Factors Affecting the Growth of Microfinance Institutions

Factors Affecting the harvest-festival of Micro pay InstitutionsCHAPTER ONE accounting entry1.0 IntroductionThis chapter introduces the problem statement which the look proposes, the clinicals that the enquiry seeks to address, the prosecutionions that it seeks to answer and the clothe steriliseting of the look as well as the signifi outho workce of the development.1.1 Background of the readingThere be numerous types of micro pay institutions depending on structure, function or philosophy. In numerous instances, the microfinance market is segmented according to the guests involved i.e. micro-attempts, women, agriculturalists and so on. A main goal of many micro finance institutions is to fork up sustainable micro finance facilities to the curt to drive income generation and reduce pauperisation (Baumann, 2001). The genesis of this is that the misfortunate leave push through and through glide slope to pecuniary serve, impute and nest egg facilities.The goal of microfinance institutions as victimization organizations is in like manner to service the monetary require of unserved markets as means of meeting development objectives (Ledgerwood, 1999). The development objectives gener all toldy imply reduction of destitution, potency of the poor and other disadvantaged aggroups, employment knowledgeability, development of rising professiones and dish uping existing stockes to grow by diversifying their activities. In a world bank study of alter for menial and micro endeavour projects, three objectives of microfinance institutions that were most(prenominal) frequently cited were, to create employment and income opportunities through the creation and expansion of micro enterprises, addition the produceivity and incomes of vulnerable groups especially the poor and women, as well as reduce pastoral families dependence on drought prone crops through the diversification of their income generating activities (Webster et al, 1996).Th e microfinance revolution was introduced into the development economic science argonna slightly more than two decades ago. However, the widespread adoption of the microfinance case did not occur until the primordial 1990s. Since the mid 1990s, microfinance programmes and institutions contain become an progressively important component of strategies to fight micro-enterprise development in developing countries and specifically to reduce meagreness (Colin, 2006).Microfinance was defined by the United Nation in 2005 as basic monetary serve, like trust, savings and insurance, which give the great unwashed an opportunity to borrow, save, invest and protect their families a acquirest risk (UN, 2005). This definition was practised in the context of microfinance and the Millennium Development Goals (MDGs). It was thusly observed that microfinance promotes not precisely course reference, but in like manner inculcates savings that accumulate assets for poor people.Besides the major attributes of microfinance, namely commendation and savings, the concept of joint or sh ard indebtedness has been highlighted by other interrogationers. correspond to Harper (2003), the concept of microfinance originated in Bangladesh, near 1976 through the pioneering experiment by Dr Muhammad Yunus, who was thus a Professor of Economics. The primordial difference between microfinance and the conventional course credit disbursal mechanism lies in the joint liability concept. Whereby a group of individuals get together to con abidanceation an association of persons called ego Help Groups (SHG) of which all the members undergo a facts of life programme on the basic bring procedures and borrowing requirements. Loans to individuals within the Self help groups are approved by the others members of the group, who are to a fault jointly responsible for its repayment in case of default. The members of the self help group save regularly through monthly contributions to t he groups fund.Formal microfinance add has been in existence in Kenya since the 1950s through the knock Loan bill Scheme developed by the colonial regime (Hondo, 2001). After freedom in 1963, the Kenyan organization went on to provide support countryfied credit programs as a development strategy. There are many organizations both unaffixed and formal which also offer these monetary serve. The informal channels are characterized by lending family, friends and neighbours. Rotating savings and credit associations (ROSCAs) are also very common. They hold regular meetings and each member contributes a fixed amount and an agreed amount is given to one member at a time (CBS et al, 1999).Commercial banks traditionally lend to fair and large enterprises which are judged to be creditworthy and tend to avoid doing business with the poor and the micro enterprises because the associated costs and risks are considered to be relatively high. Microfinance institutions (MFIs) aim there fore become the main source of funding for micro enterprises in Africa and in other developing regions (Anyanwu, 2004).Microfinance institutions turn out become an important indorser to the Kenyan parsimony. The orbit contributes to the national objective of creating employment opportunities, training entrepreneurs, generating income and providing a source of musical accompaniment for the majority of low income households by financing the businesses that they run. The government and its development partners return spent considerable amount of resources in crafting policies and programs to manufacture the outdevelopment of micro finance institutions. However results to date lose been mostly unsatisfactory (Gichira, 1992).1.2 PROBLEM STATEMENTProvision of microfinance services that can have a sustainable impact on clients well being and cut vulnerability is not an easy endeavour, microfinance institutions face many risks that can adversely affect their long term ontogenesi s, operational and financial sustainability (Jeyanth, 2003).With regard to sustainability and growth, a study conducted by Omondi (2005) revealed that few microfinance institutions had attained sustainability and growth and had fleshy financial cost control and good loan portfolios. A good reduce of microfinance institutions had not attained financial stableness and growth and were relying on changesidies from donors.Growth in the microfinance industry may be characterized by an increase in the breadth and depth of out move over of existing microfinance institutions, heightened argument among microfinance service providers, diversification of product and service offerings, and the presence of private and commercial funds for microfinance activities.There is junior-grade reading on a standard blueprint to show us how to achieve these characteristics and to visualize the growth of the microfinance industry. To a large extent, the growth should be market driven and is yet to b e achieved (Amando, 2005).Tilman, (2006) highlighted that although microfinance activity has increased advantageously in recent historic period, solid growth was wishing and microfinance institutions are wind slightness far from touching a significant portion of the population that lacks get at to formal financial services.Further, studies conducted in Kenya have shown that even though the microfinance vault of heaven has been growing over the past few years, majority of the individual institutions have not experienced much growth. Moreover much of growth of the microfinance institutions has been natural (G.O.K 1997). It is therefore against this background that the aim of the study is to assess factors affecting the growth of micro-finance institutions in Kenya.1.3 RESEARCH OBJECTIVE1. To assess the factors affecting the growth of microfinance institutions in Kenya.1.4 RESEARCH QUESTIONThis research seeks to answer the following question1. What are the factors affecting th e growth of microfinance institutions in Kenya?1.5 SIGNIFICANCE OF THE cogitationThis study depart benefit a summate of groups among them managers of microfinance institutions who lead use the study to gain an insight into factors that affect the growth of their businesses and how. This will in turn help them develop modalities to mitigate those factors that adversely affect the business and enhance those that promote growth of their microfinance institutions.The government too will benefit from this study. The government will use the findings of this study to craft becharm policies that would promote the growth and stability of the microfinance institutions.Further the findings will help the Kenya governments development partners, NGOs, conferrer communities and other stakeholders to effectively and efficiently print their assistance to the microfinance sector.Moreover, microfinance strategists, policy makers, aspiring microfinance researchers, university and college students pursuing a career in entrepreneurship or microfinance spheres will also benefit.1.7 SCOPE OF THE STUDYMicrofinance institutions have a wide coverage in both homespun and urban areas of the country. This study focuses on microfinance institutions operating in Kenya. The study therefore covers the registered institutions.CHAPTER TWOLIERATURE REVIEW2.1 IntroductionThis chapter presents a review of various books materials related to the study. It extensively looks at the factors that affect the growth of microfinance institutions. This review also highlights past literature that relates to this study, summary of gaps to be modify by the study, precedent research findings, various make-ups and government publications on the subject.2.2 Growth in the microfinance industryAmando, (2005) observed that growth in the microfinance industry may be characterized by an increase in the breadth and depth of outreach of existing microfinance institutions, heightened competition among microfin ance service providers, diversification of product and service offerings, and the presence of private and commercial funds for microfinance activities.Outreach and sustainability are two critical objectives for microfinance institutions (MFIs). As defined by Christen et al (1999), outreach is the ability to provide quality financial services to large numbers of people, especially the very poor. Outreach is also an indicator of the institutions complaisant agency to scale up and provide services to as many people as possible. Sustainability, in contrast, requires operating at a take of profitability that allows sustained service delivery without dependence on subsidized inputs. This represents the institutions commercial strategy. For microfinance institutions growth is the process of balancing the objectives of outreach and sustainability balancing the social mission and the commercial strategy.Despite the increase in number of MFIs in operation, their growth is constrained, espe cially in rural areas, because of their limited resource grounding and lack of institutional capacity to provide a wide range of financial services. MFI outreach is predominantly through group based programmes, which have limited spongelike capacity for financial resources. The focus of most microfinance institutions is lending to the informal economy MSEs (Jua Kali) and often women who are conducting trade in clear goods or providing services (Stevenson, 2007).Craig (1997) on the other hand observed that many microfinance institutions experience cycles of growth followed by periods of consolidation where they are forced to solve operational challenges such as decline in portfolio quality, client desertion, untrained and burned-out staff, and administrative challenges including loan processing and information systems. In addition, many smaller credit programs never experience growth because they lack the resources technical and or financial and a commitment to the financial syst ems approach.In Tanzania, a survey of 136 small firms found that 63 per cent of them consider toughies in accessing finance from big financial institutions as the major constraint to their growth (Satta, 2003).Even though micro finance bodies are meant to serve those who have been left-hand(a) out of the formal banking system, there is a growing concern that many Kenyans lifelessness lack credit facilities. Statistics from Association of Microfinance Institutions (AMFI) indicate that over 60 percent of Kenyans lack access to formal banking services. This is because most micro-credit companies are concentrated in cities and towns. intimately of the people who lack credit are in rural areas. The question now is how to facilitate growth of microfinance institutions to cover all areas (Tilman, 2006).2.2.1 Constraints liner micro finance institutions.The microfinance sector in Kenya has approach a number of constraints that contract to be addressed to enable them to improve outr each and sustainability and grow. The major cheque to the development of microfinance business in Kenya has been until lately poor legislation and set of regulations to guide the operations of the microfinance sub-sector. This has contributed to a large extent to the poor doing and eventual demise microfinance institutions because of a lack of appropriate regulatory oversight. This has also had a bearing on a number of other constraints faced by the industry, namely wide diversity in institutional form, misfortunate governance and management capacity, limited outreach, unhealthy competition, limited access to funds, hostile image and lack of functioning standards, Poverty reduction strategy paper (PRSP 1999).Providing financial services to poor people is costly, in part, because they have small amounts of money, often live in urban slums and remote rural setups, and seldom have documented credit histories. During the past decade, microfinance institutions (MFIs) started address ing this problem by developing techniques that permit safe lending in the absence of borrowers credit history. Still, MFIs comm all charge relatively high interest rates to cover the administrative costs of handling small transactions for dispersed populations (Gaulum, 2006).Mutua et al (1996) highlighted that a problem facing NGOs running microfinance institutions is the ability to balance traditional offbeat objectives with the goals of maintaining sustainable credit programmes. This is because when credit policies are based on addition rather than financial considerations, inefficiency and ineffectiveness can follow which hampers sustainability and growth of microfinance institutions.A study by Anyanwu (2004), on Microfinance institutions policy practice and potentials in Nigeria revealed that the sub sector in Africa faces a number of challenges which imply the urgent access to mass medium to long term sustainable sources of funding.2.2.2 Importance of the microfinance secto rThe number one attribute that distinguishes microfinance institutions from others is what has come to be called its dual mission of balancing a social agenda or social impact with its financial objectives. virtually microfinance institutions (MFIs) are institutions that combine a social development mission preparation of financial services to the lowest income population possible with a financial objective that drives the institution to achieve self sufficiency and thereby win sustained service delivery without dependence on subsidies (Humphrey, 2006).The government appreciates the brilliance of microfinance institutions in the development of SMEs. In G.O.K (2005) policy paper the government sates lack of access to credit is a major constraint inhibiting the growth of the entrepreneurs. The same paper get ahead states that the government recognizes that access to credit and financial services is appoint to the growth and development of any enterprise and more so the SMEs The government therefore has its own programmes and projects targeting the sector. Some of them are the Kenya Industrial Estates, the Joint Loan board both under the Ministry of Trade and Industry and the recently instituteed Kshs. l billion youth fund under the Ministry of jejuneness Affairs in the office of the Vice President.According to an evaluation study on microfinance programmes in Kenya Supported through the Dutch co-financing programme, (Hospes 2002) concludes that the impact of the financial service readying by Kenya Women Finance Trust (KWFT) at the enterprise level is positive in many respects Enterprise surface and employment generation, both the quantitative and qualitative assessment show that the readying of loans by KWFT has helped women to keep them going even in the most elusive times, as well as contribute to providing continued employment to the women and their families, and to increase the number of employees in their business, either on temporary or perp etual basis.It is now widely acknowledged that the MFIs, with their innovative program packaging, have blown-up the financial market, increased the volume of household financial savings and induce financial independence among rural families (Sajjad et al 1999).According to the Poverty lessening Strategy Paper (PRSP) of 1999, a large number of Kenyans derive their livelihood from small and micro-enterprises. Therefore, development of this sector represents an important means of creating employment, promoting growth, and reducing meagerness in the long term. However, in spite of the importance of this sector, experience shows that provision and delivery of credit and other financial services to the sector by formal credit institutions, such as microfinance institutions has been below expectation. This means that it is difficult for the poor to climb out of poverty due to lack of finance for their productive activities. Therefore, new, innovative and pro-poor modes of financing low income households and SMEs based on sound operating principles take to be developed.The United Nations acknowledges microfinance as a key instrument to achieving Millennium development Goals (MDGs), which seeks to reduce poverty by 2015. They include reducing child mortality by two thirds, eradicating extreme poverty and hunger, achieving universal primary education, promoting gender equality and empowering women, as well as combating HIV/AIDS, malaria and other diseases (UN, 2005).As microfinance institutions in Kenya continue to increase in numbers, their survival in the market economy will greatly be influenced by the impact their products and services have to their recipients. This will include the empowerment of family, generation of income and improvement of welfare, the increase in business performance, training and business skills provided to clients, terms and conditions for loan repayment and servicing among others.Microfinance institutions are critical to Africas quest f or solutions to the continents development challenge. The area of their greatest potential impact, rural Africa, is not only home to the bulk of the continents population, but also the vast majority of Africas poor. MFIs with examples from Zambia, Kenya, randomness Africa, Mali and Zimbabwe, establish a link between MFIs and both poverty eradication and the empowerment and equality of women, two of the major Millennium Development Goals (Kaoma, 2001).Anywanu, (2004) observes that microfinance institutions aim to improve the socio-economic conditions of women, especially those in the rural areas through the provision of loan assistance, skills acquisition, reproductive health care service, adult literacy and girl child education. They also aim to build community capacities for wealth creation among enterprising poor people and to promote sustainable livelihood by strengthening rural responsive banking methodology as well as eradicate poverty through the provision of microfinance an d skill acquisition development for income generation.2.2.3 Promotion of Microfinance institutions growth.As an enterprise grows, different needs arise to correspond with either grade of its development. The level of sophistication of knowledge, skill and attitude change, inputs will vary with this every stage. It should however reflect that the needs are choose driven because they can be correlated with the problems and opportunities that micro financiers face in managing the business (Murumbutsa, 1998).Oikocredit International, a social investor increasingly engaged in microfinance, expressed that channeling commercial roof to microfinance institutions is key in establishing the conditions for sustainability and for the scaling-up of microfinance institutions. Commercial capital pushes microfinance institutions to have more tight financial discipline and management (Amando, 2005).Microfinance institutions in Kenya need to adopt and support to performance standards in their o perations so as to measure and ensure growth. In the Philippines the Central Bank as a member of the guinea pig Credit Council worked very hard in finalizing a set of performance standards that can be used by microfinance institutions across the banking, non-governmental and cooperative sectors to facilitate assessment and evaluation of their performance. The standards go by the acronym P.E.S.O, which stands for Portfolio Quality, Efficiency, Sustainability and Outreach.MFI growth includes diversification, such as the introduction of new financial products, training needs to be intentional to gradually provide staff with new skills, thus increasing their flexibility and productivity. Credit bureaus are useful in reducing risks in lending and in encouraging a more responsible attitude towards credit by borrowers which will ultimately lower delinquency and strengthen the credit and financial system. In addition, the presence of credit bureaus will foster lending to the previously n eglected sector such as the micro, small and medium enterprises due to less reliance on collateral based credit decisions. The other necessary condition is the presence of a comprehensive credit information system. With more and more players engaged in microfinance, the problem of credit pollution and multiple borrowings is also increasing. The sharing and disseminating of credit related information will be able to address this problem (Kitabu, 2007).To be boffo an organization should have special features over and above being new and small in an industry. If any developments have to take place among microfinance institutions then the rate of their growth would depend on accumulation of physical and military personnel capital. This however would require an effective allocation of resources and ability to acquire and hope modern technology (Biggs et al, 1996)Growth of the microfinance sector however, is very much aquiline on a host of factors among them, the policy and regulatory environment, which consists of broad, high level policies that affect the economic and regulatory conditions in which micro finance institutions have to operate. Such are macro-policies for the stabilization and growth of the economy. Other factors include provision of technological capabilities and skills upgrading, competition. These factors promote higher business productivity and growth through improved techniques, and the related introduction of better quality products and services that support the institutions high added value and larger markets. The provision of financial services, technology upgrading, complements the sound effects of a truly enabling policy environment (Ronge, et al, 2002)The government is struggling to thrust the country into a state of economic convalescence by integrating the microfinance sector into the national economic grid, by staidly looking at the potential of the microfinance institutions sectors for driving SMEs, creating employment and econo mic growth, further the Kenya government has taken major steps in the development of this sector by passing a regulatory framework in the form of the micro-finance bill which will enable their registration and regulation of micro finance institutions (Munguti, 2005).For a growing business to continue growing, it has to be a breeding organization that monitors the market and scans the horizon looking for clues or trends. It needs to be proactive by regularly analyzing how it can do better. There may be a tendency in mature MFIs to assume that, because their authentic financial products are so advantageful, they should continue to operate the way they are and just increase the scale of their operations. Successful firms are constantly innovating and upgrading, and they choke a significant percentage of their budget on research and development. Donor organizations should consider how their resources may fund the imagination of microfinance institutions to enhance their growth (Toma sko, 1996).Businesses need to have an effective management information system in place prior to an explosive growth phase to enable it to manage growth. Most emerging firms get into trouble because the management team either does not have the information it needs to make the right decisions or chooses to give notice the information that is available. For microfinance, information is even more important than in most businesses. It is the lifeblood of an MFI. Microfinance relies an information based lending technology, as opposed to commercial banks that use a collateral-based approach. Microfinance information must focus on financial as well as non-financial indicators, such as productivity, efficiency, average loan size, and client retention. The management information system should provide information about factors and forces that need to be monitored closely as well as insights into what should be changed. This early warning system can scan the horizon for trends, and identify th reats and opportunities (Craig, 1997).2.3 compendious and GapFrom literature reviewed the information available indicates that the number of micro finance institutions in Kenya is gradually increasing and dominant market players are growing, most microfinance institutions however register slow growth and further the reasons for this with respect to Kenya are not conclusive.Despite their success so far microfinance institutions only reach a fraction of the estimated underlying demand. There is huge latent demand for micro-credit around the country. Even though micro-finance bodies are meant to serve those who have been left out of the formal banking system, there is a growing concern that many Kenyans still lack credit facilities. This is because despite the growing number of microfinance institutions in Kenya, their outreach is constrained especially in rural areas, the study therefore seeks to establish the factors affecting their growth.Most studies have focused on the small and micro enterprises growth to show how successful they have been after receiving micro-credit, few have tried to analyze the factors affecting the growth of microfinance institutions themselves.Although microfinance activity has grown well in recent years, it is still far from reaching a significant portion of the population that lacks access to formal financial services. Microfinance institutions despite their success over the past few years, have only grown to reach a fraction of the estimated underlying demand, extensive study is yet to be done on factors affecting their growth.RESEARCH METHODOLOGY3.0 IntroductionThis chapter discusses the research method that was applied in carrying out the study. It covers the following areas Research design, target population, sampling design, info consumeion procedure and data analysis.3.1 Research jutThis study adapted a descriptive research design. The research aimed to collect data on the factors affecting the growth of microfinance inst itutions in Kenya. Descriptive research design is used when data undisturbed describes persons, organizations, settings or phenomena. This approach was appropriate because the data tranquil mainly involved descriptions of the variables in the study. This descriptive research design enabled the research capture quantitative data to provide in depth information about the factors affecting the growth of microfinance institutions in Kenya.3.2 sucker PopulationThe target population in this research were microfinance institutions registered and operating in Kenya. There are 56 registered microfinance institutions, this was the group of interest. Questionnaires were administered to finance managers of these microfinance institutions.3.3 Sample functionThe nosecount method was used in this study. In this method of study, all registered microfinance institutions were surveyed. For the purposes of this study all 56 registered microfinance institutions.3.4 Data collection methodsData was collected from microfinance institutions using structured questionnaire.Primary data was collected by use of questionnaire method in this study. Primary data are those which are collected fresh and for the first time and thus happen to be current in character (Kothari, 2004). In this study, the research made use of a questionnaire to solicit ideas related to the research problem from respondents. The questions sought to address the research objective and question related to the study.A drop and pick method was used in administration of the questionnaire.3.5 Data Analysis and PresentationThe results obtained from data collected were summarized under common themes and presented in form of frequency tables, percentages and pie charts. According to Cochran (1989) results from research findings are often presented in these forms. Data was analyzed by frequency distribution and percentages to show the frequency of institutions citing common factors and the percentage of them identifying equal factors affecting their growth. Written explanations are provided to interpret data, to draw conclusions and make recommendations. The purpose was to measure and provide information on factors affecting the growth of microfinance institutions.CHAPTER foursomeDATA ANALYSIS AND PRESENTATION OF RESULTS4.1 IntroductionThis chapter deals with the results and findings of the study. It presents and descriptively analyzes the data self-collected from respondents and summarizes the major findings from the respondents. These responses were analyzed using excel computer package and the results summarized in form of tables, bar graphs and pie charts as appropriate.4.2 Results and Data AnalysisThe primary objective of the study was to assess the factors affecting the growth of microfinance institutions in Kenya. A census was undertaken where all 56 registered microfinance institutions were presented with questionnaires, 34 of the 56 respondents returning their duly filled up questionna ires. This represented a 60.7% response rate which was deemed sufficient for derivations of conclusions viewing the entire population under the study.4.3 General Findings.4.3.1 Years of operationOn the number of years that the organizations have been in operation, the results showed that majority (55.9%) were between 10 and 15 years old since they started operating. 14.7% of the organizations were the oldest being over 15 years old, while 11.8% of the population being the youngest having being in operation for less than 5 years. The remaining 17.6% of the respondent organizations were between 5 and 10 years.4.3.2 node segments.In response to the question regarding to which customer segments the organizations provide microfinance facilities to, 5.9% verbalise they provide services to women, 11.8% indicated micro enterprises, 79.4% provide services to all segments, while 2.9% said the cater for agriculturalists.4.3.3 Client baseFrom this study it was established that 50% of the org anizations that responded had a client base of over 10,000 clients. 32.4% of the microfinance institutions had between 5,000 and 10,000 clients and 17.6% of the respondents indicated having a client base of less than 5,000 customers.4.3.4