies. According to Kihuro (2010), most economies in the Africa are composed of 90% SME’s and 10% big corporate. Furthermore, SME’s in Africa provide employment to 50% of the total employed population and contributes to over half of the economies GDP (Kihuro, 2010).

There is no standard or internationally accepted definition of SME’s. However, the definition of SME does vary from one country to another or one regional block to another. The European Union defines SME’s as companies employing less than 10 employees for micro institutions, fewer than 50 employees for small institutions and fewer than 250 employees for medium enterprises. On the other hand, most Kenyan institutions define SME’s as institutions employing between 6 to 50 employees or those with an annual revenue below Kshs. 50 million (Kihuro, 2010). The Government of Kenya (2012), defines Small enterprises as those with less than 10 employees while medium enterprises should have less that 50 employees. According to Parker and Torres (1994), most enterprises in Kenya are micro –enterprises while there is almost a non-existence of small enterprises in Kenya.

Statement of the Problem

In the definition, of microfinance, most critics condemn it as offer micro credit or micro finance, however, unknown to most, microfinance encompasses much more than micro credit. Indeed, micro credit is just on of the major components of microfinance. Due to the broad, definitions of microfinance, very few studies have sought to identify the impact of microfinance institutions in the economy or on SME’s. However some literature exists e.g. Obli (2011), who sought to identify impact of microfinance on SME’s in Ghana, Luyirika (2010) who sought to identify the role of microfinance in socio economic development of women in Uganda, and Mustafa (2012) who sought to identify the performance and interventions of microfinance institutions in Suda. While these studies have provided evidence of the impact of microfinance institutions all over the world, there is a dearth in literature on the Kenyan Local sector. Though not entirely new in the Kenyan environment the study of Microfinance has taken many dimensions, the impact of microfinance institutions on the growth of SME’s is a rarely researched topic.

This study therefore seeks to study the impact of Microfinance institutions on Small and Medium Enterprises in Kenya. This study seeks to provide literature and fill a research void existing in the Kenyan market on the impact of MFI’s on SME’s in Kenya.

General Research Objective

The main objective of this study is to identify the impact of Microfinance institutions on Kenyan Small and Medium Sized enterprises.

Specific Research Objectives

The specific objectives of this study include;

1.3.1 To establish the impact of MFI’s on Kenyan Small and Medium Enterprises

1.3.2 To establish the products offered by MFI’s to Kenyan small and medium enterprises

1.3.3 To establish why some customers are dropping off MFI’s

Importance of the Study

As noted above, Microfinance institutions are very important players in the poverty reduction strategies of countries around the world. However, in the local setting this study will be very important to several key stakeholders in the microfinance value chain.

Government

This study will provide findings on the impact of MFI’s on Kenya SME’s. These findings will be of importance to the government and other policy making bodies as it can provide the basis for policy formulation. The impacts identified in this study will provide a basis for the formulation of policy especially amendments to the Microfinance act.

Furthermore, this study will identify the reasons why customers are changing from MFI’s therefore, the government will take a keen look at these findings to provide possible and plausible solutions to this reasons. In addition, the government will be keen to identify the challenges that MFI’s face in their efforts to increase the financial inclusion of the Kenyan population.

Microfinance Institutions

This study will identify the impact of MFI’s, this study will of importance to the existing and prospective MFI’s. Managers and decision makers in MFI’s will find the findings of this study useful as they will be informed of the products, services and trends that their competitors are offering as opposed to them. Therefore, this study will provide them with useful information on the product offering which can form the basis for product or market formulation.

Furthermore, this study will identify the patterns, trends, and products offered in the international, local and regional arena. This will provide further impetus to the MFI’s to develop similar products or identify market niches which have not been exploited. Therefore the findings of this study will be important as they will provide data on how MFI’s can develop products to drive growth in SME’s

General Public (Prospective Entrepreneurs)

Millions of Kenya have no access to financial products and services in their localities. Financial intermediation is an important catalyst of wealth creation and there the lack of access to financial services reduces the chances of wealth creation. This study will provide information to the general public on the services and products offered by the Microfinance institutions across Kenya. In addition, this study will inform the general public on the available of micro finance products and how the products compare to other products offered in other countries.

Academia

This study will be of critical importance to the academic fraternity and prospective researchers. The findings of this study will provide a useful source of reference for other researchers on the aspects of Microfinance especially in Kenya. The findings of this research will offer useful and lacking literature on the impact of MFI’s on Kenyan SME’s in the process fill an existing literature gap.

Secondly, this study will be useful to the academic fraternity as it will provide reference for future studies i.e. other researchers can use this research as a basis of future or further study on Microfinance institutions in Kenya.

Scope of the Study

This study will be undertaken in the County of Nairobi in the months of April and May of 2013. The population of the study will be drawn from all the 15 microfinance institutions and 6 deposit taking microfinance institutions. In total the population of this study will be 21. Since this study will be a census survey, all the 21 Microfinance institutions will be included in the study.

Limitations of the Study

Due to the scope of the study, timelines set and resource limitations of the researcher the following limitations are expected to be encountered in the process of the study. These limitations may impact negatively on the validity and reliability of the findings of this study.

Unavailability of Top Managers

Due to the very restricted timelines and the congested dairies of the Top managers, it may become impossible for this study to include the data collected exclusively from the top management. The top management is deemed more authoritative as they are policy makers and decision makers. The unavailability of top managers for inclusion in this study may be a limitation encountered. However, to counter this limitation, the research will use an easy to administer, fill and complete questionnaire for data collection. The questionnaire will be left at the managers’ desk for completion when he or she is free. This is expected to be more convenient as the researcher will not have to book an appointment.

Non Co-operation of Top Managers

Some of the data required for this study may be confidential and private. This may make some of the managers to conceal the data, be uncooperative or provide false figures. This will reduce the reliability and validity of the findings of this study. However, to counter this, the researcher will provide assurances to the respondents that the data is meant for academic purposes only and that the data collected will be treated with utmost confidentiality and privacy.

Limited Resources

The researcher may encounter insufficiency of resources especially, time and monetary resources required for a complete research. This will impact the coverage of MFI’s, reducing the validity or reliability of the findings especially where the sample size is not representative of the population. However to counter this research will use a cost effective data collection tool, the questionnaire which is not only cheap to administer and collect, it also reduces the physical interaction between the researcher and respondents thereby reducing the researchers effect.

Definition of Terms

1.7.1 MFI’s

Microfinance institutions are institutions that provide credit services and other financial service to the poor in the form of small loans or savings (Harris, 1994)

1.7.2 Financial Intermediation

It is the process of provision of financial products and services such as savings, credit, insurance, credit cards, payment systems that do not require subsidies (Asiama, 2007)

1.7.3 Social Intermediation:

The process of building human and social capital needed for sustainable financial intermediation of the poor (Bennet, 1997)

1.7.4 Microfinance

Microfinance involves the provision of financial services to clients in the low income segments of the society including, small scale traders, vendors in the streets, farmers and other small scale business people e.g. artisans and producers (Ledgerwood, 1999)

Chapter Summary

This proposal is segmented into three chapters. Chapter One of this study provides an introduction, the background of the study, the statement of the problem, research objectives and importance of the study.

Chapter Two of this proposal will review the existing literature on Impact of MFI’s on SME’s across the globe. In addition, the chapter will provide a conceptual framework for the study.

Chapter Three of this proposal will provide an overview of the research methodology, research design, research procedures, data collection, population and sample to be used in the course of the study.

CHAPTER TWO

2.0LITERATURE REVIEW

This chapter presents a review of existing literature on the impact of MFI’s on SME growth in and around the globe. In addition, the chapter provides literature on the products offered by MFI’s and the reasons why customers are shifting their businesses from MFI’s.

2.1 Impact of MFI’s

Microcredit and Microfinance has the main aim of enhancing and improving the welfare of the poor. In essences, microfinance seeks to improve the living standards of the poor (Navajas et al 2000). According to Diagne and Zeller (2001), lack or inhibited access to credit or loans by the poor has had negative effects on most of the Small and Medium business around the world. In deed, access to credit has been identified as a critical stimulant to the growth and development of SME’s. In most development partners and aid organizations, it is though that access to loans helps the poor up lift their living standards in a number ways. This includes; overcome liquidity challenges, make investments, increase incomes, provide and access employment, access modern farming technologies that enhance agricultural production e.t.c (Hiedhues, 1995).

SME’s that are able to access credit has the ability to withstanding greater risks, adopt better strategies for coping with risk and enhance consumption patterns of customers overtime. In deed, this has been a major intervention or impact of Micro finance and microcredit.

Rhymen and Otero (1992) noted that, MFI’s have a positive effect on SME develop because it enhances or guarantees access to sustainable credit to those living below the poverty line. In addition, according to the due to the high outreach and financial sustainability, Micro finance institutions have a greater impact on the livelihoods of the poor (Buckley, 1997).

In a study of the impact of MFI’s in Kenya, Malawi and Ghana, Buckley (1997) noted that existing evidence did not support the existence of a great impact of microfinance activities to clients in terms of increase in income flows or levels of employment. However, in his study he noted that microfinance coupled together with changes in technology and management models led to a positive impact on clients especially on their incomes.

Alleviating of poverty in the developing countries has been shown to be effective when done at the family level. According to Zeller and Sharma (1998), micro finance institutions provide help to families to establish business providing them with an avenue for escaping poverty and establishing economic activities that secure sustainable lifestyles for themselves.

On the other hand, Burger (1989), in his study noted that microfinance acted as a stabilizer rather than a catalyst for increase in incomes. According to him, microfinance provides for stabilization of incomes rather than increases in income. Moreover, microfinance is more successful in preserving employment opportunities than at creating them.

Coleman (1999) found that there was no physical accumulation of assets emanating from village banking systems. According to him, participants in the village banking systems who were mainly women ended up in a rat race full of debts and clearing of debts. However, this was a consequence of use of credit from the systems for consumption rather than development purposes. In deed, Coleman identified that women in the system were forced to borrow bigger loans at higher interest rates to cover previous loans. According to Coleman, microcredit or micro finance was not the best tool for fighting poverty. According to him, the poor were in that situation due to a lack in access to markets and unequal distribution of resources rather than access to credit. Similar findings were provided by Adams and Von Pischke (1992).

Mosley and Hulme (1998) in their study of thirteen Micro Finance institutions across seven countries found that as the income and asset position of the population increased, the incomes of house holds tended to be on the decline. In Malawi, Diagne and Zeller (2001) concluded that microfinance had no impact on household incomes and consequently on SME development. This was occasioned by a lack of growth in physical infrastructure and markets in the country.

Several studies have found evidence that, gender empowerment using micro finance or micro credit has had a negative impact on poverty levels. This has been supported by findings of Goetz and Gupta, (1994; Ackerly, (1995); Montgomery et al, (1996). According to Goetz and Gupta (1994), the use of gender empowerment in microfinance had a negative effect. This was because the control over the loans acquired by the women was with the men especially where the women were married. In deed, Ackerly (1995) concluded that in the access to micro credit or credit overall, women were marginalized when compared to men.

In modern business environments, every firm seeks to grow and make profits. Penrose (1995), defines a firm an organization with administrative structures and is legal incorporated which may expand in time through accumulation of physical resources, tangible or intangible resources. Growth in firms can be measure as the relative expansion in size or other quantifiable aspects of the business. In addition, growth can be measured in terms of increase in efficiency or changes that improve the company (Penrose, 1995).

Firm size is a product of growth over a period of time and is a process rather than a state or destination (Penrose, 1995). Factors that characterize growth of firms include availability of capital, human capital, viable opportunities for investments and adoption of modern and appropriate management styles. However, for a company to growth it must have resources available at its disposal. Microfinance institutions provide these resources through a structured framework. This is especially so for Small and Medium Enterprise (Ghoshal, Halm and Moran, 2002).

MFI’s provide enterprise development services and business development services. This can be classified as non financial services offered by MFI’s that have had an impact on the management, growth and expansion of SME’s across the world. Some of the other non financial services provided by MFI’s include marketing and technology services, business training, production training and subsector analysis and interventions (Ledgerwood, 1999). The provision of these services has led to better management in SME’s, growth of SME’s to big or large corporations, and creation of employment opportunities and eradication of poverty. In fact, according to Ledgerwood (1999), micro finance institutions have a huge positive impact on economic growth and overall national development.

Non financial services offered by MFIs have also led to the acquisition of skills and new technologies in specific economic sectors. This has been possible due to efforts in enterprise development which provide for training of persons on special skills and business management. In deed, MFI’s have had the impact of enhance education, training and literacy in business management and other business skills (Ledgerwood, 1999; Obli, 2011).

MFI’s have also led to enterprise transformation. Enterprise transformation has been achieved through training, technology transfer, exploration of new markets and technical assistance by MFI’s. In deed this has had the profound effect of enhancing production in SME’s (Oblie, 2011)

2.2 Products Offered by MFI’s

According to Obli (2011), MFI’s provide products that can be classified into four major categories;

Financial Intermediation

According to Obli (2011), the financial intermediation services offered by MFI’s include savings products, insurance services, credit cards, payment services and other financial services that do not require subsidies.

Social Intermediation

Social intermediation services include providing subsidized products and services to the poor in the efforts to build human and social capital. Essentially social intermediation is the provision of financial intermediation services at subsidized rates (Obli, 2011).

Enterprise development

This are non financial services aimed at aiding micro entrepreneurs to improve their skills, business training services, marketing and technology transfer or acquisition strategies and analysis of market data (Obli, 2011). The provision of this services can be done at subsidized or unsubsidized rates.

Social Service or Non Financial Services

Social services or non financial services include the provision of welfare improvement services to micro-entrepreneurs. These include the provision of services in education, literacy, health and nutrition. This services are offered at subsidized rates and are mostly provided with donor funding, NGO and government forums e.t.c (Bennett, 1997; Legerwwod, 1999)

2.2.1 Organization of Microfinance Institutions

Microfinance institutions offer the above services using different channels or financial models. Microfinance institutions can be modeled as co-operatives, village banking systems or formal banks.

2.2.1.1 Cooperative financial institution

Cooperative MFI’s are semi informal financial institutions which include; credit unions, savings and loan cooperatives and other financial cooperatives (Obli, 2011). This cooperatives or unions offer general savings and credit facilities to their members.

These forms of MFI have excluded any external shareholders and are managed in accordance with the rules and regulations governing cooperatives in a given country. The shareholders of the cooperatives who are at the same time the owners are also the customers of the cooperatives (Obli, 2011). Furthermore, cooperatives are not subject to banking regulations but are supervised by a regulatory body set up separately or the ministry concerned with finance and cooperative management.

According to Schmidt (1997), financial cooperatives are often managed to provide financial services to their members. In addition, a league of this cooperatives provide inter lending facilities, assist in training and acts as a link between the cooperatives and external donors (Schimdt, 1997).

Funds for distribution in the form of loans are collected through savings. In addition, this form of MFI is characterized by minimum collateral requirements, co-guaranteeing of loans and character securization of loans (Schmidt, 1997).

2.2.1.2 Group Lending

Micro finance institutions prefer this mode of financing in the provision of small credit and loans to customers. According to Natarajan (2004), this form of financing has the same costs as the commercial credit. However, compared to interest rates offered by sharks, this form of financing is much cheaper.

According to Stiglitz (1990), group lending has proved to be a viable form of lending with high repayment rates since each member in a group is liable for the debt of the other. According to Obli (2011), this form of micro lending was popularized by the Grameen Bank of Bangladesh.

According to Armendariz (1994), groups that access credit using this form of financing are characterized by closely knit social ties. In addition, loans are granted to the individuals in a group rather than individuals not in a group. Group lending has proved to reduce costs of adverse selection and also reduce the costs associated with monitoring loans to the members who must ensure that the others pay the loans (Armendariz, 1994).

2.2.1.3 Individual Lending

Micro lending to individuals is mostly undertaken to individuals who can provide security for the loans. Besley and Coate (1995), argue that despite benefits of using groups in microfinance, some members of the group may fail to repay their loan.

Montgomery (1996) therefore argued that individual lending provides an alternative to group lending with the distinct advantage of reducing social costs of repayments e.g. pressure from group members. According to Stiglitz (1990), group lending is riskier than individual lending because individuals bear their own risk in the latter than in the former where the individual bears the risk of other members in the group.

According to Zeitingner (1996), to ensure high repayment rates in individual lending, clients must be visited regularly to ensure loans are used for the collect purpose. These monitoring is vital but at the same time increases the cost of the microfinance institution.

2.2.1.4 Self-help groups (SHG)

According to Ajai (2005), self help groups are most common among women in rural areas who come together to initiate income generating projects. Access of credit to the members of SHG’s implies empowering them.

SHG’s are an important avenue for provision of financial intermediation services, social intermediation but also social services and enterprise development. SHG have however, been classified as bureaucratic channels with unregistered groups having priority of savings and credit rather than enterprise development (Ajai, 2005). Usually, members of SHG, set specific dates for contribution of savings and this savings are given to members in the form of loans at a fixed interest rate (Bowman, 1995).

2.2.1.5 Village Banking

Village banking involves the provision of credit facilities to individual members, with constant access to money from their daily businesses (Nelly and Stock, 1998). SME owners prefer this method of financing as it provides them with an avenue for social upgrading as their businesses earn money. Furthermore, the ability to generate daily cash flows allows them to access higher amounts of loans which increase their opportunities to invest and increase their profits. Village banking as of the 90s has gained grounds and certain adjustments are made to suit partner institutions (Nelson et al; 1996); Hatch and Hatch (1998).

2.3 Customers change from MFI’s

Several studies have provided different factors as to why customers are dropping off from microfinance institutions and preferring other modes of financing or access to credit.. The main factors can be classified into environment, supply and demand factors.

2.3.1Supply reasons

Supply reasons refer to factors that are specific to the suppliers of MFI finance i.e. the micro finance institutions. Some of the factors identified under supply reasons include; in appropriate products, staff attitude and competition from other providers of capital.

2.3.1.1 Inappropriate products

Microfinance products are very inflexible according to a majority of scholars in finance. Guerin (2009) argued that micro finance institutions have the challenge of adapting their products they offer to a variety of customer needs. Similar observations were made by Hulme and Mosley (1999).

In fact Hulme and Mosley (1999), in their study concluded that, for MFI’s to be sustainable in the economy they need to diversify their products and services portfolio. Wright (1999), in his study provided similar findings but encouraging MFI’s to provide products and services that are not standardized rather they should customize their products to the customer needs and wants.

Standardization of products in MFI’s is a serious constrains to their attraction and retention of customers. Hulme et al (1999), in their study found that, MFI’s seek to replicate MFI products from one country to another without taking due diligence on the suitability of the products to the needs and wants of the customers. Therefore where there is no intersection between the customer needs and products offered, there is a high drop out rate in MFI’s

2.3.1.2 Loan size

Hulme et al (1999), in their study pointed out those customers in MFI, withdrew due to the small amounts of loans provided. In addition, Hulme et al found that , as the income of the clients increased or as the wealth of the customers increased, they tended to withdraw from MFI’s. Further, the study found that as the loan amount was increased, poorer clients dropped off from MFI’s.

2.3.1.3 Repayment schedule and delays in loan disbursement

Repayment schedules and delays in disbursement of loans has been described as very rigid and not adequate to support microfinance (Musona and Coetzee, 2001). This has been often not be in the consideration of the business environment that customers work in.

The rigidity in loan repayment schedules and loan disbursement has been attributed to a substantial drop out in most of the clients in MFI’s. This has been supported by the findings of Musona and Coetzee (2001) and Hulme et al (1999).

2.3.1.4 Group lending

Group lending has been identified as a major reason for the high drop out of customers in MFI’s. This has been occasioned due group dynamics such as group size, group liability, lack of quorum in weekly meetings among others (Painter and Mc Knelly, 1998; Mustafa and Al, 1996; Wilson, 2001; Meyer and Al, 2001; Wright, 1999).

2.3.1.5 Staff attitude

According to a study by Stark and Nyirumuringa (2002) in South Africa, information asymmetry between customers and staff on the products and services offered has led to some clients dropping off from the MFI’s.

On the other hand, Urquizo (2006), in his study had different findings that customer drop off has not been attributed to staff attitude. According to him, staff attitude has no effect on the drop off rate of customers. This position was supported by the findings of Dackauskaite (2009) in his study conducted in Ethiopia.

2.3.1.6 Competitive environment

The microfinance sector has received a lot of competition and fierce competition from other providers of capital or credit. As the financial systems improve and become sound, microfinance institutions are facing competition from other financiers including mainstream banks and capital markets including investor angels and venture capitalists. Competition is also rife in the Microfinance sector where hundreds if not thousands of MFI’s have been established in a particular country (Urquizo, 2006)

Wright (2001) and Pagura (2004) in their study found that dissatisfaction of customers with the product offering of MFI led to the perception that other banks or financial institutions offered better facilities or cheaper facilities. In effect, customers would switch from one MFI to another, or from an MFI to another financier.

As far as the competitive environment is concerned, many authors have recognized that over the past few years, microfinance sector has faced high competition. The so many institutions which have been created over the last years and which are competing in the same market account for the above. As observed by Wright (2001) and Pagura (2004), dropouts are frequent because of dissatisfaction with the financial services being offered by one MFI and the belief that other MFIs or other financial institutions can offer better facilities. Thus, they switch from one financial institution to another.

According to Urquizo (2006), inappropriate products and competition are the highest causes of customer drop outs while staff attitude and clients factors are factors without a huge effect on the cause to drop.

2.3.2 Demand reasons

Demand reasons for the dropping off customers from MFI’s include crisis reasons, socio economic characteristics and client’s maturity.

2.3.2.1 Crisis reasons

Morduch and Hashemi (2003), Armedariz and Morduch (2007), argued that micro finance enables empowerment of poor people to experience an increase in their assets and decrease in their vulnerability. In essence, microfinance is viewed as a circle that allows for increase in the well being, economic, social and political empowerment of the masses (Armedariz and Morduch, 2007).

This is only a theoretical proposition, in practice however; studies have shown that too much debt by customers, illiteracy, and reallocation of resources by clients has led to dropping off of customers from MFI’s. Furthermore, the occurrence of major tragedies and unexpected events in the family such as death of a family member, the loss of a job, funeral expenses and wedding or children education has led to the dropping off of customers from MFI’s (Rutherford, 1999).

2.3.2.2 Socio economic characteristics

Social economic characteristics that influence customers to drop off from MFI’s include demographic characteristics of age, gender, location and occupation. According to Muson and Coetzee (2001), age played a crucial role in the recruitment and drop out of customers in MFI’s in Tanzania. According to the study customers aged 21 years and less, had the highest drop out rate while those above 60 years had the lowest drop out rates.

This group includes variables such as age, gender, location of residence and occupation as well as socio economic characteristics. Never the less, the study found that members must eventually drop out when they stop being entrepreneurs or when they drop out of the organization (Musona and Coetzee, 2001).

Gender has also been cited as a major reason for drop out of customers in MFI’s. According to Armendariz and Murdoch (2007), Guerin et al (2009), most MFI’s have been successful because they mainly target women. According to Schreiner (2004), women are less likely to drop out of MFI’s than member. Furthermore in the study by Schreiner (2004), they found that the occupation of the customer had a direct relationship with the drop out rate. Wright et al (1999), however did not find any evidence supporting the finding that women were less likely to drop out of MFI’s than men in the East African Region.

Hulme et al (1999), in their study of Micro finance in Uganda, however, found that men were less likely to drop out of MFI’s than women.

Crisis reasons or factors are the major causes of drop outs in MFI’s (Pagura, 2004; Lehner, 2009). Furthermore, these studies have provided evidence to show that migration in Bangladesh was the major cause of drop outs in MFI’s. Migrations were often driven by search for better opportunities and better life conditions. Musona and Coetzee (2001), however found that occupation and location of residence were the major causes of drop outs in MFI’s.

Clients who progress to qualify for large loans to maintain working capital or finance asset acquisition are often referred to as mature clients (Wright, 1999; Simanowith, 2000; Dackauskaite, 2009). According to Dackauskaite (2009, client maturity also means that clients will accumulate enough capital and they do not need another loan (Dackauskaite, 2009). According to Wright (1999), client maturity often leads to exit of customers.

2.3.3 Environmental reasons

The economic position and adverse climatic conditions are often referred to as environmental reasons leading to customers exiting MFI’s. According to Meyer et al (2001), downturns in the economy, financial difficulties, adverse economic climate, seasonality and natural calamities are major causes of exit of customers from MFI’s. Wright et al (1999), in their study, in African countries where there is macroeconomic instability, customers exit MFI’s when there is a recession in the economy but join back the MFI’s when there is growth in the economy.

2.4 Chapter Summary

This chapter provides the literature review on the impact of MFI’s on SME’s. The literature is drawn from local, regional and international studies. The chapter also provides a conceptual framework.

Chapter Three of this proposal provides the research framework to be adopted in this study. The research framework includes research design, research procedures, data collection and data analysis procedures

CHAPTER THREE

3.0 RESEARCH DESIGN AND METHODOLOGY

3.1 Introduction

This chapter presents the research methodology to be utilized in the course of the study. The chapter presents a clear framework of the steps to be undertaken during the research. It details the research design, the population, sampling design, research instruments, data collection and research procedures.

3.2 Research Design

A research design helps the researcher to allocate resources for an effective and efficient research (Cooper and Schindler, 2007). This study will adopt a descriptive research design as it will aid the researcher to describe patterns and themes noticed in the data collected. A descriptive research design includes data collection for the provision of answers to questions on the status of the object under study (Zikmund, 2003). Since this research seeks to describe the impact, products and the reasons why customers are changing from MFI’s in Kenya, the descriptive research design is considered appropriate as it will enable the researcher to describe the characteristics of MFI’s. This study will collect data using a questionnaire as is noted by Chandran (2004) who noted that in undertaking a descriptive research design, a well structure questionnaire is critical for better synergy between the researcher and respondents.

Further, this study will utilize a cross sectional census survey as a research approach. A cross sectional survey involves the studying of more than one case study at a particular point in time (Bryman and Bell, 2011). This study will study all the MFI’s in Nairobi county in the months of April and May 2013 indicating the appropriateness of a cross sectional survey. The use of cross sectional survey is justified as it will enhance reliability, validity and replicability of the study. Cross sectional survey as will be adopted in this study enhance reliability due to the stability of the concepts and internal reliability of the respondents i.e. their responses in some questions will be similar to those of other related questions. According to Bryman and Bell, the external validity of a cross sectional research design is strong where the sample form which data is collected has been randomly selected (Bryman and Bell, 2011).

In addition, this study will include all the elements in the study i.e. all the MFI’s in Nairobi county will be included in the study. This indicates the use of a census study.

Finally, this study will utilize a quantitative approach. A quantitative study as noted by Bryman and Bell (2012), involves the employment of measurement of variables. Further, quantitative research strategies emphasize on the use of quantification in the data collection and analysis procedures.

3.3 Population and Sample

3.3.1 Population

The population denotes all the elements that have the same characteristics for inclusion in a study. Mugenda and Mugenda (2003) define a population as the total number of units from which a sample will be selected from.

3.3.2 Sampling Design

The sampling design indicates the statistical procedures to be adopted for the acquisition of an appropriate sample and sample size.

3.3.2.1 Sampling Frame

The sampling frame denotes all total elements in the population. For the purpose of this study, the sampling frame includes all the Microfinance institutions operating in Nairobi County. According to statistics held by CBK (2012), there are 15 microfinance institutions and 6 deposits taking microfinance institutions licensed by the Central Bank of Kenya. This population of 21 comprise of the total sampling frame of this study.

3.3.4 Sampling Technique and Sample Size

Since this study will be a census where all the elements in the population will be included in the study the selection of an appropriate sampling technique and sample size is therefore invalidated. The total sampling frame of 21 microfinance institutions will form the sample size of this study.

3.4 Data Collection

This study will utilize primary data. According to Yin (2003), primary data is fresh and raw data collected for the first for the purpose of a specific study. This study will collect fresh data for the purposes of this study.

Data for the study will be collected using a well structured questionnaire. A questionnaire was deemed appropriate for this study as it is cheap to administer and collect, the questionnaire eliminates the researcher effect and a questionnaire takes less time to administer and collect. Furthermore, a questionnaire is recognized as an appropriate tool for collecting of quantitative data (Byrman and Bell, 2011).

The questionnaire for this study will be structured into four sections i.e. the demographic section, the impact of MFI’s section, the products offered section and the customers drift section. Each section will comprise of open ended and closed questions. Open ended questions will be used to collect quantitative data or to allow the respondents exercise their own opinions while closed questions will be used to collect specific responses from the respondents. The structuring of the questions will be made to ensure that the respondents feel as part of the research and comfortable while responding to the questions.

3.5 Research Procedures

After formulation of the questionnaire, it will be pretested using 3 managers for completeness and ease of understanding. Errors, ambiguities or insufficiency of questions noted will be edited, added or amended to encompass the opinions of the managers included during the pretesting stage. After pretesting, the questionnaire will be self administered to the top managers of the MFI’s through couriers, emails and personal deliveries. However, before delivery the researcher will have communicated with the bank on his research and the need for institutions inclusion in the study.

After administration of the questionnaire, the researcher will make follow up, through emails, phone calls and personal visits to ensure that the questionnaires are completed sufficiently and effectively with the time period for the research.

3.6 Data Analysis

Data collected for analysis using questionnaires will be cleaned and edited for errors, completeness and sufficiency. After analysis of the data, it will be coded and keyed into Statistical Package for Social Sciences for analysis. Analysis will be undertaken using descriptive statistics of centrality e.g. Means, Standard Deviations, Modes and Variances Analyzed data will be presented in tables and figures including graphs and charts.

Findings of this research will be communicated to the public and the academic fraternity through the compilation of a research report that will be presented to the United States International University.

3.7 Chapter Summary

This chapter presents the research framework to be adopted in the course of this study. The chapter provides the research design, the research procedures, the population and sample size, the data collection techniques and instruments and a detail of the data analysis steps to be undertaken.