IMPACT OF MICROFINANCING ON THE PERFORMANCE OF

SMALL AND MEDIUM SIZED ENTERPRISES (SME’S) IN KISUMU

CENTRAL BUSINESS DISTRICT- A STUDY OF KISUMU LAKE

MARKET.

GROUP MEMBERS

BY:

NAMES REG. NO. SIGN

1. MOHAMMED JAFFER BA/0345/06……………………...2. KENNEDY NYABWALA BA/3150/06………………………3. SANDA DAVID WASONGA BA/3147/06………………………4. ARNOLD MBALANYA

BA/3164/06……………………….5. PATRICK NYIKA BA/3203/07………………………6. JEREMIAH .O. MOKAYA

BA/3149/06……………………….. 7. STEPHEN MWANGI

BA/0216/06……………………….8. ODOTE DENNIS

BA/3197/06……………………….9. ELSA ODENY

BA/3110/06……………………….10.GITU DICKSON GATHU BA/0350/02……………………….

1

A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILMENT

FOR THE DEGREE OF BACHELOR OF BUSINESS

ADMINISTRATION WITH INFORMATION TECHNOLOGY

DEPARTMENT OF ECONOMICS AND BUSINESS STUDIES

FACULTY OF ARTS AND SOCIAL SCIENCE

MASENO UNIVERSITY

FEB 2010

2

DECLARATION

We declare that this is our original work and has not been

presented in any other university or college for

examination/academic purposes.

Signature: …………………….... ……………………

Students: Date

This research project proposal has been submitted for oral

presentation with my approval as the University Supervisor

Signature: ……………………………. ………………………

Supervisor: Mr. Nelson Obange Date

Maseno University

Department of Economics and Business studies

3

TABLE OF CONTENTS

DECLARATION.................................................................................3

DEDICATION....................................................................................4

ACKNOWLEDGEMENT.....................................................................8

ABSTRACT..........................................................................................

CHAPTER ONE...................................................................................

INTRODUCTION.................................................................................

1.1 Research background................................................................

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

1.3 Research Questions...................................................................

1.4 Objectives of the Study.............................................................

1.5 Significance of the Study..........................................................

1.6 Scope of the study.....................................................................

1.7 Definition of key terms.............................................................

CHAPTER TWO..................................................................................

LITERATURE REVIEW.........................................................................

2.1 Introduction...............................................................................

2.2 Theoretical Review...................................................................

2.2.1 Micro credit theory..............................................................

2.2.2 Realities of Microfinance...................................................

4

2.3 Empirical review.....................................................................

2.3.1 Formal Banking in India.......................................................

2.3.2 Grameen Bank in Bagladesh.................................................

2.3.3 Linking Banks with self-help group.....................................

2.3.4 A Pilot proje ct from Indonesia...........................................

2.4 Conceptualization......................................................................

CHAPTER THREE................................................................................

RESEARCH METHODOLOGY..............................................................

3.1 Introduction...............................................................................

3.2 Research Design........................................................................

3.3 Research Area...........................................................................

3.4 Target Population......................................................................

3.5 Sample and Sampling techniques.............................................

3.6 Data Collection Techniques......................................................

3.6.1 Questionaire and schedulle method.......................................

3.6.2 Interviews methods...............................................................

3.6.3 Observation methods............................................................

3.6.4 Documentary Reviews.........................................................

3.7 Data Analysis and Presentation ..................................................

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CHAPTER FOUR.................................................................................

DATA ANALYSIS AND FINDINGS........................................................

4.1 Introduction...............................................................................

4.2 Business Management...............................................................

CHAPTER FIVE...................................................................................

CONCLUSIONS AND RECOMMENDATION.........................................

5.1 Summary of the Findings..........................................................

5.2 Conclusion.................................................................................

5.3 Recommendations.....................................................................

5.4 Suggestions for further research................................................

REFERENCES......................................................................................

APPENDICES......................................................................................

Appendix 1: Questionnaire.............................................................

6

DEDICATION

We dedicate this project to our family members who have always

stood with us and to the entire body of Department of Economics

and Business Studies for the academic inspiration.

7

ACKNOWLEDGEMENT

We acknowledge our supervisor Mr. Nelson Obange who guided

us throughout the research period.

We also acknowledge the spirit and willingness in terms of

cooperation of our esteemed respondents to our research. Without

your cooperation our research could not have been successful.

Finally, we thank the Almighty God for the life and strength He has given unto us all through. Amen

8

LIST OF ABBREVIATIONS

TERMINOLOGY OF TERMS

SME’s :Small and Medium size Entrepreneurs

MFI :Micro-financial Institution

SHG :Self Help Group

NGO :Non Governmental Organization

GB :Gremeen Bank

DCCB :District Central Co-op Bank

UCCS :Urban Credit Co-op Society

UCB :Urban Co-op Bank

HFI :Housing Finance Institution

RDB :Rural Development Bank

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CHAPTER ONE

1.0 INTRODUCTION

This chapter provides the background to the study. It details the

problem statement, research objectives and questions and rationale

for the study.

1.1 RESEARCH BACKGROUND

Micro-finance concept has operated for centuries in different

parts of the world. Notable in Indonesia, “cheetu” in Srilonka,

“tontines in Ghana west Africa and “pasanaku” in Bolivia.

One of the earliest and longest serving micro-credit organization

providing small loans to rural poor dwellers with no collateral is

the Irish loan Fund system initiated in the early 1700”s by

Jonathan swift. His idea began slowly in 1840s and became a

widespread institution of about 300 branches all over Ireland in

less than one decade. The principal purpose was to advance small

loans based on some trust for short periods. The iris loan fund

attracted about 20 percent of all Irish SME’s leading to growth of

small and medium sized enterprises every year.

In the 1800”s various types of longer and more formal savings

and credit institutions began to emerge in Europe organized

primarily among the rural and urban people. These institutions

10

were known as people’s banks credit unions and savings and credit

cooperative. The credit unions and cooperatives were motivated by

concern to assist the rural population to break out of their

dependence on money leaders and to improve their welfare.

From 1870 the unions expanded rapidly over a large cooperative

movement and quickly spread to other countries in Europe and

North America and eventually supported by the cooperative

movement in developed countries and donors and also to

developing countries. In the early 1900”s various adoptions of

these models began to appear in parts of rural Latin America.

While the goal of such rural finance intentions was usually defined

in terms of modernizing the agricultural sector, they usually had

two specific objectives: first, Increase the commercialization of the

rural sector and second, Increase the investment through credit. It

is against such background and the second objective that this study

sought to investigate the impact of micro financing on performance

of SMEs in Kisumu.

The micro finance industry in Kenya has experienced rapid growth

over the years in an attempt to meet the large demand from the

estimated 38 percent of Kenyans lacking access to financial

services (www.kenya bureau of statistics.com).The demand for

micro-finance service in Kenya is high yet the industry is only able

to meet about 20 percent of their demand because of lack of

11

financial resources and the capacity to assess risk process and

monitor loans.

SME’s are dynamic entities where some grow into larger

enterprises, some stabilize without changing the scale of operation,

while others disappears (Bhalla A.S,1992). Micro financial sectors

in Kenya have rapidly expanded as a source of credit for small

scale businesses. An example in Kenya is Faulu Kenya which is

one of the largest MFI’s (MFI) in Kenya. Initially Faulu Kenya

focused on micro enterprise lending in Mathare slums of Nairobi.

However, over the last 17 years, as lending methodologies and

systems were improved, Faulu Kenya grew to become a company

with 31 branches and a presence in most districts of Kenya

The objective of this Institution is to support SME’s in Kenya as it

transforms from a credit only institution to a regulated deposit

taking institution. This transformation is characterized both by the

development of a broader product offering as well as by the

formalization of the shareholding structure and regulatory

framework the institution adheres to. The addition of liability

products will provides secure savings to SMEs as well as more

control over funding and asset liability management for them , this

12

thus improves the performance of SME’s by making them to

expand their businesses from saving and also acquiring huge loans.

1.2 STATEMENT OF THE PROBLEM

SME’S (Small and medium enterprises) face challenges in

obtaining funds from large and formal financial institutions, thus

opt for loans from micro-financial institutions to fund their

business projects. This Research seeks to explore the impact of

microfinance loans on the SMEs growth of SME’s in Kisumu West

District.

1.3 RESEARCH QUESTIONS

1) Have the existing SME’s been actually been financed by the

MFI’s or not?

2) Have the financed SME’s been able to repay their loans as per

the terms and conditions of the MFI’s?

3) Do financed SME’s realize growth on acquisition of credits

from the MFI’s?

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1.4 OBJECTIVES OF THE STUDY

1.4.1 General Objective

The general objective of this research is to determine the impact of microfinance on the growth of SME’S in kisumu central business district.

Specific objectives

1) To establish whether the SMEs have been financed by

Microfinance institutions or not

2) To determine if the financed SMEs have managed to

repay their loans according to terms and conditions of the

microfinance institutions

3) To determine if the financed SMEs have realized business

growth since acquisition of credit from the microfinance

institutions

4) To formulate policy recommendations that would enhance

micro financing for positive performance of SMEs

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1.5 SIGNIFICANCE OF THE STUDY

The study is geared towards the recognition of the importance of

micro finance on the growth of SME’s. SME’s have benefited

from microfinance institutions through the provision of

equity/capital for start ups Moreover micro finance institutions also

offer

Business support to the SME’s before start up by developing a

business proposal of their choice and helping them in developing a

saving scheme.

Micro finance can benefit from this study by determining how fast

they can provide funding and motivation towards spreading their

ability in funding the SME’s thereby justifying their essentiality.

When analyzed well this study broadens our level of thinking in

sourcing equity/capital through financial institutions and develop

saving scheme skills for our businesses thereby broadening our

scope and ability to fund our own businesses. It will thereafter

15

raise our living standard by enabling us develop business that may

be of an increment to our normal income.

Since the government is the backbone of the economy,

microfinance will enable the government to establish the tax rates

to levy on the SME’s thus generating income which they can

deploy to other sectors of the economy and check the economic

growth level e.g. by checking the lending rates of micro financial

institutions It is also relevant to the government for the formulation

of regulatory policies regarding MFI. Besides, commercial banks

also get motivated in considering funding of SME’s through the

collection of various statistics on their performance.

Also the awareness that created on the challenges facing MFI

would help create a good saving culture in Kenya thus leading to

the creation of a strong capital base which can be invested in

profitable ventures creating employment opportunities and

uplifting the living standard of SME’s.

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1.6 SCOPE AND LIMITATIONS OF THE STUDY

This research study is targeting SME’S in CBD of kisumu

town .the scope of the study is to research on the impact of micro

finance on the growth of SME’s for the past 5 years.

Limitations of the study

Due to lack of time and access to resources e.g. bus fare to cater

for the transport around Kisumu west district, access to

information in Kisumu west district concerning the impact of

micro finance on the growth of SME’s. To curb this limitation we

got the information relevant to our study from the Kenya national

bureau of statistics thus easening our work. It also proved to be

difficult to access information from the MFI’s thus we managed to

get detailed information through questionnaires to the SME’s. We

also experienced hostile weather condition and this made us to

carry out our survey in the morning hours and in the evening.

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1.7 DEFINITION OF KEY TERMS

Micro-financing

Micro-financing is the provision of financial services to low

income clients including customers and self employed that

traditionally lack access to banking and related services.

SME

The research will consider a small enterprise to be that consisting

of 10-50 employees, a turnover of 0.5m annually and an asset base

of shs 100,000. A medium enterprise is assumed to consist of less

than 250 employees, a turnover of 5m annually and a set of shs

500,000.

MFI (micro finance institutions)

These are financial institution that offer credit facilities to

individuals and businesses for an agreed period of time

CBD (central business district)

The CBD in kisumu is main center of kisumu town where majority

of business activities take place

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SMEs performance

This is the measure of the growth, profits and stability of the

SME’s in relation to business environment in which they operate

CHAPTER TWO

LITERATURE REVIEW

2. 1 Introduction

This chapter discusses literature related to micro financing and

SMEs growth. It focuses on two substantive literature aspects.

First, theoretical reviews of the conceptual theories so far advanced

in the field of microfinance and SMEs and second, the empirical

review for evidences about micro financing and SMEs

performance in various parts of the world.

2.2 Theoretical Review

2.2.1 Micro credit theory

The psychological component of the micro credit theory - known

as social consciousness-Driven capitalism - has been advanced

by the most ardent promoter of micro finance, Muhammad Yunus

19

(1998). His theory argues that a species of profit-making private

venture that cares about the welfare of its customers can be

conceived. In other words, it is possible to develop capitalist

enterprises that maximize private profits subject to the fair interests

of their customers. (Journal of political and military sociology,

summer by Elahi, Khandakar Q, Danopoulos, Constantine P-

2004 edition)

The rationale of the theory is straightforward. Although altruism is

not totally absent, Capitalism is founded mainly on the premise

that human beings are selfish by nature. Accordingly, individuals

interested in businesses are naturally motivated by the principle of

profit-maximization, with little consideration for the interests of

their clients. This premise is too limited to be a general model for

capitalism, however, because it excludes individuals who are

concerned about the welfare of their fellow human beings. A more

generalized principle would assume that an entrepreneur

maximizes a bundle consisting of financial return or profit and

social return. This assumption creates three groups of

entrepreneurs (Elahi, 2002). The first group consists of traditional

capitalists who mainly maximize financial returns or profits. The

second group consists of philanthropic organizations (like

traditional microcredit NGOs) and public credit agencies that

mainly maximize social returns. The third group consists of

20

entrepreneurs who combine both rates in making their investment

decisions under the additional constraint that financial return

cannot be negative. This group includes the microfinance

enterprisers who are to be treated as socially concerned people, and

microfinance, which is to be treated as a social consciousness-

driven capitalistic enterprise. Microfinance theoreticians have

advanced two theories regarding their aims-an economic and a

psychological. The economic theory treats microfinance

institutions (MFIs) as infant industries, while the psychological

theory differentiates microfinance entrepreneurs from traditional

money lenders by portraying them as "social consciousness driven

people." According to Remenyi (2000:65), the gist of the economic

argument is that success in any business venture, including MFIs,

is determined by the entrepreneurs' ability to deliver appropriate

services and profitably. However, studies conducted in different

parts of the TW show that there are no successful MFIs by this

definition. At best, some MFIs cover their operating costs while

some of the better known among them are able to cover in part the

subsidized cost of capital employed. This situation suggests that

the MFIs will not become financially viable in the long run. One

solution to this problem is to treat MFIs as infant industries, so that

micro-lending businesses can be subsidized during their initial

stages of operation. This subsidization would be beneficial to both

21

the economy and society because this will help micro lenders

realize economies of scale and the productivity fillip that comes

with profitability. The logic goes as follows: Over time, as clients

of MFIs, micro entrepreneurs will establish their economic

contracts with banks, retailers, government employees, and

suppliers of production inputs, which will improve their skills

dealing with money management, contractual obligations, and

resource management. These skills should reduce the cost of

transaction, disseminate information, and increase the micro

entrepreneurs' ability to assess effectively available information to

make sound business decisions. In this respect, society benefits

from what is, in effect, a productive process leading to the creation

of public goods as spin-offs from the growth of microfinance. To

the extent that these public goods have value, they are a legitimate

basis on which to provide subsidies to MFIs while the transition to

widespread outreach to poor households is ongoing (Remenyi,

2000: 46).The Wealth of Nation says little about the psychological

aspect of the theory. Smith articulates the psychological

components in his other book, The Theory of Moral Sentiments.

Published seventeen years before is Wealth of Nations, this book

deals with moral theory. Smith advances the maxim that human

self-interest acts as a prime mover of the capitalist development.

Moral Sentiments is an inquiry into moral psychology, for which

22

the main concern is the nature of moral judgment (Raphael, 1985;

Sprague, 1967).

Smith finds the original source of moral judgment in the

conception of sympathy, which he makes sufficiently clear in the

first paragraph of the book: How selfish so ever, man may be

supposed, there are evidently some principles in his nature, which

interest him in the fortune of others, and render their happiness

necessary to him, though he derives nothing from it except the

pleasure of seeing it. Of this kind is pity or compassion, the

emotion, which we feel for the misery of others, when we either

see it, or are made to conceive it in a very lively manner. That we

often derive sorrow from the sorrow of others is a matter of fact

too obvious to require any instances to prove it; for this sentiment,

like all other original passions of human nature, is by no means

confined to be virtuous and humane, though they perhaps may feel

it with the most exquisite sensibility. The greatest ruffian, the most

hardened violators of the laws of society, is not all together without

it. (Smith, 1976:9)

This opening paragraph is both an attack on the ethical theories of

Thomas Hobbes and Bernard Mandeville and an indication of the

central idea of his work on moral philosophy (Weinstein, 2001). In

The Leviathan, Hobbes, a die-heart materialist in his methods of

23

philosophical investigation, paints a very negative picture of

human nature. His materialistic conception of human nature may

be understood from his interpretation of human life. He sees

human life simply as motion of limbs. The human heart is simply a

spring; nerves are nothing but a complex system of strings; and

joints are just wheels which give motion to the whole body

(Hobbes, 1960). In other words, Hobbes conceives human beings

as nothing more than living machines.

National development is the fundamental objective of trade policy.

Accordingly, international trade theory and policy are basically

founded on a normative criterion that seeks to improve the

economic health of society. Trade policies either facilitate or

impede the flows of voluntary exchanges of goods and services

between nations undertaken by private nationals. The generic term,

free trade policy, is used to describe government measures that

facilitate these exchanges. Government measures aiming to do the

opposite go by the generic term "protectionism". It follows that

discourses in international trade theory and policy revolve around

two thematic ideas-free trade and protectionism-both of which seek

the same objective, national development.

Historically, protectionism is regarded as a conservative economic

idea that precedes the liberal economic idea of free trade.

24

Protectionism is often traced to the 16th century, while the history

of free trade definitely begins in the 18th century (Ellsworth,

1950). The original protectionist argument is mercantilism, while

the French Physiocrats are the original authors of free trade that

received its fuller exposition in the able hands of Adam Smith. The

infant-industry argument was developed later to accommodate

mercantilist sentiments within the framework of Smith's liberal

economic theory. Since the infant-industry argument has been

invoked to justify the establishment of the microfinance industry in

the TW, the following brief discussion of the theory of

mercantilism is in order.

Mercantilism is associated with five leading features (Alien, 1987;

Blaug, 1978). First, bullion and treasure are the essence of wealth

of nations. Second, foreign trade should be regulated to produce an

inflow of specie. Third, domestic industries are to be promoted by

inducing cheap raw-material imports. Fourth, the importation of

manufactured goods is to be discouraged through custom duties,

while the exportation of domestic manufactured goods is to be

encouraged by exempting them from such duties. Finally,

population growth is to be encouraged to keep wages low. These

features suggest that the core doctrine of this trade theory is the

favorable balance of trade as desirable and essential for national

prosperity. This theory, however, clearly involves a dual policy

25

regime of taking advantages from trading partners. This is the

reason mercantilism is popularly described in economic literature

as the "beggar thy neighbors" policy.

Mercantilism is without a doubt a very unfair trade policy regime;

it might, and it did, trigger trade wars. In addition to its negative

political implications, the theory is economically unsound as a

policy for national development. Adam Smith was the first to

expose this weakness. He argued that "mercantilism is nothing but

a tissue of protectionist fallacies foisted upon a venal Parliament

by our merchant and manufacturers, grounded upon the popular

notion that wealth consists in money. Like an individual, a country

must spend less than its income if its wealth is to increase. What

tangible form does this surplus over consumption take? The

mercantilist authors identified it with the acquisition of hard

money or treasure. Money was falsely equated with capital and the

favorable balance of trade with the annual balance of income over

consumption” (Blaug, 1978: 10-11).

The publication of The Wealth of Nations was a severe blow to the

mercantilist idea of improving national economic welfare through

protection. Yet, this idea soon reappeared under different

designations, the most influential of which is the infant-industry

argument. Modern writers (Chacholides, 1978; Ellswoth, 1950)

26

credit John Stuart Mill with the clearest articulation of this

influential protectionist trade policy argument, which can be

summarized as follows: "temporary" protective duties may be

justified in cases where foreign suppliers' comparative advantages

lie mainly in starting the production of these items sooner. This

suggests that the present superiority is due to acquired skill and

experience. Under certain conditions, a protecting duty might be

the least inconvenient method for national development. However,

Mill warns very emphatically about the use and abuse of his

theory. He states that "it is essential that the protection should be

confined to cases in which there is good ground of assurance that

the industry which it fosters will after a time be able to dispense

with it; nor should the domestic producer ever be allowed to expect

that it will be continued even beyond the time necessary for a fair

trial of what they are capable of accomplishing" (Mill, 1961: 922).

In Kenya like in many other countries, approaches to the regulation

of MFI are complicated by the fact many institutions are involved

in providing MF services under different legal structures. The

present a challenge in identifying an appropriate regulating

approach, which is conducive to the development of the sector

while providing adequate facility to the MFI activities. The tiered

approach recommended for Kenya recognizes the

27

inappropriateness of the existing banking legalization for the

regulation of specialized activities of MFI and the diversity of the

institutions engaged in the less regulated sector. However MFI

operating as banking institutions, SACCOs and Kenya Post Office

Saving Bank are already regulated by the act of parliament that

specifies their different supervisory authority

28

2.2.2 Realities of microfinance

Apart from subsidies the poor need access to credit. Absence of

formal employment make them non `bankable'. This forces them to

borrow from local money lenders at exorbitant interest rates. Many

innovative institutional mechanisms have been developed across

the world to enhance credit to poor even in the absence of formal

mortgage. The present paper discusses conceptual framework of a

microfinance institutions in India, Bangladesh and Indonesia.

2.3 Empirical Reviews

2.3.1 Formal banking in India

Traditionally, the formal sector Banking Institutions in India have

been serving only the needs of the commercial sector and

providing loans for middle and upper income groups. Similarly, for

housing, the HFI’s have generally not evolved a lending product to

serve the needs of the Very LIG primarily because of the perceived

risks of lending to this sector. The following risks are generally

perceived by the formal sector financial institutions: Credit Risk,

High transaction and service cost, Absence of land tenure for

financing housing, irregular flow of income due to seasonality,

29

Lack of tangible proof for assessment of income and Unacceptable

collaterals such as crops, utensils and jewellery

As far as the formal financial institutions are concerned, there are

Commercial Banks, Housing Finance Institutions (HFIs),

NABARD, Rural Development Banks (RDBs), Land Development

Banks and Co-operative Banks (CBs).

As regards the Co-operative Structures, the Urban Co-op Banks

(UCB) or Urban Credit Co-op Societies (UCCS) are the two

primary co-operative financial institutions operating in the urban

areas. There are about 1400 UCBs with over 3400 branches in

India having 14 million members, their total lending outstanding in

1990-91 has been reported at over Rs 80 billion with deposits

worth Rs 101 billion.

Similarly there exist about 32000 credit co-op societies with over

15 million members with their total outstanding lending in 1990-91

being Rs 20 billion with deposits of Rs 12 billion. Few of the

UCCS also have external borrowings from the District Central Co-

op Banks (DCCBs) at 18-19%. The loans given by the UCBs or

the UCCS are for short term and unsecured except for few which

are secured by personal guarantees. The most effective security

being the group or the peer pressure.

30

The Government has taken several initiatives to strengthen the

institutional rural credit system. The rural branch network of

commercial banks have been expanded and certain policy

prescriptions imposed in order to ensure greater flow of credit to

agriculture and other preferred sectors. The commercial banks are

required to ensure that 40% of total credit is provided to the

priority sectors out of which 18% in the form of direct finance to

agriculture and 25% to priority sector in favour of weaker sections

besides maintaining a credit deposit ratio of 60% in rural and semi-

urban branches. Further the IRDP introduced in 1979 ensures

supply of credit and subsidies to weaker section beneficiaries.

Although these measures have helped in widening the access of

rural households to institutional credit, vast majority of the poor

rural have still not been covered. Also, such lending done under

the poverty alleviation schemes suffered high repayment defaults

and left little sustainable impact on the economic condition of the

beneficiaries.

2.3.2 The Grameen Bank in Bangladesh

The concept is the brainchild of Dr Muhammad Yunus of

Chittagong University who felt concern at the pittance earned by

landless women after a long arduous day's work labouring for

other people. He reasoned that if these women could work for

31

themselves instead of working for others they could retain much of

the surplus generated by their labour, currently enjoyed by others.

Established in 1976, the Grameen Bank (GB) has over 1000

branches (a branch covers 25-30 villages, around 240 groups and

1200 borrowers) in every province of Bangladesh, borrowing

groups in 28,000 villages, 12 lakh borrowers with over 90% being

women. It has an annual growth rate of 20% in terms of its

borrowers. The most important feature is the recovery rate of

loans, which is as high as 98%. A still more interesting feature is

the ingenious manner of advancing credit without any "collateral

security".

The Grameen Bank lending system is simple but effective. To

obtain loans, potential borrowers must form a group of five, gather

once a week for loan repayment meetings, and to start with, learn

the bond rules and "16 Decisions" which they chant at the start of

their weekly session. These decisions incorporate a code of

conduct that members are encouraged to follow in their daily life

e.g. production of fruits and vegetables in kitchen gardens,

investment for improvement of housing and education for children,

use of latrines and safe drinking water for better health, rejection of

dowry in marriages etc. Physical training and parades are held at

weekly meetings for both men and women and the "16 Decisions"

32

are chanted as slogans. Though according to the Grameen Bank

management, observance of these decisions is not mandatory, in

actual practice it has become a requirement for receiving a loan.

Numbers of groups in the same village are federated into a Centre.

The organization of members in groups and centers serves a

number of purposes. It gives individuals a measure of personal

security and confidence to take risks and launch new initiatives.

The formation of the groups - the key unit in the credit programme

- is the first necessary step to receive credit. Loans are initially

made to two individuals in the group, who are then under pressure

from the rest of the members to repay in good time. If the

borrowers default, the other members of the group may forfeit their

chance of a loan. The loan repayment is in weekly instalments

spread over a year and simple interest of 20% is charged once at

the year end.

The groups perform as an institution to ensure mutual

accountability. The individual borrowing member is kept in line by

considerable pressure from other group members. Credibility of

the entire group and future benefits in terms of new loans are in

jeopardy if any one of the group members defaults on repayment.

33

There have been occasions when the group has decided to fine or

expel a member who has failed to attend weekly meetings or

willfully defaulted on repayment of a loan. The members are free

to leave the group before the loan is fully repaid; however, the

responsibility to pay the balance falls on the remaining group

members. In the event of default by the entire group, the

responsibility for repayment falls on the centre.

The Grameen Bank has provided an inbuilt incentive for prompt

and timely repayment by the borrower i.e. gradual increase in the

borrowing eligibility of subsequent loans.

2.3.3 Linking Banks with Self-Help Groups: A Pilot Project

from Indonesia.

In Indonesia, financial liberalization since 1988, disenchantment

with traditional subsidized credit programs and an openness to

innovative approaches led the Central Bank to support a pilot

project in which 13 participating banks, with the assistance of 12

NGOs, have lent to about 420 self-help groups (SHGs) in the first

phase, to be onlent to their members.

Some of the principles underlying the project and the guidelines

that were issued to the implementing groups are listed below:

34

The SHGs are to use part of their funds (almost 60%) for

lending to their members and the rest for depositing in a bank

to serve as the basis for refinancing from the bank.

Savings are to come first: no credit will be granted by the

SHG without savings by the individual members of the SHG.

These savings are to serve as partial collateral for their loans.

The joint and several liabilities of the members are to serve

as a substitute for physical collateral for that part of loans to

members in excess of their savings deposits.

Credit decisions for on lending to members are to be taken by

the group collectively.

Central Bank refinance is to be at an interest rate equal to the

interest rate at which the savings are mobilized.

All the intermediaries (the Central Bank, banks, NGOs and

SHGs) will charge an interest margin to cover their costs.

Interest rates on savings and credit for members are to be

market rates to be determined locally by the participating

institutions.

Instead of penalties for arrears, the banks may impose an

extra incentive charge to be refunded in the case of timely

repayments.

The ratio of credit to savings will be contingent upon the

credit worthiness of the group and the viability of the projects

35

to be implemented, and is to increase over time with

repayment performance.

SHGs may levy an extra charge on the interest rate for

internal fund generation (which would be self-imposed

forced savings).

Within the first ten months of the implementation period, by

March 1990, 7 private banks and 11 branches of government banks

had made 229 group loans to SHGs, which had retailed them to

about 3500 members. Loans totalling about $0.4 million had been

disbursed, on an average of about $2000 per group and $118 per

member. SHG savings deposits with the bank amounted to about

$400 per group, giving a credit to savings ratio of about 5. NGOs

have received loans from the banks at 22 to 24 per cent which is

only slightly higher than the refinancing rate of large to small

banks. Rates to end users have been between 30 to 44 per cent after

the NGOs and SHGs have added their margins to cover costs and

build funds to cover joint and several liability. Only one of the

participating banks had sought a guarantee under the scheme from

the Central Bank.

36

2.4 CONCEPTUAL FRAMEWORK

Figure 1

37

M F I loans repayment

period. capital

ENVIRONMENT Political Economic Social economic Legal

Micro-loan

Security

STRATEGY Borro

w Intern

al financing

SMALL SCALE BUSINESS

License Employment

PERFORMANCE Profit

Investment Expand

Advisory services

Sales

In developing this proposal, we came up with the above conceptual

framework which shows the environment in which the SME’s and

micro financial institution are set up.

The government regulates SME’s through issuance of licenses. The

government will also impose limits on the minimum capital that the

micro finance institutions are supposed to maintain at any period.

In advancing the loans to SME’s, the micro finance institutions require

securities for the business like title deed, Business registration

certificates, certificate of life insurance policy etc.

The business may also borrow or use internal funds in their financing. In

return, the microfinance institutions will offer advisory services to

business such as viable projects to invest in. From funds acquired by

SME’s they may opt to expand the business or to invest in new line of

business. This will result into higher sales to increase in demand and

expansion from the economies of scale. This will results into increased

profits resulting to higher level of performance of the business and hence

contribute to the economic development.

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 INTRODUCTION

This chapter presents a detailed descriptions of the methodology used in

the study. It includes research design, description of the study area,

target population, sample population, sampling procedure, data

collection methods and data analysis methods.

3.2 RESEARCH DESIGN

The research will be carried out in form of a cross section survey of

SMEs that have accessed loans from microfinance institutions.

3.3 RESEARCH AREA

The research will be conducted in the central business district kisumu

town, the CBD covers an area of about 300 sq meters the research will

focus on SME’s at lake market within the CBD.

3.4 TARGET POPULATION

The target area of this research will be the small and medium enterprises

in kisumu CBD Lake market that receive credit from the microfinance.

Lake market has about 110 SME’S and The target population of the

research will be 80 SME’S consisting of 20, 40 and 20 salons,

Electronics and hotels respectively. The research targets 80 SME’s who

have actively been in their areas of business for the last 5 years.

3.5 SAMPLE AND SAMPLING TECHNIQUES

For convenience, the target population will be clustered into groups of

similar SME’S, i.e. salons, electronics and hotel enterprises; this is

because of limited time and resources.

The table below shows the target population and the sample size .for

each target population the research will focus on the SME who have

managed to get a loan from the MFI this year.

Table

Chart view

There are a total of 80 SME’S targeted, and the survey will aim at investigating eight of these.

SME (members of population) Population Sample size

Salons 20 10

Electronics 40 15

Hotels(food joints) 20 8

Totals 80 33

3.6 DATA COLLECTION TECHNIQUES

3.6.1 QUESTIONAIRE AND SCHEDULE METHOD

The researchers will use the questionnaire and the schedule in form of

questions in a set form to draw information from respondents. The

questionnaire will be self administered while the schedule will be

administered by trained interviewers to the respondents.

3.6.2 INTERVIEW METHOD

The researcher will use interviews to obtain required information orally

or face to face. It will be easy to apply since it would only require a

notepad, a sound tape recorder and the part of researchers the skill to

hold a conversation. The researcher may apply individual interview by

meeting face to face with the respondents or by use of telephone

communication. Also group interview may be used, in particular the

focused group interview that will involve all stakeholders.

3.6.3 OBSERVATION METHODS

This will involve the researchers to draw direct evidence of the eye by

witnessing events first hand. Information will be sought by way of direct

observation without asking from the respondents.

3.6.4 DOCUMENTARY REVIEWS

The researcher will seek data from records, reports, printed foms, letters,

autobiography, diaries, compositions, periodicals, bulletins, court

decisions, and academic works such as books and journals e.t.c.

3.7 DATA ANALYSIS AND PRESENTATION

Both descriptive and inferential methods that will be used include;

measures of central tendency (mean, median mode), measures of

dispersion (range, variance, standard deviation, coefficient of variation),

measures of relative position and measures of relations and associations,

correlation and regression.

Data analyzed will be presented in form of graphs, charts and tables, a

PowerPoint presentation will be designed for presentation etc.

CHAPTER FOUR

DATA ANALYSIS AND PRESENTATION

4.1 INTRODUCTION

This chapter presents the findings of the study and the analysis of the

data collected from questionnaire which was distributed to the small

and medium size entrepreneurs. The questionnaire was distributed to

33 SME’s out of which all were fully completed with few difficulties

experienced here and there and collected by the researcher for data

analysis. This gives a response rate of 95%.

4.2 BUSINESS MANAGEMENT

The respondents’s were asked to state their relation with the business in

existence. It was found that 33 per cent of the respondents were

employees while 67 per cent were owner of the business. This is

presented in the figure below.

Figure 4. 1: Respondents relation to the Business

f %Employee 11 33owner 22 67Total 33 100

The study also found out that 33 per cent of the respondents’s are

partnership while 50 per cent are sole proprietorship. Only 17 per cent of

the respondents’s are in form of joint venture. This is presented in the

figure below.

Figure 4. 2: Business Formation

Type of business f.(%) Hotels f (%) Electronic f (%)

Salons f (%)

Joint venture 7. (17) 0.(0) 0.(0) 0.(0)

Sole proprietorship

17. (50) 30. (91) 32. (97) 28. (85)

Partnership 9. (33) 3.(9) 1.(3) 5.(15)

Total 33 (100%) 33.(100) 33. (100) 33.(100)

The researcher also sought to know the line of operation of the business.

From the analysis, it was found that 37% of the respondents’ dealt with

electronic kind of business, 36% indulged in hair dressing whereas 27%

operated hotel businesses. The analysis of the line of business of

respondents’s can be observed from the figure below.

Figure 4. 3: Line of business of the respondents

The researcher sought to find out the source of capital for their business

before the start or operation of the business. Statistically in the

perception of the respondents’s, 75%, said that the business obtained its

capital from micro-financial institutions while 25% from other financial

institutions that were stated. The results are shown in the table below.

Table 4. 1: source of capital

Response Frequency Percent (%)

Micro-financial institution 20 75%

Other financial institution 13 25%

Total 33 100%

The researcher also sought to investigate whether the respondents have

ever benefited from the services of micro-financial institutions and those

who had obtained their capital from MFI had some reasons, major ones

being the offer of cheap loans and financial services advices.

As to what measures would you like the MFI’s to implement so that

loans repayment can be favorable to all SME’s, the study found out from

the respondents’s opinions that MFI’s should a little flexible towards the

members who do not meet the MFI’s deadline of loan repayment and

this they should do by lengthening their repayment periods. It was also

proposed that they should also adjust their loan interest charges, relaxing

their security requirements and offer proper training to the illiterate

citizens to be acquainted with their terms and conditions.

25 respondents’ who said that they have benefitted from the services of

the micro-financial institutions as to obtaining loans claimed to have

experienced a favorably shorter loan repayment period as per the

conditions of the MFI’s. This is illustrated in the table below whereby,

25% were subjected to 2-5 years, and 62.5% were subjected to 6

months-1 year, while 12.5% were subjected to 5 years and above.

Table 4. 2: Loan repayment period as per the conditions of MFI’s

Loan Repayment Period Frequency Percent (%)

2 – 5 years 8 25%

6 months – 1 year 13 62.5%

Above 5 years 4 12.5%

Total 25 100%

As evident from the table below, 83.3% of the respondents claimed that

although they have benefitted from MFI’s, they also faced some

challenges as loan beneficiaries, majority with the reason being long

periods of waiting for the loan processing, while the remaining 16.7%

were of the suggestion of having experienced no challenges as loan

beneficiaries.

Table 4. 3: challenges as loan beneficiaries

Response Frequency Percent (%)

Yes 20 83.3%

No 5 16.7%

Total 25 100%

The findings presented in the table below are based on the question,

“rate the performance of your business operation?” 85% of the

respondents’ answered average, 10% answered high, while 5% answered

that their business performance was yet to regain its stands after facing

stiff competition thus rated their performance to be low.

Table 4. 4: Rate of performance of the business

Answer Frequency Percent (%)

High 3 10%

Moderate 28 85%

Low 2 5%

Total 33 100%

As evident from the table below, 66.6% of the respondents’ said to be

making savings in their business operation through realization of profits

when extracting their business balance sheets and profit and loss

account, while the remaining 33.7% are yet to realize profits thus no

savings since they are fresh in the business field.

Table 4. 5: Impact of political environment on the company

Response Frequency Percent (%)

Yes 25 66.6

No 8 33.7

Total 33 100.0

58.3% of the interviewed clients claimed to be having an external

business outlet apart from their business thus attaining business diversity

and expansion through the realized savings, while the remaining 41.7%

had no any business outlet apart from the one in existence. This is

presented in the table below.

Table 4. 6: Other Business outlets

Response Frequency Percent (%)

Yes 15 58.3%

No 18 41.7%

Total 12 100%

The findings on the table below are based on the question, “How do you

rate the loan services from the MFI’s?” 8% of the respondents answered

excellent, 25% of the respondents answered very good, 55% of the

respondents’s answered good while 12% answered poor. All these were

based on the terms and conditions laid upon before accessing loan by the

MFI’s.

Table 4. 7:

Response Frequency Percent (%)

Excellent 5 8

Very good 10 25

Good 14 55

Poor 4 12

Total 33 100%

The findings on table 4.10 below are based on the question, “What

would you wish the MFI’s to do so as to improve your business

performance?” 33.3% of the respondents’ opted for MFI’s in offering

training, while 66.7% of the respondents’ opted for MFI’s in increasing

their lending rate.

Table 4.9: Perception on the type of strategy adopted by the company

Response Frequency Percent (%)

Increase lending rate 18 33.3%

Offer training 15 66.7%

Total 33 100.0%

CHAPTER FIVE

CONCLUSIONS AND RECOMMENDATION

5.1 Summary of the Findings

This study was designed with three main objectives. One, to establish

whether the SME’s have been financed by MFI’s, two, to determine if

the financed SME’s have managed to repay their loans according to the

terms and conditions of MFI’s and three to determine if the financed

SME’s have realized business growth since acquisition of credit from

MFI. The general objective formulated was to find out the impact of

MFI’s on the performance of SME’s.

From the study, the researcher found out that

……………………………………………………………………………

5.2 Conclusion

Some valuable lessons can be drawn from the experience of

successful Microfinance operation. First of all, the poor repay their loans

and are willing to pay for higher interest rates than commercial banks

provided that access to credit is provided. The solidarity group pressure

and sequential lending provide strong repayment motivation and

produce extremely low default rates. Secondly, the poor save and hence

microfinance should provide both savings and loan facilities. These two

findings imply that banking on the poor can be a profitable business.

However, attaining financial viability and sustainability is the major

institutional challenge. Deposit mobilization is the major means for

microfinance institutions to expand outreach by leveraging equity

(Sacay et al 1996). In order to be sustainable, microfinance lending

should be grounded on market principles because large scale lending

cannot be accomplished through subsidies

A main conclusion of this paper is that microfinance can contribute to

solving the problem of inadequate housing and urban services as an

integral part of poverty alleviation programmes. The challenge lies in

finding the level of flexibility in the credit instrument that could make it

match the multiple credit requirements of the low income borrowers

without imposing unbearably high cost of monitoring its end-use upon

the lenders. A promising solution is to provide multi-purpose loans or

composite credit for income generation, housing improvement and

consumption support. Consumption loan is found to be especially

important during the gestation period between commencing a new

economic activity and deriving positive income. Careful research on

demand for financing and savings behavior of the potential borrowers

and their participation in determining the mix of multi-purpose loans are

essential in making the concept work (tall 1996).

5.3 Recommendations

For MFI’s to succeed in the global sector, it should loosen their terms

and conditions for SME’s to easily access loans and also create

awareness to the people through civic education on the services offered

by them.

5.4 Suggestions for further research

The research proposes that a similar research be undertaken focusing on

strategies adopted by MFI’s in bringing their services to the rural

population .Further, the research proposes a study on the impact of

MFI’s on savings.

REFERENCES

Barry, N.(1995), "The Missing Links: Financial System that

Works for the Majority," Women's World Banking, New York.

Barry, Nancy, Armacost, Nicola and Kawas Celina (1996)

"Putting Poor people's Economics at the Center of Urban

Strategies," Women's World Banking, New York.

Chriseten, R.Peck Rhyne, Elisabeth and Vogel, Robert C

(1994) "Maximizing the Outreach of Microenterprise Finance: The

Emerging Lessons of Successful Programs," September IMCC,

Arlington, Virginia.

Churchill, C.F. (1996)," An Introduction to Key Issues in

Microfinance: Supervision and Regulation, Financing Sources,

Expansion of Microfinance Institutions," Microfinance Network,

Washington, D.C. February

Grameen Trust (1995) Grameen Dialogue No.24, Dhaka,

October.

Otero, M. and Rhyne, E.(1994) The New World of Micro-

enterprise Finance -Building Healthy Financial Institutions for the

Poor, Kumarian Press, West Harford, Connecticut.

Phelps, P.(1995) "Building Linkages Between the Microenterprise

and Shelter Sectors: An Issues Paper," GEMINI, Betuesda,

Maryland.

Women's World Banking (1994) "United Nations Expert Group

on Women and Finance," New York.

QUESTIONAIRE

LETTER OF TRANSMITTAL

We the students of Maseno University would like to appeal to the

respondents of this questionnaire to participate fully and your

cooperation will be highly appreciated, This questionnaire is aimed at

collecting data required for the study entitled: IMPACT OF MICRO

FINANCE ON THE PERFORMANCE OF SME’S IN KISUMU CBD

LAKE MARKET

The data collected would be strictly for academic purposes and any

correspondence given be treated as confidential. Respondents are

requested to give any information that is necessary for the topic. The

interviewer is in any case not allowed to force any respondent to give

information. Thanks

This questionnaire is aimed at collecting data required for the study

entitled: IMPACT OF MICRO FINANCE ON THE PERFORMANCE

OF SME’S IN KISUMU CBD LAKE MARKET.

Name of the

interviewer…………………………………………………

Please give the following details

1) Name of business…………………………………………….

2) Ownership

a. Employee

b. Owner

3) Year of establishment………………………

4) Type of Business

a. Joint venture

b. Sole proprietorship

c. Partnership

Others state……………………………………………………………….

5) State your line of business……………………..

SECTION 1

1) Select sources of capital to your business (tick any appropriate)

a. Micro financial institutions

b. Other financial institutions

If none of the above state……………………………………

2) Do you benefit from micro financial institutions?

a. Yes

b. No

If Yes, how

……………………………………………………………..

3) If you obtain loan from MFI’s what made you to seek financial

assistance from the MFI’s

a. Easy loan repayment

b. Good services

Others state……………………………………

What is the loan repayment period as per the conditions of MFI?

a. 6 months-1 year

b. - 5 yrs

c. Above 5 yrs

SECTION 2

4) How loan has it taken you to repay the amount awarded to you by the

MFI’s (tick one)

a) 1-3yrs

b) 4 – 10 yrs

5) How do you rate the loan services from the MFI’S? (Tick one)

a. Poor

b. Good

c. Very good

d. Excellent

6) Do you face any challenges as a loan beneficiary from the MFI’s?

(tick one)

a) Yes

b) No

If yes state………………………………………..

SECTION 3

7) How many employees did the business employ at the start of its’

operation?

a) 1-10

b) Above 10

8) How many employees are there currently?

……………………………………………………..

9) Do you have any other business outlet (branch) that is part of this

business?

a) Yes

b) No

If yes (tick one)

a) 1 -5

b) 6-10

c) Above 10

10) Do you make any savings from your business?

a) YES

b) NO

If no, what could be the reasons?

……………………………………………………………………

11) How do you rate the performance of your business?

a) High

b) Low

c) Average

SECTION 4

12) What would you wish the MFI’s to do so as improve your business

performance? (Tick one)

a. Increase lending rates

b. Offer training

Others specify………………………………………………………..

13) What do you think should be done so that the MFI’s can easily

award loans to any SME

equally? .............................................................................................

14) What challenges do you face when trying to access loans from the

MFI’s?(tick )

a) Lack of security

b) Lack of proper knowledge

c) Conditions on repayment

Others state………………………………………………………

End*************End************* End ************* End

Thank you very much for participating!!!!