Dissertation on the Impacts of Microfinance in Kenya final report

Prepared by Fred M’mbololo 1 | P a g e

MICROFINANCE AWARENESS AND IMPACT IN KENYA: A CASE OF

NAIROBI COUNTY


Table of Contents CHAPTER ONE .................................................................................................................................... 4

INTRODUCTION ................................................................................................................................. 4

1.1 Background of the Study ......................................................................................................... 4

1.2Statement of the Problem ....................................................................................................... 8

1.3 General Objective of the Study ............................................................................................. 10

1.4 Specific Objectives of the Study ............................................................................................ 10

1.5 Research Questions ............................................................................................................... 10

1.6 Hypothesis ............................................................................................................................. 11

1.7 Significance of the Study ....................................................................................................... 11

1.8 Scope of the Study ................................................................................................................ 12

1.9 Assumptions of the Study ..................................................................................................... 12

1.10 Limitations of the Study ...................................................................................................... 13

1.11 Delimitations to the Study .................................................................................................. 14

1.12 Definition of terms .............................................................................................................. 15

CHAPTER TWO ................................................................................................................................. 16

THE LITERATURE REVIEW AND THEORETICAL FRAMEWORK .......................................................... 16

2.1 Definition of microfinance .................................................................................................... 16

2.2 Characteristics of microfinance ............................................................................................. 16

2.3 Micro finance services ........................................................................................................... 17

2.4 Microfinance Services in the World ...................................................................................... 19

2.5 Microfinance Services in Africa ............................................................................................. 20

2.6 Microfinance Services in Kenya ............................................................................................. 21

2.7 Impact of Microfinance ......................................................................................................... 22

2.7.1 Economic impacts .............................................................................................................. 23

2.7.2 Social Impacts ..................................................................................................................... 26

2.8 Conceptual Framework ......................................................................................................... 27

CHAPTER THREE .............................................................................................................................. 29

METHODOLOGY .............................................................................................................................. 29

3.1Research Design ..................................................................................................................... 29

3.2 Target population, Sample and Sampling Techniques .......................................................... 29

3.3 Data type and Collection Method and Instruments ............................................................. 30


3.4 Research Instruments’ Reliability and Validity ...................................................................... 30

3.4.1: Pilot Test ....................................................................................................................... 30

3.4.2 Validity ........................................................................................................................... 30

3.4.3 Reliability ....................................................................................................................... 31

3.5 Data Analysis and Processing ................................................................................................ 32

CHAPTER FOUR................................................................................................................................ 34

RESULTS AND DISCUSSION .............................................................................................................. 34

4.1 Introduction .......................................................................................................................... 34

4.2 Respondents Profile .............................................................................................................. 34

4.3 Level of development of microfinance institutions .............................................................. 37

4.4 Impacts of microfinance ........................................................................................................ 39

4.5 Strategies employed by the microfinance institutions ......................................................... 43

CHAPTER FIVE .................................................................................................................................. 47

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS ................................................................. 47

5.1 Introduction .......................................................................................................................... 47

5.2 Summary of major findings ................................................................................................... 47

5.3 Conclusion ............................................................................................................................. 51

5.4 Recommendations ................................................................................................................ 53

5.5 Areas for further research ..................................................................................................... 54

REFERENCES .................................................................................................................................... 56


CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The need for development that saw the Kenya develop several strategies and plans such as

the vision 2030 and the millennium development goals has led to development of the

finance sector. The need for financing of the development projects has developed

microfinance institutions in the country. Microfinance has received a lot of attention since

its inception in the early 1970s perhaps, as argued by Okiocredit (2005: 30-32), due to the

ability of microfinance to enable poverty alleviation and economic development through

provision of credit and savings services to those earning low income. The attention has

seen development of different definitions to microfinance.

According to Otero (1999: 8) microfinance is “the provision of financial services to low-

income poor and very poor self-employed people”. On the other hand, Schreiner and

Colombet (2001: 339) define microfinance as “the attempt to improve access to small

deposits and small loans for poor households neglected by banks.” Independent of the

definition provided to microfinance it is a general agreement in the economic field that

micro financing alleviates economic development. The money or funds that are provided

by microfinance institutions in terms of credit and micro loans enables those who are poor

to invest into productive activities that are bound to earn them income helping them boost

their economic level and alleviate poverty in the entire economy.


Microfinance institutions therefore are an opportunity for sustainable development. The

extent opportunities available to generate income and the ability of citizens to respond to

the available opportunities are to a large extent determined by the degree or ability to

access financial services that are affordable. Microfinance being able to provide such

financial services is being pursued by every economy worldwide. Initially microfinance

aimed at providing donor finances and financing experimental projects. This has

developed to financial institutions that provide a wide range of services and several routes

to opportunities that are significant for economic development and expansion (Khan,

2005:131-142).

The concept of microfinance in most instances has been used interchangeably with

microcredit imploring that they have the same meaning. However microcredit and

microfinance are two different concepts. In an attempt to describe the difference between

microcredit and microfinance, Sinha (1998: 2) states that, “microcredit refers to small

loans, whereas microfinance is appropriate where non-governmental organizations

(NGOs) and microfinance institutions (MFIs) supplement the loans with other financial

services (savings, insurance, etc)”. This definition indicates that microcredit is part of

microfinance since it involves providing credit to the poor. Microfinance is an overall

concept as it involves both credit and non-credit financial services such as insurance,

savings, pensions and other payment services.

Microfinance institutions, given the nature of their objective of ensuring that the prop are

able to access financial services, operate in several models. The most commonly identified

models of operations of microfinance institutions include the Rotating Savings and Credit

Association (ROSCAs), the Grameen Bank and the Village Banking models. Rotating


Savings and Credit Association are formed when a group of individuals come together and

form an agreement to make regular cyclical contributions with an aim of developing to a

common fund. After some period of specified time the lump sum of the contributions is

given to one member of the group in each cycle.As argued by Schreiner (2010: 112-119),

this model is a very common form of savings and credit.

The solidarity group model is based on based on group peer pressure. Loans are made

available to individuals who are in organized groups of four to seven peoples (Berenbach

and Guzman, 1994: 119). The advantage of being in groups is that the members

collectively guarantee loan repayment. They are therefore able to access subsequent loans

depending on successful repayment by all group members. These payments are usually

made after a specific period of time, usually one week (Ledgerwood, 1999: 137). This

model of micro financing is the most commonly used by banks. It has proven to be more

effective in the long run as there are few loan defaulters as each member of the group is a

guarantor of the other. Berenbach and Guzman (1994: 119-139) argues that, solidarity

groups have proved effective in deterring defaults as evidenced by loan repayment rates

attained by organizations.

Village banking model are based on village banks which are normally community-

managed. The banks are established and managed by credit and savings associations

established by NGOs to provide access to financial services, build community self-help

groups, and help members accumulate savings (Schreiner, 2003: 118–136). This is

perhaps the oldest model of micro financing, considering their formation in the mid-

1980s. Usually these village banks normally consist of 25 to 50 members who majorly


low-income earning individuals are seeking to improve their lives through self-

employment activities.

In Kenya, the need for economic development has seen the development of micro finance

institutions which in normal cases start as Chamas. Chamas are small groups of

individuals, who come together, collect money in a pool through continuous contributions

with an aim of accomplishing an investment objective. According to Onumah (2002), the

development of Chamas has led to the development of banks in Kenya. For example,

equity bank developed from a micro finance institution where its major purpose was to

help customers get mortgage loans for individuals who are low income earners in the

society. It was initiated as equity building society (Coetzee, Kamau and Andrew, 2003).

There has been other current deposit taking microfinance institutions in Kenya such as

Rafiki and Jammii Bora who are also in the same path.

The rapid development of micro finance institutions in Kenya has helped the country

develop economically with the current rate standing at 5% improvement annually(CGAP,

2004). This has shown that there are several impacts of the financial institutions to the

economy. There are also business that were majorly part of the institutions that have

flopped in the economy. Independent of the connection of economic development to these

financial institutions many Kenyans residents are not members of the microfinance

institutions, let alone being aware of their existence (Kodhek, 2003). It is in line with this

background that the study wishes to determine the level of awareness and impact on

microfinance institutions among the residents of Nairobi County.


1.2Statement of the Problem

Microfinance institutions have been identified to be the major component to economic

development. In her study on Rural Financial Services in Kenya: What is Working and

Why? Betty (2006) possess that micro financing institutions have in a large extent helped

the development of the Kenyan rural community; “microfinance institutions will continue

serving the rural people and will transform themselves into community based micro-credit

units. This will most likely reduce unemployment in the rural areas”. Development

practitioners and policy makers have as well identified efficient microfinance services as

important for a variety of reasons; helping the poor manage their risks, build their assets,

enhance their income earning capacity, be able to develop small enterprises to generate

income, and these in turn will ensure improved life. Microfinance has also positive

impacts on poverty alleviation and specific economic indicators such as nutrition status,

women empowerment and children schooling.

Despite the several merits attributed to micro financial services, the level of poverty in

Kenya is still high with 40% of Kenyans leaving below a dollar, businesses are performing

poorly and this is indicated by the slow economic development of below 5%, many

Kenyans are still not members of any microfinance institution. This may be attributed to

lack of information on the positive impacts of micro financing and the lack of awareness

by the general public on the existence of microfinance institutions and the services such

institutions offer.

Few studies have been done in Kenya revolving around microfinance. However none of

these studies provide direct information on the impacts of microfinance institutions in


Kenya. Mjomba (2011) studied micro-finance in Kenya by specifically considering micro

finance on financial empowerment of women in Kenya. This study though identified the

impact of micro financing as empowering women positively, it majored on Kenya Women

Finance Trust and was also bias to women only. Therefore it lacked evidence on other

impacts of microfinances in Kenya.

A similar study by Joy (2007) majored on the impact of microfinance on rural

development with a setting of Makueni County. Although this study was a great milestone

to the studies on the field of impact of micro financing services, it narrowed down to poor

households, income and poverty eradication. The setting was also rural. This study

therefore lacks enough evidence to ascertain the awareness and impacts of microfinance in

Kenya. Therefore, we remain unable to judge the validity of this tentative explanation.

That is, there remains insufficient empirical evidence to assess this claim.

Several questions therefore remain unanswered. Who largely benefit from micro financing

services? What is the level of awareness of microfinance services in Kenya? What are the

impacts of microfinance in Kenya? What strategies are employed by microfinance

institutions to ensure they meet their objectives? What kinds of policy questions do these

findings raise for microfinance institutions and for national government?

This study proposed to interrogate the data that was collected in residents of Nairobi

County in relation to these broad questions that are emerging around the issue of

awareness and impacts of microfinance in Kenya, and suggests areas of purposeful focus

for policy attention.


1.3 General Objective of the Study

The aim of this study was to determine the level of awareness of microfinance services

and the impacts of microfinance services to residents of Nairobi County. The objective

was to come up with findings that may be used to make assertions on the awareness and

impacts of microfinance in Kenya.

1.4 Specific Objectives of the Study

The specific objectives of the study included;

i. To determine the level of awareness to microfinance among Nairobi County

residents

ii. To assess the level of development of microfinance institutions within Nairobi

County

iii. To assess the impacts of microfinance to Nairobi County residents

iv. To determine the strategies employed by the microfinance institutions in Nairobi

County to meet their objectives

1.5 Research Questions

i. What is the level of awareness of Nairobi County residents on microfinance

institutions and the services they offer?

ii. What are the impacts of microfinance to Nairobi County residents?


1.6 Hypothesis

i. Nairobi County residents are unaware of microfinance institutions within the

county and the services such institutions offer

ii. Microfinance has positive impact to economic and social development of Nairobi

County residents

1.7 Significance of the Study

To the government

In line with the ability of micro financing services to ensure economic development by

providing savings and credit to low income earners, the government has been pushed to

support the development of microfinance institutions. This has seen a lot of investment by

the government in providing financial support to the microfinance institutions. The

information from this study on the impact of microfinance may help the government in

determining the viability of their investments.

Microfinance institution’s management

The microfinance institutions are formed with the objective of ensuring that low income

earners have access to financial services. There are several Kenyans who fall under the

bracket of low income earners. Microfinance institutions aim at ensuring that all these

citizens who are low income earners are catered for in terms of provision of financial

services. It is therefore necessary for the institutions to understand the perceptions of the

citizens on the impact of the microfinance services they are offering and the level of

awareness of the public on the existence of microfinance institutions and their services.


This information may be used by the management of the microfinance institutions in

determining areas for improvement so as to ensure their success.

Academicians/ researchers

Little research has been done in sub-Saharan Africa to directly identify the impacts of

microfinance. Considering the benefits attributed to microfinance institutions in economic

development and the rapid development of these institutions, impact of microfinance has

received attention of researchers and academicians. Therefore a study on the awareness

and the impact of microfinance in Kenya, with major focus on Nairobi County, may

therefore attract researchers and academicians who are in need of educating more and

providing solutions to lack of access to financial services in sub-Saharan Africa.

The information from the study will also form basis for literature for other researchers and

academicians who are willing to carry out studies in the same field in Sub Saharan Africa.

Next, the study will be a starting point for further studies on microfinance in Kenya.

1.8 Scope of the Study

The study was carried out in Nairobi County. The respondents included the Nairobi

County residents. Data was collected from the Nairobi residents who formed the

population of the study, with an aim of determining their level of awareness to

microfinance in Kenya and the impacts of microfinance in Kenya.

1.9 Assumptions of the Study

The researcher made the following assumptions regarding this study:


i. Respondents answered the survey questions about the awareness and impacts of

microfinance truthfully.

ii. Respondents were familiar enough with the microfinance services to answer the

survey questions.

iii. The researcher expected the entire exercise to move on smoothly relying on the

maximum cooperation of all those who were involved. That the sample properly

represented the population, the data collection instruments had validity and

measured the desired parameters and that the respondents truthfully and correctly

answered the questions.

1.10 Limitations of the Study

Limitations are potential weaknesses or problems with the study identified by the

researcher. The limitations often relate to inadequate measures of variables, loss or lack of

participants, small sample sizes, errors in measurement, and other factors typically related

to data collection and analysis. These limitations are useful to other potential researchers

who may choose to conduct a similar or replication study (Creswell, 2005).

The limitations of this study include;

i. The study involved the perception of residents on the impacts of microfinance. The

data was collected from individuals who are self-reporting their perceptions.

ii. Perceptions of those who participated are not factual information and are biased

based on the respondent’s own experiences and attitudes.

iii. The geographical expanse of the study area, inadequate financial resources and

time constraints also reduced the chances of contacting more respondents.


These limitations were mitigated by making sure that, there is purposive sample selection,

piloting and careful scrutiny of the perceived parameters of measurement in the

microfinance institution, population and sample.

1.11 Delimitations to the Study

Delimitation narrows the scope of the study. The follow were delimitations of this study:

i. Participation in this study was voluntary.

ii. The population was limited to microfinance institutions in Nairobi County

iii. Respondents involved in the study were from the same large urban area

iv. There could be other impacts of microfinance that may not be exclusively

addressed in this study.

The study was bound to have a reasonable degree of success because the population and

the sample are readily available in Nairobi County. The use of the SPSS programme in

analyzing the collected data was helpful in making reasonable deductions. Some of the

respondents’ concerns connected with the impacts of microfinance were quantitatively

measured and appropriate records made. Such parameters included number of people

registered with the microfinance institutions and the number of microfinance institutions

within the county.


1.12 Definition of terms

Microfinance

Otero (1999: 23) defined microfinance as the provision of financial services to low income

poor and very poor self-employed people. On the other hand Schreiner and Colombet

(2001:339) argues that microfinance is generally the attempt to improve access to small

deposits and small loans for poor households which have been neglected by banks.

Microfinance in this study is the concept by which financial institutions avail savings and

credit opportunities to the poor or those who cannot access bank services.


CHAPTER TWO

THE LITERATURE REVIEW AND THEORETICAL FRAMEWORK

2.1 Definition of microfinance

Microfinance is a form of financial development that has primarily focused on alleviating

poverty through providing financial services to the poor people in the country (Sinha,

2008). Most people view microfinance as being about micro-credit i.e.it is involved in

lending small amounts of money to the poor in order to uplift their living standard.

Microfinance is not only this, but it also has a broader perspective which also includes

insurance, transactional services, and importantly, savings (Brenna, 2008).

According to Schreiner (2010), microfinance is a bit of a catch all-term. In the broad

perspective, it refers to the provision of financial products which are usually targeted at

low-income groups. These financial services include credit, savings and insurance

products. A series of neologisms has emerged from the provision of these services, name

micro-credit, micro-savings and micro-insurance. The Canadian International

Development Agency (CIDA) defines microfinance as, the provision of a broad range of

financial services to poor, low income households and micro-enterprises usually lacking

access to formal financial institutions (Graheen, 2000).

Microcredit, or microfinance, is banking the unbankables, bringing credit, savings and

other essential financial services within the reach of millions of people who are too poor to

be served by regular banks, in most cases because they are unable to offer sufficient

collateral. In general, banks are for people with money, not for people without.”

(Oikocredit, 2004)

2.2 Characteristics of microfinance

Microfinance gives access to financial and non-financial services to low-income people,

who wish to access money for starting or developing an income generation activity. The

individual loans and savings of the poor clients are small (Kodheka, 2003). Microfinance

came into being from the appreciation that micro-entrepreneurs and some poorer clients

can be ‘bankable’, that is, they can repay, both the principal and interest, on time and also


make savings, provided financial services are tailored to suit their needs. Microfinance as

a discipline has created financial products and services that together have enabled low-

income people to become clients of a banking intermediary. The characteristics of

microfinance products include:

i. Little amounts of loans and savings and short- terms loan (usually up to the term of

one year).

ii. Payment schedules attribute frequent installments (or frequent deposits) and

Installments made up from both principal and interest, which amortized in course

of time.

iii. Higher interest rates on credit (higher than commercial bank rates but lower than

loan-shark rates), which reflect the labor-intensive work associated with making

small loans and allowing the microfinance intermediary to become sustainable

overtime.

iv. Easy entrance to the microfinance intermediary saves the time and money of the

client and permits the intermediary to have a better idea about the clients’ financial

and social status.

v. Application procedures are simple and short processing periods (between the

completion of the application and the disbursement of the loan).

vi. The clients who pay on time become eligible for repeat loans with higher amounts

and the use of tapered interest rates (decreasing interest rates over several loan

cycles) as a n incentive to repay on time. Large size loans are less costly to the

MFI, so some lenders provide large size loans on relatively lower rates.

vii. No collateral is required contrary to formal banking practices. Instead of collateral,

microfinance intermediaries use alternative methods, like, the assessments of

clients’ repayment potential by running cash flow analyses, which is based on the

stream of cash flows, generated by the activities for which loans are taken.

2.3 Micro finance services

Micro finance Services refer mainly to small loans; savings mobilization and training in

micro enterprise investment services extended to poor people to enable them undertake

self employment projects that generate income (Onuaman, 2002). Micro finance came into

being from the appreciation that micro entrepreneurs and some poorer clients can be


‘bankable’, that is, they can repay both the principal and interest, on time and also make

savings, provided financial services are tailored to suit their needs (Coetze, 2003)). Micro

finance is perceived as the provision of financial and non financial services by micro

finance institutions (MFIs) to low income groups without tangible collateral but whose

activities are linked to income generating ventures (Sinha, 2008). These financial services

include savings, credit, payment facilities, remittances and insurance. The non-financial

services mainly entail training in micro enterprise investment and business skills. There is

also a belief that micro finance encompasses micro credit, micro savings and micro

insurance (CGAP, 2004).

Micro finance is not a new development. Its origin can be traced back to 1976, when

Muhammad Yunus set up the Grameen Bank, as experiment, on the outskirts of

Chittagong University campus in the village of Jobra, Bangladesh. The aim was to provide

collateral free loans to poor people, especially in rural areas, at full-cost interest rates that

are repayable in frequent installments. Borrowers were organized into groups and peer

pressure among them reduced the risk of default (Khan and Rahaman, 2007). In many

cases, basic business skill training should accompany the provision of micro loans to

improve the capacity of the poor to use funds (UN, 20005). Micro financing should

addresses capital investment decisions, general business management and risk

management. In the world over, provision of micro finance services to the youth has been

considered an innovative and sustainable approach to youth financial and micro enterprise

activities empowerment leading to generation of income so as to improve their livelihoods

and contribute to economic growth. Debates on extending the reach of microfinance to the

very poorest people increasingly focus on savings facilities. For many youth, savings

facilities are essential in increasing the amount of income under their control and in

building assets. In remote areas, mobilization and intermediation of member savings may

be crucial first steps before accessing external loan funds. A number of studies have

observed that savings-led groups perform better than credit-led ones (Allen 2005; Murray

and Rosenberg 2006; Ritchie 2007). Access to micro-finance has the potential to assist the

poor in earning income from microenterprises, smooth their income and consumption

(Brennan, 2008), help households diversify their income sources. (Anand et al.,


2005).According to Kodheka (2003) microfinance makes a considerable contribution to

the reduction of poverty. It helps increase income earning and asset building opportunities

which make households less reliant on a single asset type and consequently deal with

disasters. (Anand et.al., 2005). According to Hassan (2002), many Grameen Bank

borrowers were actually building larger houses. Sinha (2008) advances that the income of

borrowers has risen and their assets base has widened. Investments made by loans appear

to have been extremely productive and to have contributed significant improvements in

household output, income and consumption (CGAP, 2004). In Tegucigalpa and Cholteca

in Honduras in 2003, effect assessment studies revealed that 60% and 50% of the

recipients had their sales and incomes increase respectively one year after receipt of credit

for working capital. Agricultural Finance Cooperation Limited in 2008 in India, assessed

development effect of microfinance programmes. Clients reported increase in income

from 76% of activities. There is therefore reason to believe microfinance services in its

entirety should report effect on savings, income and investments alongside non financial

effect such as change in skills through training. This study was specific in investigating

these aspects.

2.4 Microfinance Services in the World

The current global youth population is very large. Of the world’s more than 3 billion

people estimated to be under the age of 25, approximately 1.3 billion are between the ages

of 15 and 24. Just under half of these young people live on less than two dollars a day, as

estimated by the UN (Youth Save, 2010). Yet young people the world over are aware of

the inequities of the global system, which leaves them vulnerable in many ways.

Unemployment, especially amongst them, also leads to high risk behaviour – crime, drugs

and spread of HIV/AIDs. Moreover in line with most cultures in developing countries, the

employed have to look after the unemployed extended family members, thereby reducing

their ability to save and opportunities for wealth creation that is needed to spur economic

growth. To this end, microfinance, the provision of a wide range of financial services, has

proved immensely valuable to poor people, especially the youth and women on a

sustainable basis. Access to financial services has allowed many families throughout the


developing world to make significant progress in their own efforts to escape poverty

(Onuman, 2005).

The provision of credit has increasingly been regarded as an important tool for raising the

incomes of youths, mainly by mobilizing resources to more productive uses. As

development takes place, one question that arises is the extent to which credit can be

offered to the youths to facilitate their taking advantage of the developing entrepreneurial

activities. The generation of self-employment in non-farm activities for example, requires

investment in working capital. However, at low levels of income, the accumulation of

such capital may be difficult. Under such circumstances, loans, by increasing family

income, can help the youth to accumulate their own capital and invest in employment-

generating activities (Schreiner, 2010).

2.5 Microfinance Services in Africa

Many diverse institutional models of micro financing are functioning in Africa, but most

clients are served by credit unions and co-operatives members sell (e.g. coffee, tea, cotton

etc.) or the nature of their employment (Onuman, 2005). In West and Central Africa

however, savings and credit cooperatives are generally more community-based. In

contrast to Asia, the lack of population density means that rural and agricultural finance is

particularly challenging, and thus many MFIs are urban-based and focused. Perhaps as a

result the July 2003 Micro Banking Bulletin identified only 8 sustainable institutions and

estimated that only around 25 million clients are being served throughout the continent.

However, these numbers may under-estimate or ignore the large numbers being served by

cooperatives and postal banks. Nonetheless both international and domestic banks are

starting to take an interest in the potential of the low-income market in Africa. The last

twenty years have seen significant improvements in micro financing through advances in

understanding and providing financial services to better advance development and

eradicate poverty. This includes providing the financial means to save, access credit, and

start small businesses, with the potential to enhance community development, as well as

local and national policy making. When properly harnessed and supported, microfinance

can scale-up beyond the micro-level as a sustainable part of the process of financial

empowerment by which the poor can lift themselves from poverty.


The micro financing revolution effectively demonstrates that when poor households have

access to financial services, not only do they save, but, they also have high repayment

rates when they borrow. It is noted that, microfinance institutions have made financial

services available to millions of poor households worldwide but this still represents a tiny

fraction of the population in developing countries where the majority lack access to formal

financial services.

2.6 Microfinance Services in Kenya

In Kenya, the youth is defined within the age 15-35 years are about 13 million which is

equivalent to 56% of the population (Ministry of Youth and Sports, 2008). Of the 13

million youth, less than 50% are in gainful economic activities in the formal, informal and

public sectors of the economy while majority are unemployed, (Simeyo et al.2011). They

comprise 61% of the unemployed. This trend is worrying and calls for intervention

measures. Micro finance lending and associated services are one such intervention.

However, lack of collateral and high interest rates are an impediment to access to loans

from Micro finance institutions (MFIs) by the youths (Mushimiyimana, 2008). The youths

who secure funds from such institutions spend the bulk of their returns on investment in

paying the cost of capital, thus leaving them with none or little savings for reinvestment.

As a result, majority of the youths in the youth investments fail to grow into Small and

eventually Medium enterprises. Therefore, to bring the youth on board, the Kenyan

government with the support of development partners in 2006 established a youth

enterprise development fund that is channeled to Micro finance Institutions and other

financial intermediaries for onward lending to the youth without collateral. Such a fund

attracts a greatly reduced cost of capital which stands at 8% per annum as a strategy to

make the fund affordable to the youth who in many cases do not have collateral and

therefore ideal for start-ups.

Given that the vision of micro finance is to promote the growth of micro enterprises, MFIs

and other financial intermediaries have experienced rapid growth to support the youth

financial requirements. Institutions such as the Kenya Rural Enterprise Program (K-REP),

a non-governmental organization that was started in 1984 under the funding of the USAID

are some microfinance institutions. Today, K-REP is fully licensed as a bank and offers a

wide range of banking services in addition to its micro finance specialty (Dondo, 1991).


K-REP operates two major loan programs for micro and small entrepreneurs, Jihudi and

Chikola. Each Jihudi group consists of three to eight individuals. The Chikola loan

program works through existing rotating savings and credit self help groups (ROSCAS)

that comprise of individual micro entrepreneurs (Kioko, 1995). A number of MFIs and

financial intermediaries including K-REP, Equity bank, Kenya Women Finance Trust

(KWFT), Fauluetc have since then come up to provide micro finance services to the low

income groups for purposes of starting or developing income generating activities. These

groups include youth and women. Related to this is the indication that MSEs access to

credit has increased greatly from 7.5% in 2006 to 17.9% in 2009. (Simeyo et al. 2009)

In view of the increasing microfinance services in the world targeting the poor with

anticipation of an increase in positive outcomes, particularly in developing countries, as is

evidenced by the efforts above; this research sought to establish the effect of micro finance

lending and related services on financial empowerment of youth in Nairobi County.

2.7 Impact of Microfinance

Microfinance institutions offer several services to their clients who in most cases are the

economically less privileged. According to Bennett (1994) and Ledgerwood (1999)

microfinance clients who are mostly men and women slightly below or above the poverty

line can be able to access variety of products and services which are mostly financial.

Microfinance institutions offer services to the low income earning groups because these

groups are ignored by large financial institutions since they are considered less profitable.

Olaitan (2001) and Akanji (2001) argue that products and services that make microfinance

institutions different from large financial institutions include increased provision of credit,

increased provision of savings, repositories and other financial services to low income

earners or poor households.

The impact of microfinance can be described in a triangle where it has effect on financial

sustainability, outreach to the poor, and institutional performance/impact.


2.7.1 Economic impacts

Income is one of the important elements of living standard of the poor people as well as

saving. Mohammed and Mohammed (2007) The Microfinance Banks are to provide loans

to the poor not only the increase their income but also to mobilize their savings CBN,

(2005).

According the report by the United Nations Development Programme, microfinance has

over the years proven to be a major tool which is effective in alleviating poverty (UNDP,

2001). Microfinance therefore empowers those individuals who are financially

disadvantaged. Morduch et al. (2003) and Alegiemo and Attah (2005) also asserts that

microfinance institutions help in financial empowerment of the economically activebut

poor individuals by the providing microcredits and other assets to enhance production.

Micro financing therefore enhances the latent capacity of the poor for entrepreneurship,

enabling them engage in economic activities, be self-reliant and also enhancing the

household income as well as creating wealth.

According to Christabell (2009), when reaching out to those who are poor, there are costs

that every financial institution expects to incur especially when reaching them with small

loans. To every finance institutions it is viable only if these costs are kept to the minimum

as possible. However when the targeted people are in a vast geographical area, the cost of

reaching them increases. The provision of financial services to the poor is expensive and

to make the financial institutions sustainable requires patience and attention to avoid

excessive cost and risks (Adam and Fitchett, 1992).

The economic impact of microfinance originate from the assumption that those who are in

need of economic support (borrower) are sole operators of an income generating activity

and the output of their businesses is constrained by lack of enough capital or the high

marginal cost of credit relative to the marginal returns from the credit. In a bid to increase

their financial capability and ease their capital constraints, the business operators will

work hard to improve on their output, net income, profits, and hence their own welfare

(McKernan, 2002).

The economic impacts of microfinance stretch to the livelihoods of the targeted

individuals. Microfinance institutions target poor individuals whose management of


livelihood related to resource allocation, uncertainties and risks cannot be completely

separated from their decisions about their household’s production (Gertler et al.

2009).Moreover since credit is a factor affecting the management of diversified and is

seasonally volatile to household economic portfolios (Sebstad et al. 1995),by a large

extent it has effect on the promotion of enterprise (Morduch1995, Rutherford 2001,

Collins et al. 2009).

According to Shahidur (1998), poverty is regularly the effect of low economic growth,

high population growth, and exceptionally uneven spreading of resources. The

determinants of poverty can be traced to unemployment and low productivity amongst the

poor. This type of poverty requires to be solved by the creation of jobs (Cameron and

Trivedi, 2005). Poverty is as well a result of low productivity and low income which can

only be alleviated by putting more investments on human and physical capital so as to be

able to increase the productivity of the workers’. In many countries, such as Bangladesh,

poverty is caused by lack of both physical and human capital. From the above analysis

solving the problem of poverty therefore demands the increase in productivity by creating

employment and developing human capital as well. Microfinance institutions which in the

past were considered to be informal lenders therefore play an important role in many low-

income countries (Adams and Fitchett 1992; Ghate 1992), by providing the poor with

enough capital to start off and expand their business and improve on their livelihoods.

Microfinance institutions, such as such as Rotating Savings and Credit Associations, can

meet the occasional financial needs of rural households in many societies (Webster and

Fidler, 1995).

Since microcredit programs from microfinance institutions are able to reach the poor at

affordable cost, the programs are in a position to ensure that the poor become self-

employed. Microcredit services are supported by microfinance institutions so as to enable

the poor access institutional credit hence playing an important role in alleviating poverty

(Yunus, 1983). They argue that by virtue of their design such programs can reach the poor

and overcome problems of credit market imperfections. In their view improved access to

credit smoothens consumption and eases constraints in production, raising the incomes

and productivity of the poor.


Empirical studies support the view that microfinance institutions provide credit market

interventions that ensure that the consumption and production of the poor is improved and

the lack of credit do not deter them from improving their livelihoods (Foster 1995;

Rosenzweig and Wolpin 1993).Several researches in Bangladesh have shown that

microfinance institutions have positive effects on the economic lives of the poor people.

For example, in his study on participants of Grameen Bank in Bangladesh, Hossain (1988)

found significant impacts of the effect of microcredit programmes on alleviating poverty

in Bangladesh. This was reflected in higher income, capital accumulation and employment

among loan recipients. Khandker (1998) carried out a similar study in Bangladsh. From

his study he found that 5% of those who received the loans were able to get out of poverty.

Another research in Bangladesh was carried out by Mustafa (1996). He found out that

microcredit programmes enabled the loan recipients to enhance their economic wellbeing

which was reflected in indicators such as wealth, revenue earning assets, the level of cash

earned, value of house structure, per capita expenditure on food, and total household

expenditure. Similarly, Zaman (1999) found out that credit from microfinance institutions

aim at enhancing the abilities of the recipients to build assets while reducing their

vulnerability to poverty by ensuring that their consumption is smooth through balancing of

their consumption and spending.

In Thailand, Kaboski and Townsend (2005) found the positive impacts of microcredit

when they evaluated the impacts of microfinance institutions in rural Thailand. They

found out that micro-financing enhances asset growth, consumption smoothing and

occupational mobility. The microfinance services as well help in decreasing borrowers’

vulnerability, especially if women are the main recipients. Another study by Kaboski and

Townsend (2005) found that income, consumption and agricultural investment increased

among recipients as well as overall wages levels in a village in Thailand.

In Mexico a study by Bruhn and Love (2009) identified the positive impacts of havng a

microfinance institution as improving business ownership, income and employment.

Positive impacts of microfinance on the economic wellbeing of the people have been

documented by researchers who determined the effects through randomized experimental

research. Karlan & Zinman (2009) carried out their randomized experimental research in

Manila Philippines and found out that microfinance institutions increased business profits


but only for male entrepreneurs not females. Another study by Banerjee (2010) using

similar approach in India also indicated that found that only the expenditure on durable

goods and number of new businesses increased in the treated areas while expenditure per

capita per month did not change.

2.7.2 Social Impacts

Studies indicate that microfinance programs do not have a positive impact on the poor

household income and consumption level only but on their social wellbeing as well. The

improvement in the social well-being is reflected on recipients’ level of education, health

and children nutrition. Furthermore it extends to women feelings of empowerment and

independence. For example a study by Khander (1998) found that there are significantly

higher levels of schooling for children especially that of girls for credit program

participants.

According to Ghalib (2007), all microfinance program targets one thing in general; human

development that is geared towards both the economic and social uplift of the people they

cater for. Ghalib (2007) argued that tackling poverty points to multidimensional concepts

that emphasizes on reducing unemployment, infant mortality, maintaining essential

healthcare, sanitation, food, nutrition basic hygiene, and establishing gender equality.

Microfinance programs have positive impacts on households’ wellbeing which is

indicated in the recipient of the microcredit’s children’s education, health and household

nutrition especially when the recipients are women (Zaman, 1999; Panjaitan-Drioadisuryo

& Cloud, 1999; Pitt et al., 2003).

Health

Health intervention has been an integral part of the MFIs. Different organizations apply

different or similar policy to identify the health problems, undertake rigorous

experimentation and try to explore and then apply suitable, affordable and culturally

acceptable technology. Throughout the work process, they measure and monitor its

implementations and recommends corrective actions to modify methods of


implementation of program, health message, training and management, where needed

(Annual Report, 2005).

Education program

Another important goal of all MFIs is to spread the light of education throughout the

society. Development through this program, along with the health program, indicates

human development among the people. Their effort and mission is to build up a society

free of poverty, illiteracy and disease. Their goals are to expand education opportunities

for disadvantaged children and provide them with necessary technical and financial

support (Annual Report, 2005).

Generally provision of credit demands a lot of knowledge on credit by the borrower. This

is because the imperfect knowledge from the borrower and their limited capacity to

compute changes when they borrow credit since the forms of credit will have an important

impact on the mental models that guide their business decisions (Nino-Zarazua and

Copestake, 2009).

Food security programe

In the developing countries, achieving household food security remains a critical objective

of rural development. This can be done in principle by escalating agricultural productivity

and off-farm income, thus improving the capability of households to steady their income

and food purchasing power. Food security, at the household level, is defined in its most

basic form as access, by all people at all times, to the food needed for a healthy life (Zeller

M. & Meyer L. (2002).

2.8 Conceptual Framework

The literature review in this study will cover the previous studies that have been done on

microfinance and its effects. However there will be need to have a clear understanding on

microfinance which will call for concise definition to microfinance concepts such as

microfinance itself, microfinance institutions, economic development and SACCOs.


Conceptual framework

Levels of impact Types of Impact Impact variable/indicator

Household

Community

Economic

Social

Economic variables

Income

Access to food

Household assets

Housing

Human capital

Skills

Education

Health

Empowerment

Confidence

Social capital

Social networks

Social mobility


CHAPTER THREE

METHODOLOGY

3.1Research Design

A descriptive survey design was adopted. Both qualitative and quantitative techniques

were applied. Descriptive research design is connected with providing solutions to the

problems. (Mugenda and Mugenda, 2003). This design was appropriate for exploring the

effect of micro-finance services on the people in Nairobi County.

3.2 Target population, Sample and Sampling Techniques

The population of this study comprised of all people accessing micro-finance services and

are beneficiaries within Nairobi County.

The sample size will be derived as follows;

n = Z2pq /d

2

Where:

n = the desired sample size (if target population is greater than 10,000)

z = the standard normal deviate at the required confidence level.

P = the proportion in the target population estimated to have characteristic being

measured.

q = 1-p

d = the level of statistical significance set.

Assuming 50% of the population have the characteristics being measured, q=1-0.5

Assuming we desire accuracy at 0.05 level. The Z-statistic is 1.96 at this level

Therefore n= (1.96)2(.5)(.5)/(.05)

2 =385

Because the population is less than 1000

The study however adopted a sample size of 384 as shown in the sampling frame above.

Beneficiaries of micro-finance in the County will act as the sampling frame. The study

treated people from on micro-finance as one cluster. It proceeded to pick individual

respondents by simple random sampling from the individual microfinance beneficiaries

and picked the interview groups in a similar way from the list of micro-finance.


3.3 Data type and Collection Method and Instruments

Primary and secondary data were used. Structured and Semi structured questionnaire and

interview were used to obtain information from the sample. The researcher gathered

secondary electronic and hard data from several books, research literatures, articles,

journals and micro-finance documents. Internet sources were also be used.

3.4 Research Instruments’ Reliability and Validity

3.4.1: Pilot Test

Pilot test assists in determining if there are flaws, limitations, or other weaknesses within

the interview design and allows for make necessary revisions prior to the implementation

of the study (Lokesh, 2004). Ledgerwood (2009) indicates that, pilot test is necessary for

testing the reliability of the instruments and the validity of the study. The desirability of

piloting research instruments is not solely to ensure that survey questions operate well but

also ensure that the research instruments as a whole functions well (Bryman & Bell,

2011).

3.4.2 Validity

Validity refers to the issue of whether or not an indicator (or set of indicators) that is

devised to gauge a concept really measures that concept (Bryman& Bell, 2011). Betty

(2006) defined validity as the extent to which differences found with a measuring

instrument reflect true differences among those being tested. There are two ways of

establishing the validity of a research instrument, that is, logic and statistical evidence.

Logic evidence implies justification of each question in relation to the objectives of the

study, whereas statistical procedures provide hard evidence by way of calculating the

coefficient of correlations between the questions and the outcome variables (Okio, 2005).


This study adopted content validity. Blaikie (2000) assert that, content validity of an

instrument is improved through expert judgment. To evaluate the content validity of a

research instrument, one must first agree on what elements constitute adequate average. If

the data collection instruments adequately covers the topics that have been defined as

relevant dimensions, the instrument is deemed to have good content validity (Cooper and

Schindler, 2011). To ensure content validity, the questionnaire was subjected to a panel of

peers to assess whether each measurement question in the questionnaire is essential, useful

or necessary (Saunders, 2009, Cooper and Schindler, 2011). Essential responses on each

item from each panellist are evaluated by a content validity ratio, and those meeting

statistical significance value are retained (Cooper and Schindler, 2011).

3.4.3 Reliability

Reliability refers to the consistency of the measure of concept (Bryman, 2012). It is

generally understood to be extent to which a measure is stable or constituent and produces

similar result when administered repeatedly (Mjomba, 2011 ). A measuring instrument is

reliable if it provides consistent results ; if the quality of reliability is satisfied by an

instrument, then while using it the researcher can be confident that the transient and

situational factors are not interfering ( Kothari, 2009) .

Cronbach’s alpha (α) was used to ensure that items have reasonably good internal

consistency and measure the same underlying construct consistently. Cronbach’s alpha (α)

is a coefficient (a number between 0 and 1) that is used to rate the internal consistency

(homogeneity) or the correlation of items in a test (Mjomba, 2011). It is used to test

internal reliability, and it essentially calculates the average of all possible split- half

reliability coefficients (Bryman, 2012). A computed alpha coefficient will vary between


1(denoting perfect internal reliability) and 0 (denoting NO internal reliability). (Bryman

and Bell, 2011). Reliability of 0.8 is typically employed as the rule of the thumb to denote

an acceptable level of internal reliability (Bryman, 2012).

3.5 Data Analysis and Processing

Data analysis usually involves reducing accumulated data to a manageable size,

developing summaries, looking for patterns and applying statistical techniques. Data

preparations includes editing, coding, and data entry and is activity that ensures the

accuracy of the data and their conversion from raw form to reduced and classified form

that are more appropriate for analysis. Editing detects errors and omissions, corrects them

where possible and satisfies that maximum data quality standards are achieved. Coding

involves assigning numbers or other symbols to answers so that the responses can be

grouped into a limited numbers of categories (Cooper and Schindler, 2011). Data entry

converts information gathered by secondary or primary methods to a medium of viewing

and manipulation. Statistical Package for Social Sciences (SPSS) version 18.0 was used

as a tool to analyse the data. SPSS version 18.0 provides better reporting capabilities

through improvement to the presentations graphics system (Khan, 2002).

The study employed descriptive statistics in the form of percentages, means and measures

of dispersion which allows for presentation of data in a more meaningful way and thus

simpler interpretation of data. Use of percentages is important because data is translated

into standard form with the base of 100 for easier translation and comparison and they

simplify data by reducing all numbers to range between 0 and 100 (Cooper & Schindler,

2003). The analysed data was interpreted and presented in frequency tables, graphs,


histograms, frequency polygons and pie charts. Responses from open ended questions

were coded, interpreted and their frequencies determined through cross- tabulations on

differences between respondents and the central tendencies of responses to each factor.

Cross - tabulation was used to determine if association exist between various variables.

Cross- tabulation is a technique for comparing two classification variables using tables

with rows and columns that correspond to the level or values of each variable’s categories

(Coopers and Schindler, 2011).

Analysis was descriptive in nature and normality test will be done for qualitative data to

test for normal distribution for all dependent and independent variables (Khan, 2002).

Normality is important in knowing the shape of distribution as the normality help to

predict dependent variable scores (Onumah, 2002). To test the normality of the data, the

study will use Kolmogorov-Smirnov One- Sample Test. It can be used with ordinal data to

test for the degree of goodness –of –fit between an observed set of ranked scores and some

theoretical distribution. This test checks the nature of a statistical population’s relative

frequency distribution. The theoretical distribution of population is the specified

cumulative frequency distribution which represents the H0 (Creswell, 2003).

Chi-square test of independence was done to establish existence of relationship between

the variables. The Chi-square test is used to test the significance of difference between the

two independent samples, when the data is in discrete frequencies. Usually the agreement

or disagreement about some opinion can be measured more effectively by using such test

(Creswell, 2003).


CHAPTER FOUR

RESULTS AND DISCUSSION

4.1 Introduction

The number of respondents who participated in this survey totaled to 94 with a response

rate of 97.92%. Respondents’ demographics characteristics are presented in the first part

of this chapter. The second part involved descriptive statistics to determine microfinance

awareness and impact in Kenya.

4.2 Respondents Profile

Majority of the study respondents (59.3%) were male with female being 40.7%. Most of

the study respondents (46.4%) were aged between 18 and 35 years while the minority

(9.1%) were over 60 years of age. Majority of the respondents were in employment

(33.8%) and business (33.2%). Most of the respondents (32.4%) were reported to earn a

monthly income of less than Ksh.10,000 while minority of the respondents (9.9%) were

earning above Ksh. 40,000.

Table 4. 1: Profile of respondents

Frequency Percent

What is your gender?

Male 216 59.3

Female 148 40.7

Your age

18-35 169 46.4

36-45 89 24.5

46-60 73 20.1

Above 60 33 9.1

Where do you work?

Employment 123 33.8

Farming 72 19.8

Trading 121 33.2


Artisan works 48 13.2

Monthly Level of income (KSHs)

Less than 10,000 118 32.4

10,001-20,000 65 17.9

20, 001-30,000 78 21.4

30,001-40,000 67 18.4

Above 40,000 36 9.9

More than half of the respondents (59.8%) reported to have applied for a loan to finance

their business.

Figure 4. 1: Have you ever applied for a loan “borrowed capital” to finance your

business?

Respondents that reported to have applied for loan to finance their business were asked to

state where they had borrowed the funds and the majority (53%) had borrowed from

microfinance institutions while the remainder 47% had borrowed from banks.

NO, 40.2%

YES, 59.8%


Figure 4. 2: If yes where?

Respondents that banked with MFI were asked to sate whether they received financial

services from any other MFI (more than one MFI) where majority (73%) reported to be

receiving financial services from more than one MFI.

Figure 4. 3: Do you obtain financial services from any other microfinance

institution?

To assess satisfaction of respondents with services provided by MFI, two questions were

asked. The questions were “Overall satisfaction with service provided by your

microfinance institution?” and “Observed service improvement in your microfinance

institution in past 5 months?”. Most of the respondents (46.4%) reported that were very

dissatisfied with services offered by their microfinance institution. Only 6.6% of the

respondents were very satisfied with the services offered by their microfinance institution.

Most of the respondents (33.5%) reported that their MFI had slightly improved its services

53% 47% Microfinance

institution

Bank

73%

27%

Yes

No


in the past five months, while 6.6% felt that the services were much worse.

Figure 4. 4: Satisfaction with services provided by MFI

4.3 Level of development of microfinance institutions

To assess the level of development of microfinance institutions, respondents were

presented with statements on 5 point likert scale and asked to rank the statements by

indicating how much they agreed with the statements. The statements were ranked with

ranks ranging from “5- strongly agree” to “1-strongly disagree”. Averages for every

statement were calculated and the general average score evaluated. Scores were also

converted to percentages for easy interpretation. It is observed that the scores were also

distributed across gender of the respondents and level of income to provide comparative

results.

From the results, generally the respondents ranked lowly the statements on development

of their MFI in terms of the way the services were offered with an average score of 62.7%.

46.4%

20.1%

13.5% 13.5%

6.6%

26.6%

33.5%

19.8%

13.5%

6.6%

0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%50.0%

Ve

ry d

issa

tisf

ied

Dis

sati

sfie

d

Neu

tral

Sati

sfie

d

Ve

ry s

atis

fied

Mu

ch b

ette

r

Slig

htl

y b

ette

r

Alm

ost

sam

e

Slig

htl

y w

ors

e

Mu

ch w

ors

e

Overall satisfaction Service improvement


Howerver, respondents unanimously agreed with the statement that they served on first

come basis (77.2%). Service providers displaying name tags and counter satisfaction were

ranked the least with average scores of 50.6% and 54.6% respectively.

Figure 4. 5: Thinking of the most recent visit to your MFI, please tell me how

satisfied or dissatisfied you were with the following

Great discrepancies in responses across gender and income were not observed.

Table 4. 2: Thinking of the most recent visit to your MFI, please tell me how satisfied

or dissatisfied you were with the following

Total

gender

Monthly Level of income (“000”

KSHs

Male Female < 10 10-20

20, -

30 30-40 Above 40

I was served on a first come

basis 3.86 4.00 3.66 3.90 3.89 3.79 3.87 3.81

The service providers displayed

name tags 2.53 2.67 2.33 2.55 2.58 2.50 2.48 2.53

I was addressed by my name 3.34 3.22 3.51 3.33 3.34 3.33 3.43 3.22

50.6%

54.6%

58.8%

60.0%

66.8%

70.8%

77.2%

0.0% 20.0% 40.0% 60.0% 80.0% 100.0%

The service providers displayed nametags

I am very satisfied with countersatisfaction

The service provider smiled at me

I was greeted by the provider

I was addressed by my name

The service provider made eye contact

I was served on a first come basis

Mean score=62.7%


The service provider made eye

contact 3.54 3.89 3.02 3.54 3.49 3.53 3.58 3.53

I was greeted by the provider 3.00 2.89 3.17 3.04 3.11 2.90 2.97 2.97

The service provider smiled at

me 2.94 2.89 3.01 2.93 2.92 2.97 3.00 2.81

I am very satisfied with counter

satisfaction 2.73 2.89 2.50 2.74 2.78 2.74 2.66 2.72

4.4 Impacts of microfinance

To assess satisfaction with loan lending terms of microfinance institutions, respondents

were presented with statements on 5 point likert scale and asked to rank the statements by

indicating how much they agreed with the statements. The statements were ranked with

ranks ranging from “5- strongly agree” to “1-strongly disagree”. Averages for every




results.

From the results, the respondents were observed to rank the statements on MFI impact

quite lowly with the average score of 50%. Respondents unanimously agreed that MFI had

helped them develop their business with a score of 63%. Respondents strongly disagreed

with the statements on “Am happy with loan repayment conditions given-35%”, “Interest

rate offered was fair-37%” and “It was easy to be given loan-40%”.


Figure 4. 6: If you have ever applied for a loan for your business from microfinance,

please rate the following statements.

Across the gender, male respondents were observed to rank most of the statements higher

than their female counterparts. Great discrepancies were not observed across income level.

Table 4. 3: If you have ever applied for a loan for your business from microfinance,

please rate the following statements

Total

Gender

Monthly Level of income

(“000”KSHs)

Male Female 10 10 -20 20-30 30-40 40

It was easy to be given loan 2.01 1.67 2.50 2.00 1.97 2.03 2.03 2.00

The criteria used by MFI in offering

loans is fair 2.73 2.89 2.49 2.73 2.68 2.76 2.58 3.03

The criteria used by MFI is easy to

be met 3.07 3.00 3.16 3.06 3.14 3.15 2.94 3.00

I can conclude that MFI has helped

me in developing my business 3.13 3.44 2.67 3.14 3.12 3.12 3.16 3.06

I Would like to obtain another loan

if need be from MFI 2.93 3.11 2.67 2.95 2.94 2.94 2.88 2.94

35%

37%

40%

55%

59%

61%

63%

0% 10% 20% 30% 40% 50% 60% 70%

Am happy with loan repaymentconditions given

Interest rate offered was fair

It was easy to be given loan

The criteria used by MFI in offeringloans is fair

I Would like to obtain another loan ifneed be from MFI

The criteria used by MFI is easy to bemet

I can conclude that MFI has helped mein developing my business

Mean Score=50


Am happy with loan repayment

conditions given 1.74 1.78 1.68 1.73 1.71 1.76 1.73 1.78

Interest rate offered was fair 1.87 1.89 1.84 1.87 1.91 1.87 1.82 1.86

To assess impact of microfinance institutions, respondents were presented with statements

on 5 point likert scale and asked to rank the statements by indicating how much they

agreed with the statements. The statements were ranked with ranks ranging from “5-

strongly agree” to “1-strongly disagree”. Averages for every statement were calculated

and the general average score evaluated. Scores were also converted to percentages for

easy interpretation. It is observed that the scores were also distributed across gender of the

respondents and level of income to provide comparative results.

Respondents were observed to rank averagely most of the statements with an average

score of 55%. Respondents agreed with the statements; “Reasonable total time taken to

complete a transaction-73%” and “Staff knowledge of products and services-65%” on the

other hand the respondents disagreed with the statements; “Before any loan is given this

organization conducts analysis of the viability of the business-40%” and “Trainings are

provided to customers geared towards increasing their knowledge on available products

and services-47%”.


Figure 4. 7: How do you agree with the following statements about your

microfinance?

Across the gender, female respondents were observed to rank most of the statements

higher than their male counterparts. Great discrepancies were not observed across income

level.

Table 4. 4: How do you agree with the following statements about your

microfinance?

Total

Gender


(“000”KSHs)

Male Female 10

10 -

20

20-

30

30-

40 40


Before any loan is given this

organization conducts analysis of the

viability of the business

2.00 1.78 2.32 1.98 2.03 2.04 1.94 2.00

Business analysis done for customers is

informed by organization objectives 2.74 2.56 3.01 2.74 2.83 2.78 2.76 2.47

Trainings are provided to customers

geared towards increasing their

knowledge on available products and

services

2.33 2.56 1.99 2.33 2.23 2.42 2.18 2.56

The organization has a structured way

for evaluating training 2.67 2.89 2.34 2.68 2.62 2.69 2.60 2.81

Customers do value training they

receive in this organization 2.34 2.22 2.51 2.34 2.37 2.31 2.45 2.14

Training done to this organization is

geared towards meeting customer needs 2.67 2.44 2.99 2.64 2.74 2.72 2.60 2.64

After training, the organization is

geared towards meeting customer needs 2.40 2.22 2.67 2.39 2.38 2.41 2.46 2.36

Within the organization there is an

enabling environment for transfer of

training to thrive

2.93 2.44 3.64 2.92 2.97 2.96 2.96 2.81

There is reliable or efficient Service at

the counter, dependable for solutions 2.74 2.56 3.00 2.73 2.80 2.73 2.73 2.67

Friendliness of the Counter staff,

approachable for solutions 3.01 2.89 3.19 3.00 2.98 2.94 3.25 2.81

Politeness of the Counter staff, listens

or understands needs 3.13 3.22 3.00 3.12 3.17 3.22 3.01 3.14

Reasonable total time taken to

Complete a transaction 3.67 3.89 3.34 3.65 3.66 3.68 3.69 3.67

Staff knowledge of products and

services 3.26 3.33 3.16 3.26 3.20 3.21 3.28 3.47

4.5 Strategies employed by the microfinance institutions

To assess strategies employed by the microfinance institutions, respondents were

presented with statements on 5 point likert scale and asked to rank the statements by


indicating how important the statements were. The statements were ranked with ranks

ranging from “5- most important” to “1-not important at all”. Averages for every




results.

Respondents rated most of the statements a very important with the general average of

91%. Efficient telephone services (95%) and receiving quick and efficient counter service

(93%) were ranked as the most important factors. The least in importance acoording to the

respondents were “Being greeted by friendly and Courteous staff-87%” and “Privacy for

discussing private matters-88%”.


Figure 4. 8: How important are the following statements in relation to MFI

Great discrepancies in responses were not observed across gender and monthly income.

Table 4. 5: How important are the following statements in relation to MFI

Total

Gender


(“000”KSHs)

Male Female 10 10 -20 20-30 30-40 40

Being greeted by friendly and

Courteous staff 4.34 4.22 4.50 4.33 4.34 4.32 4.37 4.31

Receiving quick and efficient

Counter service 4.67 4.56 4.83 4.65 4.68 4.69 4.64 4.69

Having a clean and tidy

environment 4.53 4.67 4.34 4.53 4.49 4.54 4.57 4.56

Having staff available to answer

questions 4.60 4.67 4.50 4.60 4.63 4.60 4.58 4.56

Having information on products

and services available 4.54 4.44 4.67 4.54 4.57 4.53 4.51 4.53

87%

88%

91%

91%

91%

92%

92%

93%

95%

82% 84% 86% 88% 90% 92% 94% 96%

Being greeted by friendly and Courteousstaff

Privacy for discussing private matters

Having a clean and tidy environment

Publication of service charges

Having information on products andservices available

Having staff available to answer questions

Staff addressing you by name

Receiving quick and efficient Counterservice

Efficient telephone services

Mean score=91%


Privacy for discussing private

matters 4.40 4.44 4.33 4.40 4.40 4.42 4.36 4.42

Efficient telephone services 4.73 4.78 4.67 4.75 4.74 4.73 4.73 4.69

Staff addressing you by name 4.60 4.67 4.50 4.60 4.60 4.58 4.63 4.58

Publication of service charges 4.53 4.56 4.50 4.53 4.51 4.58 4.49 4.58


CHAPTER FIVE

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction

In this chapter, key findings of our study have been discussed. In addition conclusions

from the main findings have drawn and recommendations made. The goal of this research

was to study the microfinance awareness and impact in Kenya. The research was guided

by four objectives including: To determine the level of awareness to microfinance among

Nairobi County residents; To assess the level of development of microfinance institutions

within Nairobi County; To assess the impacts of microfinance to Nairobi County residents

and To determine the strategies employed by the microfinance institutions in Nairobi

County to meet their objectives.

5.2 Summary of major findings

Summary of the key findings have been discussed in the following subheadings:

5.2.1 Awareness to microfinance

Most of the study participants were poor people who reported to be a monthly income of

less than ten thousands Kenya shillings. Most of the participants reported to have ever

applied for a loan from MFI to finance their businesses. These results are consistent with

those of Gertler (2009) who found out that microfinance institutions target poor

individuals whose management of livelihood related to resource allocation, uncertainties

and risks cannot be completely separated from their decisions about their household’s

production. Results also revealed that most of the study respondents obtained financial


services from more than one MFI. This results contradicts those from Shahidur(1998),

who found out that most of the beneficiaries of MFI were loyal to one MFI. From these

results respondents were observed to be aware of the existence of MFI and their benefits

towards improvement of living standards especially of the poor members of the society.

Since microcredit programs from microfinance institutions are able to reach the poor at

affordable cost, the programs are in a position to ensure that the poor become self-

employed. From the results almost three quarters of the respondents were in business or

farming and were assessing the MFI services. This result is in agreement with the findings

of Yunus (1983) who reported that microcredit services are supported by microfinance

institutions so as to enable the poor access institutional credit hence playing an important

role in alleviating poverty.

However, the study participants reported dissatisfaction with MFI services. These results

contradicts those of Thailand, Kaboski and Townsend (2005) who found out that majority

of the MFI customers were satisfied with the services rendered when they evaluated the

impacts of microfinance institutions in rural Thailand.

5.2.2 Development of microfinance institutions

Respondents agreed with the statement that they were served on a first come basis at their

MFI and the service provider made eye contact whenever they served them. These results

are consistent with those of Karlan & Zinman (2009) who found out that MFI treated their

customers with a lot of respect to earn their loyalty. Contrary, the respondents disagreed to


the statements: - services provider greeting them before service; service provider smiling

at them; being very satisfied with counter services and the service providers displaying

name tags at work. These results contradicts the findings of Banerjee (2010) who found

out that MFI service providers were trained on handling their customers with a lot of

courtesy.

5.2.3 Impacts of microfinance

Most of the respondents agreed to conclude that MFI has helped them in developing their

business. These results are in agreement with those of Ghalib (2007) who observed that all

microfinance program targets one thing in general; human development that is geared

towards both the economic and social uplift of the people they cater for. Most of the

respondents also agreed to the fact that the criteria used by MFI are easy to be met. This is

consistent with Hossain (1988) findings that MFI procedures are simple and customer

friendly.

Most of the respondents disagreed with the statements that it was easy to be given loan

from MFI which concurs with Mushimiyimana (2008) who observed that lack of collateral

and high interest rates are an impediment to access to loans from Micro finance

institutions by the majority. Respondent who had borrowed from MFI in the past

disagreed to being interested in obtaining another loan if need be from MFI. This is in

disagreement with Mushimiyimana (2008) who found out that those who secured funds

from such institutions spent bulk of their returns on investment in paying the cost of


capital, thus leaving them with none or little savings for reinvestment which makes them

borrow again and again.

Respondents disagreed with statement that interest rate offered by MFI was fair. In

addition most of the respondents argued that they were not happy with loan repayment

conditions given by the MFIs. These results contradicts findings of Olaitan (2001) and

Akanji (2001) who found out that products and services that make microfinance

institutions different from large financial institutions included increased provision of

credit, increased provision of savings, repositories and other financial services to low

income earners or poor households at affordable interest rates and friendly repayments

conditions.

5.2.4 Strategies employed by the microfinance institutions

Respondents viewed efficient telephone services, receiving quick and efficient counter

service, having staff available to answer questions, staff addressing you by name,

publication of service charges and having information on products and services available

as very important strategies employed by MFI. This results are consistent with UN

(20005) findings that in many cases, basic business skills accompany the provision of

micro loans to improve the capacity of the poor to use funds.

Most of the respondents did not value Having a clean and tidy environment and Privacy

for discussing private matters as strategies employed by MFI which was consistent with


Anandet.al. (2005) findings that most MFI interact with hundreds of customers daily

making privacy for each of the customer a challenge.

5.3 Conclusion

From the above findings the following conclusions were arrived at:

Poor people often had the perception that they do not have opportunities to influence their

inferior situation; however micro-finance with neo-liberal priorities has given them self-

confidence and also concrete tools to improve their lives. On the other hand, MFIs

approach is focused on individual poor entrepreneurs who to some extent have enabled

governments, NGOs and other responsible agents escape their duties and shift the

responsibility onto the MFIs. MFIs typically focus on people’s individual aspects, such as

engagement in economic activities, productivity and individual choice which has

empowered the poor members of the society.

The expansion of the informal sector cannot continue infinitely, and not all people are able

to be entrepreneurs. A sound national economy requires also the formal sector of the

economy or the traditional industrial sector. Micro-finance cannot solve all the problems

women and micro-entrepreneurs in the informal sector face. Some of these problems stem

from more global socio-economic problems and inequalities. There are reasons for

poverty both on the micro- and the macro-levels. Thus, eradicating poverty requires both

micro- and macroeconomic measures. Micro-finance is a micro-economic measure; in this

study macro-economic measures were not considered. On the micro-level micro-finance

has some advantages compared to more traditional and welfare-oriented development

intervention measures.


A micro-finance programme based on explicit empowerment strategies can empower both

women and men by giving them resources for developing their work and enterprises

towards a means of liberty and self-fulfilment. The policies of developing micro-finance

and the informal sector should have a gender perspective and the gender impact should be

studied. Even though the informal sector has been a form of exploitation or a feature of an

unsound economy, for the poor it provides opportunities and often their only source of

income. Thus governments should promote these opportunities and struggle against the

exploitative features of the informal sector.

Furthermore, results of this research portray that a significant portion of the respondents

deem the interest rate of micro-credit is reasonable despite the fact that the interest rate of

micro-credit is higher than commercial banking. Yet microfinance is becoming popular

day by day among the poor people. The major reasons that can contribute to such

popularity of MFI can include the fact that all poor people can get loan from MFIs without

any collateral. In addition, the loan taking procedure is less complex than that of

commercial banks. Furthermore, from the findings most of the respondents were not

aware of the interest rate of traditional banking system owing to not having easy access to

information. What’s more! They cannot compare the interest rates between the MFIs and

conventional banks because of lack of education. Another underlying reason is that the

services of conventional banking are not available in the villages.

To sum up, it can be noticed from our overall analysis that there is significant impact of


microfinance activities on improvement of the living standard of the family not only in

economic term but also in social term. Amazingly, the relation between different factors of

society and family became evident and clear, which were being neglected and not thought

about during the period of existence of only conventional banking system. From our study

and research, we have come to the conclusions that there is a noticeable and positive

impact of microfinance activities on the living standards, empowerment and poverty

alleviation among the poor people in the society.

5.4 Recommendations

From the study results the following recommendations were drawn:

1. As MFIs grow and some of them become part of the regulated financial system,

banking authorities are facing the need to learn more about this important financial

activity. In order to develop appropriate norms and regulations, policy makers

must understand how microfinance differs from conventional banking and, in order

to supervise microfinance effectively, bank supervisors need specialised training

on assessing the performance of microfinance institutions (MFIs).

2. There is a geographical constraint which needs to be overcome, especially in rural

areas. The physical infrastructure in the rural areas is perhaps the most critical

support structure currently lacking. Groundwork has been done by some MFIs to

think through what the main enabling factors are, one of them being enhancement

of the payment systems in rural areas.

3. Access to capital is a major gap. The Central Bank does not recognize the loan


book as collateral. Commercialisation moved the industry but brought with it its

own problems (e.g., donor credit programs that were localised and are in some

ways on their own with few grants available and without capital to grow). Most

MFIs will be unable to raise the KSH100 million minimum capital requirement to

become a deposit taking institution under the new Microfinance Bill and it will not

be easy to meet supervision standards. Donors could help develop the local capital

market for microfinance, including linking MFIs to banks so that they are not all

dependent on deposits for capital.

4. The lack of adequate MIS and sector data. Most MFIs have just gone through or

are going through an exercise of improving their MIS systems, some with more

hiccups than others. AMFI intends to undertake initiatives to fill the void of the

lack of information on the sector, including basic demand and supply estimation.

5. Credit referencing would strengthen the sector and is definitively needed. Survey

findings indicate that almost all microfinance clients have loans from other MFIs

as well. Although this happens in some other markets, the prevalence and scale is

particularly high in Kenya.

5.5 Areas for further research

The current study was based on small sample size taken from only Nairobi County.

Therefore, the results cannot be generalized to other counties of Kenya especially in the

analytical terms. Further research done on a bigger scale with large sample size could shed

light on how microfinance activities affect the average living standard of people of Kenya,


analytically.

The current study did not consider the reasons of motivation to join the microfinance

program. Another area that has not been investigated is the difficulties that the borrowers

face to repay the loan. These areas deserve to be studied by future researchers in the field.

Future research should also undertake an in-depth study on the microfinance sector,

including a formal estimation of total supply and demand estimation for the whole

microfinance sector (enterprise and non-enterprise). Results from such a study shall assist

the various public agencies involved to develop adequate prudential norms and

enforceable guidelines as well as reporting procedures and help them liaise with MFIs.


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APPENDIX: QUESTIONNAIRE

General Questions

1. What is your gender?

a) Male [ ]

b) Female [ ]

2. Your age is between

a) 18-35 [ ]

b) 36-45 [ ]

c) 46-60 [ ]

d) Above 60 [ ]

3. Where do you work?

a) Employment [ ]

b) Farming [ ]

c) Trading [ ]

d) Artisan works [ ]

e) Others (Please specify)………………………..

4. Have you ever applied for a loan (“borrowed capital”) to finance your business?

a) Yes [ ]

b) No [ ]

If yes where?

a) Microfinance institution [ ]

b) Bank [ ]

c) others (specify)………………………….

Level of awareness of microfinance

5. What is the name of your microfinance institution?


6. Do you obtain financial services from any other microfinance institution?

a) Yes [ ]

b) No [ ]

7. Overall satisfaction with service provided by your microfinance institution?

a) Very dissatisfied [ ]

b) Dissatisfied [ ]

c) Neutral [ ]

d) Satisfied [ ]

e) Very satisfied [ ]

8. Observed service improvement in your microfinance institution in past 5 months?

a) Much better [ ]

b) Slightly better [ ]

c) Almost same [ ]

d) Slightly worse [ ]

e) Much worse [ ]

Level of development of microfinance institutions

9. In your last visit to your microfinance, how do you agree with the following? where (5-

Strongly agree, 4-Agree, 3-Neutral, 2-Disagree and 1-Strngly disagree)

1 2 3 4 5

a) I was served on a first come basis

b) The service providers displayed name tags

c) I was addressed by my name

d) The service provider made eye contact

e) I was greeted by the provider

f) The service provider smiled at me

g) I am very satisfied with counter satisfaction


Impacts of microfinance

10. If you have ever applied for a loan for your business from microfinance, please rate the

following statements. (5-Strongly agree, 4-Agree, 3-Neutral, 2-Disagree and 1-Strngly

disagree)

11. How do you agree with the following statements about your microfinance? (5-Strongly agree,

4-Agree, 3-Neutral, 2-Disagree and 1-Strngly disagree)

1 2 3 4 5

a) It was easy to be given a loan

b) The criteria used by MFI in offering loans is fair

c) The criteria used by MFI is easy to be met

d) I would conclude that MFI has helped me in developing my business

e) I would like to obtain another loan if need be from MFI

f) Am happy with loan repayment conditions given

g) Interest rate offered was fair

1 2 3 4 5

d) The organization has a structured way of evaluating training.

e) Customers do value training they receive in this organization

f) Training done to this organization is geared towards meeting customer

needs

g) After training, the organization is geared towards meeting cutomer needs

h) Within the organization there is an enabling environment for transfer of

training to thrive

i) There is reliable or efficient service at the counter (dependable for

solutions)

j) Friendliness of the counter staff (approachable for solutions)

a) Before any loan is given this organization conducts analysis of the viability

of the business

b) Business analysis done for customers is informed by organization

objectives

c) Trainings are provided to customers geared towards increasing their

knowledge on available products and services

k) Politeness of the counter staff

e) Reasonable total time taken to complete a transaction

f) Staff knowledge of products and services


Strategies employed by the microfinance institutions

12. How important are the following statements in relation to MFI? (5-Most important, 4-

Important, 3-Neutral, 2-Not important and 1-Not important at all)

1 2 3 4 5

g) Efficient telephone services

h) Ability of branch to solve errors and complaints

i) Staff addressing you by name

j) Publication of service charges

e) Having information on products and services available

a) Being greeted by friendly and courteous staff

b) Receiving quick and efficient counter service

c) Having a clean and tidy environment

d) Having staff available to answer questions

f) Privacy for discussing private matters

Dissertation on the Impacts of Microfinance in Kenya final report

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