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THE IMPACT OF MICROFINANCE INSTITUTION ON THE

GROWTH OF LOCAL ECONOMY A CASE STUDY OF BOMET

MUNICIPALITY

A RESEARCH PROJECT SUBMITTED BY

MARYLINE CHEPKEMOI CHERUIYOT

L123/14400/2011

A RESEARCH PROJECT PROPOSAL IN PARTIAL

FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD

OFDIPLOMA IN BUSINESS MANAGEMENT IN UNIVERSITY OF

NAIROBI

IN 2012

SUPERVISOR: YONAH SAKAJA


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DECLARATION

This research proposal is my original work and has not been presented for a degree award

in any other university. No part of this project may be reproduced without prior authority

of the author and or University of Nairobi.

MARYLINE CHEPKEMOI CHERUIYOT

L123/14400/2011Signature_______________________ Date________________________

This proposal has been submitted for examination with our approval as university

supervisor

Signature___________________ Date_____________________________

MR YONAH SAKAJA

LECTURER

UNIVERSITY OF NAIROBI

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DEDICATION

I dedicated this research project proposal to my Husband who supported me financially and

to my children Arnold, Abel and Anita for their moral support.

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ACKNOWLEDGEMENT

First and foremost, I thank the almighty God for his love, care and protection in all my

endeavor in life. I am grateful to my academic lecturers and supervisor for encouragement

and tireless effort in ensuring that my work was successful. Advice and guidance form an

integral part in completion of this work.

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ABSTRACT

The purpose of the study was to perform an investigation on the impact of microfinance

institution on the growth of local economy a case study of Bomet municipality the

objectives of the study were. To establish the current state of the economy, To find out the

services of microfinance institutions, To find out the challenges microfinance face in a

local economy, To find out the relationship between microfinance services and the local

economy and To propose possible strategies to improve the running of microfinance The

study was based conceptual framework and theoretical framework.

The study employed explanatory research design in a case study area and random samplingtechniques were used in choosing the sample size. The target population, which was the

sample for the study, aimed collecting data from the SMES, the management of micro

finance institutions and staffs within Bomet municipality. The research instruments used to

collect data were questionnaire and interview schedule. The questionnaire, made up of both

open-ended and closed-ended items, were administered to the respondents by the

researcher.

Data collected was analyzed both qualitatively and quantitatively. The descriptive

statistics to use were the frequency distribution tables and percentages. The studies

findings were realized and conclusion and recommendation made which may aid in

improving use of microfinance services to develop the economy of a local town like

Bomet.

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TABLE OF CONTENTS

DECLARATION .....................................................................................................................iiDEDICATION ........................................................................................................................iiiABSTRACT .............................................................................................................................v

TABLE OF CONTENTS .......................................................................................................viLIST OF TABLES ..................................................................................................................ixLIST OF ABREAVIATIONS .................................................................................................xOPERATION DEFINITION OF TERMS ............................................................................xiiCHAPTER ONE: INTRODUCTION .....................................................................................11.0 Introduction ........................................................................................................................1

1.1 Background of the Study ...................................................................................................1

1.2 Statement of the Problem .................................................................................................3

1.3 Purpose of the study .........................................................................................................4

To investigate the impact of microfinance institution on the growth of local economy of

Bomet municipality. ...............................................................................................................4

1.4 Objective of the Study ..................................................................................................4

1.5 Research Questions ............................................................................................................5

1.6 Significance of the Study ...................................................................................................5

1.7 Basic assumptions of the study ..........................................................................................5

1.8 Limitations of the study ...............................................................................................5

2.2 State of microfinance in the local economy ..............................................................82.3 Role of microfinance ...............................................................................................102.4 Challenges of micro finance ....................................................................................14

2.5 Strategies to improve running of microfinance ...............................................................20

2.6 Summary ..........................................................................................................................24

RESEARCH DESIGN AND METHODOLOGY ...............................................................28

3.1 Introduction ......................................................................................................................28

3.2 Research Design ..............................................................................................................28

3.3 Target Population .............................................................................................................28

3.4 Sample size and sampling procedure ..............................................................................28

Table 3.2: Sample size ...........................................................................................................29

3.5 Research instruments .......................................................................................................29

3.6 Data collection procedures ..............................................................................................30

3.7 Data analysis....................................................................................................................31

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CHAPTER FOUR ..................................................................................................................32Introduction ............................................................................................................................32

4.1 Data Analysis and Presentation .......................................................................................32

4.1.1 Gender of Respondents .................................................................................................32

Table 4.1: Gender of Respondents ........................................................................................32

4.1.2 Age of the Respondents ................................................................................................33

Table 4.2 age of the respondents ..........................................................................................33

4.2.3 The Level of Education ................................................................................................33

Table 4.3 Education level ......................................................................................................34

4.1.4 Working experience of employees and duration lived in the region ...........................34

Table 4.4 Working experience of employees and duration lived in the region ....................34

4.2 Background Information ..................................................................................................354.2.1 Current state of the microfinance .................................................................................35

Table 4.5 current state of the microfinance ...........................................................................35

4.2.2 Current state of the economy ........................................................................................35

Table 4.6 current state of the economy ..........................................................................35

4.2.3 The services of microfinance institutions .....................................................................36

Table 4.7 Services of microfinance institutions ...................................................................36

4.2.4 Challenges faced by microfinance ...............................................................................36

4.2.5 Possible strategies to improve the running of microfinance ........................................37

Table 4.9 Possible strategies to improve the running of microfinance .................................37

CHAPTER FIVE ...................................................................................................................39SUMMARY OF FINDING CONCLUSSION AND RECOMENDATION ......................39

INTRODUCTION ................................................................................................................39

5.3 Summary of the findings ................................................................................................42

5.3.1 General information .....................................................................................................42

5.3.2 Gender of the respondent .............................................................................................42

5.3.3 Age of the respondents ................................................................................................42

5.3.4 The Level of Education ................................................................................................42

5.3.5 Working experience of employees and duration lived in the region ...........................43

5.4 Recommendations ............................................................................................................43

QUESTIONNAIRE ...............................................................................................................46

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LIST OF FIGURES

Figure 1 Conceptual Framework For the impact of microfinance institution and local

economy.............................................................................. Error: Reference source not found

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LIST OF TABLES

Table 3.2: Sample size........................................................ Error: Reference source not found

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LIST OF ABREAVIATIONS

ASCRA Accumulating Savings and Credit Association

BASE British Aid to Small Enterprise

CORDAID Catholic Organisation for Relief and Development

CFA Co-Financing Agency

CFP Co-Financing Programme

DIDS Diocesan Integrated Development Services

DFID Department for International Development (of the UK)

EBS Equity Building Society

FFBS Family Finance Building SocietyFSA Financial Service Association

GoK Government of Kenya

GOM Gemeenschappelijk Overleg Mede-financiering (Consultation Group

of the Co-Financing Agencies)

HIVOS Humanistic Institute for Development Cooperation

ICCO Inter Church Committee for Development

JCS Jitigemea Credit Scheme (of the PCEA)

KCB Kenya Commercial Bank

KDA KREP Development Agency

KPSOB Kenya Post Office Savings Bank

K-REP Kenya Rural Enterprise Programme

KWFT Kenya Women Finance Trust

MFA Micro-Finance Agency

MSE Micro- and Small Enterprises

NBFI Non-Bank Financial InstitutionNCCK National Council of Churches of Kenya

NGO Non-Governmental Organization

NGO-MFA Non-GOvernmental Micro-Fnance Agency

NOVIB Netherlands Organisation for International Development Cooperation

PCEA Presbyterian Church of East Africa

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PRIDE Promotion of Rural Initiatives and Development Enterprises

ROSCA Rotating Savings and Credit Association

SACCO Savings and Credit Cooperative

SISDO Smallholder Irrigation Scheme Development Organisation

SME Small and Micro Enterprises

SMEP Small- and Microenterprise Programme

STEP Saga Thrift and Enterprise Promotion Ltd.

WEDCO Womens Enterprise Development Project

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OPERATION DEFINITION OF TERMS

Micro finance; A type of banking service that is provided to unemployed or low-income

individuals or groups who would otherwise have no other means of gaining financial

services. Ultimately, the goal of microfinance is to give low income people an opportunity

to become self-sufficient by providing a means of saving money, borrowing money and

insurance.

Local economy; Activities related to the production and distribution of goods and services

in a particular geographic region. The correct and effective use of available resources.

Impact; Measure of the tangible and intangible effects (consequences) of one thing's or

entity's action or influence upon another.

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CHAPTER ONE: INTRODUCTION

1.0 Introduction

This chapter covers the background of the study; statement of the problem; the objectives

of the study; research questions; conceptual framework; the scope of the study and

significance of the study.

1.1 Background of the Study

According to Harper (2002) There are various functions involved in a micro finance.

Microfinance helps people to eradicate poverty by giving them collateral-free loans and

other financial services to support income-generating businesses. As each loan is repaid,

the money is redistributed as loans to others, thereby multiplying its impact Microfinance is

now by far the most important, well-financed, and certainly most high profile, institutional

innovation designed to address issues of poverty, under-development and marginalisation

in both developing and transition countries alike. According to the World Bank, IMF and

other international development agencies, the main western governments and their bilateralaid agencies, many major corporations, as well as the international NGO sector,

microfinance has an enormous potential to reduce poverty by providing poor individuals

with access to very small amounts of loan capital. With this microloan, the recipient can

start his/her own micro-business, generate some income, accumulate some assets, perhaps

thenceforth extend their education and skills, maintain their personal health, and ultimately,

it is hoped, a micro-enterprise can grow into an SME or even into a much larger enterprise.

Moreover, by prioritizing its own financial self-sustainability, the microfinance institution

need not become a permanent drain on government or international donor funding, but can

instead eventually survive unaided by commercializing its operations and earning its keep

on the market. The existence of such massive financial, technical and political support for

the microfinance concept does not, of course, confirm its positive economic and social

impact. While many economists are of the opinion that the short-run poverty impact of

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microfinance is positive for some microloan recipients and some others in the community,

the same cannot be said with regard to the longer run aggregate impact. The longer run

impact of microfinance must take into account various opportunity costs, negative

externalities and adverse path dependency trajectories. When these wider factors are

taken into account, then the assumed positive impact of microfinance need not necessarily

hold. In countries such as Bangladesh and Bolivia, two of the most high-profile and long-

running country experiments, it is hard to point to any localised sustainable development

trajectories arising from the provision of significant quantities of microfinance since 1970.

The same is true of Sub-Saharan Africa,

Rutherford (2000) notes that South East Asia and Latin America, where microfinance has

absorbed significant international donor community financial and technical resources overthe last thirty years, yet the gradual informalisation, marginalization and industrial

hollowing-out of these regions and countries has nevertheless continued apace, if not

actually accelerated. In the previously highly industrialized transition economies of Eastern

Europe, channeling both donor funds and local savings into microfinance after 1990 has

often provided material support to ongoing processes of deindustrialization and

infantilization. Moreover, those countries and regions successfully escaping large-scale

poverty and under-development over the last fifty years or so - Taiwan, South Korea,

China, India, Thailand, Malaysia, Brazil, Vietnam - all relied on a variety of state and non-

state interventions and institutional vehicles quite unrelated to microfinance. Arising out of

these real concerns is a growing body of work pointing to the important political role

allocated to microfinance by the international development community which is to

legitimize and give further impetus to individual responses to poverty and marginalization

and thereby, according to some, to deliberately delegitimize and block all collective,

community-based and state-driven responses to poverty and under-development. Finally,

there are also many alternatives to microfinance that might be more appropriate from a

sustainable development perspective, including development banks, cooperative banks,

development funds, social venture capital funds, community development banks,

technology funds, and so on.

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Sriram (2001) notes that over the last 20 years, microfinance institutions in Kenya have

largely developed through concerted grant funding. This situation prevailed up to the late

1990s when key donors started pushing MFIs to start moving towards sustainability in their

operations. Most MFIs in Kenya had started off as NGOs and had built significant supply

side competencies. The push towards sustainability was therefore not going to be easy for

institutions previously focused on free spending outreach drives, rather than sustainable

operations. It was also difficult for those that had significantly grown and expanded

operations on grant funding to suddenly have to look for alternative sources of capital as

donor funds either dwindled or became inadequate to sustain the growth momentum.

During this period, many MFIs seized the moment and incorporated as private capital

companies. Others, like K-Rep, chose the route to formal commercial banking with a

multiplicity of ownership. By early 2000, the landscape for microfinance was changing,and changing for good. What eventually became clear was that donors were willing to

provide funding for capacity building but not capital for lending purposes. This new shift

heralded the beginning of an almost desperate search for capital from various sources, a

case applicable to all MFIs.

1.2 Statement of the Problem

The majority of the worlds population is poor, subsisting on $2-3 per day. Over 500

million of the worlds poor are economically active. They earn their livelihoods by being

self-employed or by working in microenterprises (very small businesses which may

employ up to 5 people). These micro entrepreneurs make a wide range of goods in small

workshops; engage in small trading and retail activities; make pots, pans and furniture; or

sell fruits and vegetables. Yet these poor households often fail to secure the capital they

need and miss opportunities for growth because they do not have access to financial

resources loans or a safe place to hold savings. Over 80 per cent of all households indeveloping countries do not have access to institutional banking services. This includes

nearly all the poor people in the developing world. When there are no financial institutions

to serve them, poor enterprises and households rely largely on informal sources such as

family, friends, suppliers or moneylenders for their financial needs. About 90% of the

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poor households still lack access to institutional financial services. Most formal financial

institutions deny the poor financial services because of perceived high risks high costs

involved in small transactions the poor's inability to provide marketable collateral for loans

ADB, through its Microfinance Development Strategy, aims to ensure permanent access to

institutional financial services for the region's poor people and their small businesses.

Microfinance are mostly created to offer help to the poor who do not have access to the

bank industry, most of the microfinance users are the SMES who take the loans to start

their business the problem is that there has been an increase in the number of microfinance

institutions in Bomet municipality and most of them are not well managed and regulated by

the government and other regulatory authority resulting to a loss in both the microfinance

and the users of their service in case of closure or receivership. With this idea in mind the

researcher set out to investigate the impact of microfinance on a local economy.

1.3 Purpose of the study

To investigate the impact of microfinance institution on the growth of local economy of

Bomet municipality.

1.4 Objective of the Study

The main objective of this study was to assess the impact of microfinance institution on the

growth of local economy.

Specific Objectives

The specific objectives of this study were;

i) To establish the current state of the economy

ii) To find out the services of microfinance institutions

iii) To find out the challenges microfinance face in a local economy

iv) To propose possible strategies to improve the running of microfinance

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1.5 Research Questions

To address the above objectives, the following research questions were be used

i) What is the current state of the economy?

ii) What are the services if microfinance institutions?

iii) What challenges microfinance face in a local economy?

iv) What are possible strategies to improve the running of microfinance?

1.6 Significance of the Study

The study findings and conclusions benefit many micro finance institutions and the

government when erecting strategies and implementing them on trying to asses the impactrole of micro finance on a wider perspective.

The Government will be in a better position to improve its strategies and the measures set

to monitor and improve the role of microfinance

The study also proposed possible strategies that the microfinance institutions can adopt to

ensure its smooth running.

1.7 Basic assumptions of the study

The researcher assumes that the methods of collecting data questionnaires and interviewswill result to reliable informations while the respondents will take the questionnaires formto be valid. Moreover the research will be conducted on time.

1.8 Limitations of the study

In the course of the study there were numerous setbacks experienced as follows;

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Time factor.

The failure by some respondent to return their questionnaires despite having been notiied

of the dateline. In that case the researcher failed to meet his target of questionnaires.

Weather condition

The weather was raining during the research and the researcher was rained on when goingfrom one respondent to another.

Transport

The means of transport was another challenge which forced the researcher to arrive late atthe field of research, there scarce vehicles.

Secrecy.

Access to data was a challenge since the respondents could not diverge some informationdue to their confidentiality and also the strict code of conduct in their employmentagreement.

1.9 Delimitations of the study

The restriction/bound that the researcher imposed prior to the inception of the study tonarrow the scope of the study, study was delimited to Bomet municipality instated ofBomet County

1.10 DEFINITION OF SIGNIFICANT TERMS AS USED IN THE STUDY

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Micro finance - A type of banking service that is provided to unemployed or low-incomeindividuals or groups who would otherwise have no other means of gaining financialservices. Ultimately, the goal of microfinance is to give low income people an opportunityto become self-sufficient by providing a means of saving money, borrowing money andinsurance.

Local economy- Activities related to the production and distribution of goods andservices in a particular geographic region. The correct and effective use of availableresources.

Impact - Measure of the tangible and intangible effects (consequences) of one thing's orentity's action or influence upon another.

1.11 Organization of the study

This research report is organized in five chapters;Chapter One: Introduction

Chapter Two: Literature Review

Chapter Three: Research Methodology

Chapter Four: Data Analysis and Presentation

Chapter Five: Discussions of findings, Conclusions and Recommendation

CHAPTER TWO

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LITERATURE REVIEW

2.1 INTRODUCTION

This chapter mainly deals with review if major studies that have been done in the area

under study, theoretical framework, conceptual framework and summary of the entire

review. the purpose of literature review related to an investigation of the role of

microfinance institutions was to recognize contributions made by people towards the

subject under study which are of great importance in order to find out the extend to which

the area was researched on thus section highlights major studies before making

conclusions.

2.2 State of microfinance in the local economy

Microfinance rapid growth

Harper (2002) notes that Most people consider microfinance as extending small loans ($50

to $1,500) to those who could not access credit from banks or other financial institutions.

Loans are typically made to micro enterprises (very small businesses: one to three

employees), with the market including inhabitants of rural areas, the urban poor, and

women. Microfinance methodology often employs collateral substitutes to deliver and

recover short-term loans to micro entrepreneurs (or potential micro entrepreneurs). This

traditional concept of microfinance has changed over time as lessons were learned and

programs expanded. In many countries today, microfinance has expanded beyond this

traditional concept of lending to micro enterprises. In fact, persons without access to the

formal banking system need, use, and benefit from different kinds of financial services in

addition to loans: Over the past 10 years or so, microfinance has rapidly evolved and

expanded from the relatively narrow field of microenterprise credit to the morecomprehensive concept of microfinance (which includes a range of financial services for

poor people, including savings, money transfers, and insurance) to the enormous challenge

of building inclusive financial systems. M-Cril (2002)

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Global Demand for Microfinance

Some 70 percent of the worlds poorest people are concentrated in developing countries

and living mainly in rural areas, and for many of these people, agriculture is the main

source of economic growth, which is the cornerstone of poverty reduction. Best practices

have shown that poor people who have taken small loans to start new enterprises or expand

ongoing ones have taken advantage of increased earnings to improve consumption levels,

send their children to school, and build their assets. They have accumulated savings to

provide protection against illness and have accessed better health care. Women, in

particular, have been the focus of many microfinance programs, since it empowers them to

participate in important decisions that affect their lives. For microfinance to grow, it is

essential that MFIs develop a deeper understanding of their clients lives and of how they

can best serve their needs. Harper (2002)

The Supply of Microfinance

The past thirty years have seen strong supply growth in both established MFIs and the

number of new entrants to the market. The demand and supply for microfinance clearly

provides a means for increasing family income, for development of the financial sector,

and for overall economic expansion: the poor households and micro enterprises that access

microfinance can increase their income- generating potential, while their patronage of

MFIs in turn ensures the growth and viability of MFIs as long-term financial services

providers in the community. Klaus (1999)

Rhyne (2001) notes The challenge is how to turn effective demand for microfinance into

effective supply of microfinance and financial services. Each one contributes to the others

growth or failure. The value chain in microfinance is that institutions provide financial

services to the poor and micro-entrepreneurs, thus contributing to their viability and growth

and the micro entrepreneurs in turn contribute to the viability and growth of microfinance

institutions. The viability and profitability of micro entrepreneurs and microfinance

institutions are intimately linked and mutually reinforcing in a virtuous circle. Financial

services to the poor can be an effective means to reduce poverty and be a sustainable and

profitable business. Most MFIs do not reach large numbers of poor people. Programs

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therefore need to be designed to include the poorest, and to facilitate mechanisms that will

lead to poverty impacts. MFIs need to increase their understanding of poverty, in order for

them to take simple steps to improve their outreach and their effectiveness for the poorest.

Because microfinance is so new to Iraq, the opportunity exists to develop the industry

based on experiences in other countries and the lessons learned from its long Rhyne (2001)

In addition, there are major differences between urban and rural supply of financial

services, with the rural supply showing the major challenge in most parts of the world due

to its remoteness or because the population is spread thinly over a large region.

Most microfinance institutions start as NGO-based credit-only programs funded by

international donors. Recent trends have shown that commercial banks have entered the

microfinance market serving micro, small, and medium enterprises, and there are emergingmicrofinance investment funds, a new trend leveraging private equity for economic growth

and poverty reduction. Successful microfinance institutions have proven that providing

Microfinance institutions currently operate in over 100 countries, serving more than 75

million clients. To see the latest statistics on the microfinance industry and access in-depth

data on microfinance institutions around the world, please visit MIX Market. Klaus (1999)

2.3 Role of microfinance

Rhyne (2001) notes that Microfinance is undoubtedly the most visible innovation in anti-

poverty policy in the last half century. In the three decades since Mohammed Yunus gave

his first loan to a group of Bangladeshi women, the number of microfinance borrowers has

crossed 150 millions. The majority had no access to credit from banks before microfinance

came to them. When they needed to borrow, and most people do at some point or the

otherto pay for an illness or a wedding, to grow a business or to fix their roofthey

would go to money lenders and pay rates that have, justly or otherwise, accounted for theuniversal unpopularity of moneylenders (they can be over 20% per month). Now they

borrow from MFIs at significantly lower (though often high by US standards) rates. At the

same time MFIs have managed to find ways to be financially sustainable and to keep

growing fast. Harper (2002)

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This is itself is a remarkable achievement. Very little works in many of these countries in

terms of delivering to the poor; previous attempts to deliver credit, through state-run banks,

for example, collapsed in the face of widespread corruption and defaults. Many

microfinance institutions are led by dynamic entrepreneurs who have mastered quality

service delivery on a large scale, a tough challenge in many developing countries.

However, many see microfinance as much more than a financial instrument: it has been

suggested that it has the potential to be entirely transformative. There is an influential view

that argues that, by putting more spending power in the hands of poor families, and,

perhaps more importantly, in the hands of women, microfinance can expand investment in

child health and education, empower women and reduce discrimination against them.There is even the suggestion that, by making people feel that their lives could be better and

giving women independent access to capital, microfinance could fight the AIDS epidemic.

There are, of course, others who are skeptical or even hostile. They see MFIs as old-

fashioned money-lenders, preying on the inability of people to resist the temptation of a

new loan. One self-described expert, in a recent letter to the Financial Times, goes as far as

to suggest that microfinance leads to the death of the local economy. Unfortunately, till

very recently, there was little rigorous evidence on either sideis microfinance

transformative or ruinous? However this is changing now, thanks to the courage and vision

of a few leading MFIs (including Spandana in India, Al Amana in Morocco, First Macro

Bank in the Philippines, Compartamos in Mexico) that have allowed researchers (each of

us was involved in one or more of these) to evaluate rigorously the impact of their

programs. We now have results from two (Spandana and First Macro Bank). Klaus (1999)

Provision of loans

Rhyne (2001) notes The two programs evaluated are very different First Macro Bank

provides loan to existing business owners, male or female, on an individual basis.

Spandana uses the classic group-lending model and lends only to women. Yet at one level

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the results are remarkably similar. The effect on businesses is not dramatic but some

clearly benefit. In the Philippines, male-owned businesses increase profits, although

female-owned businesses do not. In India, borrowers who already own a business buy

assets for their business. One borrower out of eight starts a business they would not have

started otherwise. Others buy durables for their homes. M-Cril (2002)

However, there is no evidence that microfinance has any effect on health, education, or

womens empowerment, at least right now, eighteen months after they got the loans. On

the other hand, there is also no evidence that people are behaving irresponsibly. Indeed in

India we have evidence of people giving up some of the little daily pleasures of life (like

tea, snacks, betel leaves and tobacco), to pay for bigger things that they could not

previously afford (carts for their business, televisions for their homes).

Many seem to think that this is not enough. However, as we see it, microfinance seems to

have delivered exactly what a successful new financial product is supposed deliver

allowing people to make large purchases that they would not have been able to otherwise.

The fact that some people expected much more from it (and perhaps they are right, may be

it will just take longer), is perhaps inevitable given how eager the world is to find that one

magic bullet that would finally solve poverty. But to actually blame microfinance for not

promoting the immunization of children is no different from blaming immunization

campaigns for not generating new businesses. According to micro finance information

group Kiva, micro finance is a way of supplying financial services such as loans, savings

accounts and insurance to people who are too poor to usually have access to these kinds of

services. Microfinance institutions (MFIs) that supply micro finance products to

communities are made up of a variety of organizations from nonprofit groups to large

commercial banks. Klaus (1999)

Credit to farmers

Rhyne (2001) notes that to stimulate economic growth in agricultural areas by providing

farm owners with small amounts of credit in an attempt to encourage higher incomes and

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productivity. Kiva explains that during the 1980s the focus of these small-scale schemes

switched to micro enterprise with women the main recipients of small loans to encourage

the establishment of small businesses. Many micro enterprise schemes resulted in the

organizations involved transforming themselves into financial institutions in the 1990s and

expanding their range of services to poor communities in order to reinvest the money paid

to them by their members.

Organized financial service

According to the Microfinance Gateway organized by the Consultative Group to Assist the

Poor, MFIs attempt to provide financial services and assistance to members of society who

would not usually have access to traditional financial institutions such as banks. By

providing an organized financial service, MFIs attempt to provide a safer way for poorpeople to invest money than the traditional ways offered within a community. Many poor

people are described by Kiva as saving money in assets such as domestic livestock, jewelry

and building materials that can be quickly traded for cash in times of need.

Credit

Micro credit

In terms of micro finance, the most common service offered that has been studied the most

is micro credit, according to Microfinance Gateway. The role of micro credit is to offer

people near the poverty line an opportunity to create business opportunities for themselves

that have been clearly identified and can be capitalized upon quickly. Where credit lines are

opened, people who would usually be left to struggle to survive in times of hardship such

as during an illness or a natural disaster have access to money to survive on until times

improve. Klaus (1999)

SMES business support

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Microfinance Gateway explains that the services offered by MFIs, including micro credit,

are not always appropriate to all members of society. Businesses that often benefit from the

use of micro finance include small retail stores, street vendors and service providers. The

role of micro finance, as described by Microfinance Gateway, is the provision of financial

services to benefit poor communities around the world in such a way that long-term income

levels in those communities are increased. Harper (2002)

Economic stability to the poor

Micro finance groups are described by Kiva as often being associated with aiming their

products at women in poor communities. The idea behind this is to provide households

with economic stability and provide economic independence to women. By providing a

source of income to women, Kiva reports that a sense of empowerment is passed on tothose who benefit.

2.4 Challenges of micro finance

Although the importance of microfinance in the process of poverty eradication is realized,

it faces multiple problems. This is because offering credit to the poor is a complicatedprocess and the sector is still in its experimental stage. The problems are divided into two

sets; challenges faced by MFIs and challenges faced by micro entrepreneurs Rhyne (2001)

The poors inability to offer marketable collateral for loans

Microfinance clients are either very small businesses or poor individuals who usually have

few assets, non-existent credit histories, and low income levels. This is a problem because

it means these clients have cannot offer any collateral to microfinance providers against

loans. As a result, microfinance institutes (MFIs) may either raise their interest rates (which

are already high for small loan transactions) or turn down hundreds of applications (read 10

determinants of interest rates in microfinance).

Klaus (1999)

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Poor institutional viability of micro enterprises

Poorly constructed business ideas with a lack of consideration of demand and costs render

the micro venture unsustainable, and microfinance may incorrectly get the blame for it. For

instance, in the case of micro crop farming, farmers often fail to account for their personal

consumption between the sowing and harvesting periods and realize they face a shortage of

money. As a result, they often end up using the loan for personal matters. The problem

arises when its time to pay back the loan the farmer is forced to take up a second loan to

pay the original loan. This may lead to a vicious cycle where the farmer gets inundated

with debt. You may want to see how this problem was addressed as a challenge by Micro-

Crop Loans in Philippines. Harper (2002)

Lack of knowledge about microfinance services

Rhyne (2001) notes Many micro entrepreneurs live in far off rural areas, often remote

villages, and have little formal education which lead to two issues: a lack of knowledge

about the existence of financial services for the poor, (solution financial literacy

campaigns) little access to microfinance services offered by MFIs. This issue was also

mentioned in the post about challenges faced by microfinance institutions because a natural

consequence of this is that loan providers face difficulty in targeting these potential clients.

Shortage of Financial Capital Or Misallocation

Fewer than 10 million of the 500 million people who run micro and small enterprises have

access to financial support for their businesses. Data Snapshot, The Virtual Library on

Microfinance. As a result of the above three problems, a fourth problem arises for micro

entrepreneurs a lack of funds. Without credit, the micro ventures may not grow or

quickly take advantage of opportunities. Since, 20% of the worlds population accounts for

86% of consumption (Global Issues Website), one can deduce that the problem isnt related

to the shortage, but rather, mis-allocation of funds. Klaus (1999)

Inability to exploit growth opportunities

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The last point is a contributor to this problem, because a lack of access to funds means

micro entrepreneurs cannot inject money into their businesses (say, to buy more resources

or hire more people) to grow them after observing a surge in demand. Moreover, the

remote locations of micro businesses means they have little information pertaining to their

markets, such as customer needs and competitor strengths and weaknesses and so on. As a

result, many critics may find faults with the idea of microfinance, not realizing that this

isnt really a problem, but just a challenge that can be overcome as the business grows and

increases its capital base. M-Cril (2002)

Few organizational resources and poor governance

Micro entrepreneurs have limited skills, qualifications and exposure to handling businesses.While they need to be trained through capacity building initiatives by the MFIs, many

micro entrepreneurs may not grow as planned because of these problems. For instance,

they may borrow more money than needed, or mis-allocate it in their business and end up

bearing the burden of large interest payments instead of enjoying the fruits of their

business. Again, critics may say microfinance is an ineffective way of alleviating poverty

but this isnt true. The flip side of this problem is linked to the governance issues faced by

MFIs, which is discussed in the first part of this article.

Low bargaining power

In case micro entrepreneurs operate in competitive markets, their individual bargaining

power is diminished when dealing with customers because of their small size. However, at

the other end of the spectrum, there still isnt any respite because micro entrepreneurs deal

with MFIs on an individual basis, which also erodes their bargaining power. This isnt

really a problem for microfinance, but rather micro entrepreneurs. Klaus (1999)

Vulnerability to economic shocks

Micro entrepreneurs are particularly susceptible to sudden changes in customer demand, or

the weather (even though microfinance can help with natural disasters) because their

businesses cannot sustain losses owning to their small size (low capital). This may be a

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problem for the social objectives of microfinance providers but MFIs ensure their

economic performance is untarnished by charging high interest rates to compensate this

risk (read 4 ways to control high interest rates). Most problems faced by micro

entrepreneurs are caused by their small size, varied locations and improper skills.

Naturally, once the venture secures a loan and begins to grow, these problems will

eventually subside. One may think the problems at the MFIs end, therefore, need greater

attention but that wouldnt be correct because poverty eradication is a very socially-

integrated endeavor. Despite all this, one can say with great certainty that the prospects of

microfinance are still great so these issues are certainly worth solving. Rhyne (2001)

Perceived High Risk of Micro Entrepreneurship and Small Businesses

Micro entrepreneurs usually have no collateral to offer to microfinance providers against

loans, they usually lack an alternate source of income, and have little, if any, formal

education or training in the area of their business. As a result, commercial banks attribute a

high credit risk to micro entrepreneurs and steer clear of this sector.

Microfinance institutes (MFIs) are compelled to compensate for this risk by charging

interest rates on loans (read 10 determinants of interest rates in microfinance).

Fortunately, the challenge can be resolved through the idea of group lending (social

collateral against loans) which ensures good repayment rates. Harper (2002)

High Costs Involved in Small Transactions/Micro lending

The small size of micro enterprises increases the transaction cost for MFIs because they

cannot process loans in bulk (unless good management information systems are in place).

This denies MFIs the benefit of economies of scale; hence, they are forced to cover their

costs through high interest rates on loans (read 4 ways to control high interest rates).

According to a study conducted by Asian Development Bank, microfinance providers in

the Asia-Pacific region charge interest rates on micro-sized loans ranging from 30 to 70% a

year, which is much higher than rates offered by commercial banks (Fernando, 2006).

However, there are instances where the interest rates charged were too low for the MFIs

sustainability. There is, however, possible solutions to this problem by improving the

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technology model used by microfinance institutes, their operational costs can be

significantly lowered and efficiencies may be gained during automated loan processing.

Rhyne (2001)

Lack of Debt and Equity Funds for MFIs to Pass on to the Poor

Klaus (1999) notes Capital availability for microfinance is hardly a problem owing to the

rapid growth in the microfinance sector, which has been fueled by attention from the media

and development agencies. Even though there are plenty of financing options available for

MFIs, there is an emerging shortage of money because of the current financial crisis across

the globe. Another reason for this shortfall is the lack of awareness of funding sources by

MFI managers. M-Cril (2002)

Difficulty in Measuring the Social Performance of MFIs

Microfinance is delivering the economic returns its proponents promised, but there are only

a handful of tools available that measure the social return of loan programs for the poor. To

add to the problem, the tools use proxies to estimate the amount of poverty and social

change surrounding micro entrepreneurs. This makes the gathering of funds a challenge

because donors may question the actual impact made my microfinance.

Mixing Charity with Business

Since credit without strict discipline is nothing but charity (Professor Yunus), if

microfinance providers fail to protect themselves against loan delinquency, they will, in

effect, prioritize social objectives at the expense of financial sustainability. Improper

delinquency management is a result of inadequate implementation of corporate governance

principles, and formal as well as semi-formal microfinance providers often suffer from this.

As a result, looser controls over microfinance deals will lead to higher default rates. Read

more about the difficulty in mixing charity with business. M-Cril (2002)

Lack of Customized Solutions for the Poor

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Inappropriate targeting of poor households by microfinance programs is a common

problem because MFIs fail to understand the varied needs of micro entrepreneurs. MFIs

must spend time in the field with their clients and his/her business, and then use this

research to develop customized microfinance tools for each micro entrepreneur.

Generalized solutions may work for large companies dealing dealing with large

homogeneous customer groups, but microfinance providers need to serve the varied needs

of individuals in each micro market segments.

Lack of microfinance training for Human Resource in Microfinance Institutions

Klaus (1999) states that working in the microfinance sector is a different ball game

compared to the traditional financial sector. For instance, microfinance officers and

volunteers need to talk a different language, build lasting relationships with individualmicro entrepreneurs, understand the unique needs of the poor, evaluate the borrowers

sustainability, and grasp the cultural nuances of the borrowers communities (Im sure Ive

missed a few). Of course, all this needs to be done by large financial firms as well, but the

needs and characteristics of the two markets are very different. Its no surprise

microfinance providers need special training to ensure they avoid problems such as

intimidating or under-serving clients. Rhyne (2001)

Poor Distribution System of Microfinance Institutions and lack of information about

microfinance investment opportunities

Harper (2002) notes There are over 10,000 MFIs across the world, but their reach is only

4% of the potential market. World Bank, 2001 Firstly, microfinance providers may be

complacent with their client base in certain cities and feel no economic need (ignoring the

social need to eradicate poverty) to spread out their distribution system to cater to the

poorest of households. Secondly, micro entrepreneurs are sprawled over large geographical

areas, often in remote places, which often make them inaccessible to MFIs. This is a slight

problem because even though there are over 10,000 MFIs around the world, they may not

know about the existence and needs of certain micro entrepreneurs.

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Dual mission of Microfinance Institutions to be financially Sustainable as well as

Development Oriented

M-Cril (2002) states that Microfinance providers tend to forget their main objective is

social development and not profit creation. The principle of one micro entrepreneur one

micro loan is overlooked by profit-hungry MFIs who end up targeting the same individual

for many loans and cause multiple borrowing (also known as credit pollution). This is a

major problem because at the end of the day, that individual gets burdened by mounting

interest payments and is pushed deeper into the folds of poverty. Poor governance on the

side of MFIs as well as the micro entrepreneur are to blame for this. All these problems can

broadly fall into either financial or operational in nature and we can therefore see that they

should not be impossible to solve as the microfinance sector moves towards it optimal

performance level in the next several years. In other words, despite these problems, theprospects of microfinance are quite bright. In the coming weeks, we will look at potential

solutions to all these problems, which arent difficult to adopt Klaus (1999)

2.5 Strategies to improve running of microfinance

The State Bank of Pakistan recently devised a five-year strategic framework to promote the

growth and development of microfinance. Considering that Pakistan is one of the few

countries where the microfinance sector is facing a repayment crisis after years of high-

growth, these strategies rely on policy changes and regulatory interventions that promote

sustainability and capacity building of microfinance providers. Salient features of the

framework are as follows: Rhyne (2001)

Organizational Structure and Legal Status

NGO-based microfinance providers are encouraged to formalize their structures, obtainlegal identities, and preferably get licensed by the central banks to become microfinance

banks. The result is formal microfinance institutions must follow stringent internal control

and auditing principles, which will give them greater: flexibility in product range (only

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microfinance banks are allowed to take deposits from the public), and integrity from the

points of view of regulators, investors and borrowers. M-Cril (2002)

Regulatory Endorsements

A concession in the Prudential Regulations for microfinance banks (MFBs) has exempted

certain deposits and short-term liabilities of MFBs from the cash reserve requirements

rules. The result is this will release funds that MFBs can use to make microloans to the

poor, and serve the high service demand in this sector. Klaus (1999)

Innovation

Technology-based microfinance solutions, which result from partnerships between

commercial and microfinance banks, and telecom firms, are being welcomed. The result ismobile banking solutions (Easy Paisa, for instance) promises to deliver financial services

(including micro-loans, micro-savings, and money transfers) to the masses in

geographically dispersed and remote areas.

Funding for Microfinance Institutions

The links between the microfinance sector and commercial banks will be strengthened to

improve the flow of funds to microfinance banks and NGOs in the sector. At the same

time, the framework highlights the need for microfinance institutions (MFIs) to reduce

their dependence on external funding sources and improve their financial and operational

performance to become sustainable. The result is as access to low-cost funds (in the form

of loans from commercial banks) is improved, entry barriers in the sector will fall, and

new, as well as high-growth MFIs will find is easier to finance their expansion. At the same

time, established MFIs are encouraged to achieve sustainability and attain financial

independence.

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Capacity Building

Subsidies and matching grants will be offered, with the help of donor agencies, to provide

capacity building and infrastructural support to improve and sustain the performance of

microfinance providers in the areas of outreach, product range, innovation and quality.

The development of formal information systems, operational mechanisms and managerial

plans will be emphasized to create synergies between an MFIs business plan,

management talents, technology resources, and governance structures. The result is

Capacity building, led by information systems that tie together various managerial

functions, such as operations, human resource, marketing and finance, is vital for

sustainable growth in microfinance. The lack of formal information systems played a role

in the onset of the current repayment crisis in microfinance. Klaus (1999)

Post-disaster

Reversing the increasing vulnerability and destitution of the post-disaster context

population requires development strategies and not just emergency and relief programs.

The role of microfinance targeting poor and vulnerable population groups and working to

stimulate local economies is particularly relevant in regions affected by the South Asian

Tsunami Disaster. Prior to this tragedy, t he crisis in former Yugoslavia of the 1990s gave

new rise to the discussion of the role of microfinance in the post-conflict context. And

while the focus in the Balkans was on unfriendly regulatory environments and MFI

sustainability, the discussion has also provided useful insight into the possible development

role of microfinance that might have value for comparative approaches and study of

microfinance. Bosnian MFIs have also achieved some of the highest levels of MFI

profitability. This Balkan post-conflict country has adopted relevant microfinance

regulations and has allowed a number of independent microfinance institutions (for

example Prizma, Mikrofin, EKI-World Vision, Mi-Bospo, Partner, and Sunrise). Harper

(2002)

In Bosnia, the banking supervision agency promptly accepted that credit-only institutions,

in fact, represent no risk to the financial sector. The authorities decided not to supervise

NGOs and MFIs at all, as they view their task as overseeing the restructuring of the

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banking sector. So, the Bosnian laws (for the BIH Federation and Republika Srpska

entities) prepared were relatively simple: they allowed NGO-credit-only institutions to

register, had very simple reporting requirements and there were no prudential supervisions

put in place. Klaus (1999)

Today, Bosnian MFIs assist potential and existing entrepreneurs and/or poor women and

their families to address basic post-conflict needs, such as adequate shelter and sustainable

livelihoods, which often leads to entrepreneurship. Addressing local economic

development needs in the post conflict context, Prizma, for example, seeks to develop new

financial services for poor and low-income women, innovating where there is a clear

developmental need, client demand, and market opportunity. With seed capital from the

United Nations and the US Government, Prizma began offering business developmenttraining and small loans to poor and low-income ethnic minority, returnee, displaced,

domicile, and refugee women from a small office in the northern town of Bihac, Bosnia-

Herzegovina in 1997. Today Prizma has 12,000 active clients. Prizma has two clear

objectives as an emerging microfinance institution: strong social impact and long-term

sustainability. Serving low-income women in post conflict context has indeed been a

challenging task, but in 2001, Prizma was the first microfinance organization in C&EE and

the NIS to receive an external rating. Following the achievement of financial sustainability

in 2001, which is an achievement in itself, in 2002 Prizma received a follow up rating, in

which it was awarded G4*++, among the highest granted thus far. Rhyne (2001)

Microfinance as a Strategy in Disaster Situations

While microfinance is typically viewed as an economic development tool, it can also serve

as a relief and survival strategy in emergency and disaster situations and in the transition

from relief to development aid, as the example of Prizma shows. At the household level,

microfinance can serve as a vulnerability reduction strategy by promoting access to assets

and increased production. Microfinance is a better long-term option than continued

humanitarian assistance because it stimulates development at the local level, creates

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employment, increases incomes and expands economic opportunity. In the relief and

reconstruction context, microfinance reduces vulnerability by providing access to capital,

thus protecting clients against future risk by diversifying income sources and replacing

capital that might be lost in a disaster. MFIs can also provide savings services. As women

seem to benefit from access to MFI loans to a greater extent than men do, microfinance

programs that target female clients are likely to have the greatest impact on household well

being. Efforts to target female clients might result in a relatively more urban and affluent

clientele, while more vulnerable rural groups, such as female headed households, might

decline within the client population. Harper (2002)

Authorities in transition economies should maintain a considerable degree of flexibility inmanaging the MFI regulatory environment and exercise other instruments of supporting

microfinance development as well. Whether this flexibility should be carried out to the

degree of independently functioning MFIs depends on the situation of the particular

country. At the same time post-conflict and post-disaster environment is a challenge for

potential MFIs. An MFI planning to operate in such areas really needs to make strategic

decisions that may compromise their short-term sustainability. And while in the short run it

would make sense to reduce objectives by using microfinance to alleviate poverty, as

conditions improve a more viable market for a sustainable MFI might become possible.

This shall indeed require offering services that are preferred by entrepreneurs, streamlining

operations to reduce costs, motivating clients to repay loans, to access repeat and larger

loans, and charging full-cost interest rates and fees. Klaus (1999)

2.6 Summary

Wright (1999) states that Microfinance is a highly attractive intervention for donors

because it offers the possibility of sustainable intervention with long-term impact on keyeconomic and social indicators. Microfinance can be delivered in an institutional and

financially sustainable manner that permits donors to withdraw after making relatively

modest investments. However, microfinance is not a panacea or cure-all for all problems of

development. Key areas where microfinance cannot make a contribution include: assisting

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the poorest through income transfers or subsidies or serving as a vehicle to provide health

and education services. Microfinance also cannot be used as a substitute for investments in

the infrastructure that is necessary to link more remote areas to markets. These areas

necessarily require separate, specially designed interventions.

Rutherford (2000) states that the Concept Microfinance has emerged as a growing industry

to provide financial services to very poor people. Until recently, microfinance focused

primarily on providing microcredit (small loans of about $50-$500) for microenterprises.

Now, however, there is recognition that poor people need a variety of financial services,

not just credit. Current microfinance has therefore moved towards providing a range of

financial services, including credit, savings and insurance, to poor enterprises and

households. The field of microfinance was pioneered by specialized non-governmentalorganizations (NGOs) and banks such as Bank Rakyat Indonesia (BRI) Unit Desa

(Indonesia), Grameen Bank (Bangladesh), Kenyan Rural Enterprise Programme (K-Rep)

(Kenya), Fundacin para la Promocin y Desarrollo de la Microempresa (PRODEM),

Banco Solidario (BancoSol) (Boliva), and others. They challenged the conventional

wisdom of the 1970s and discovered that with new lending methods, the rural poor repaid

loans on time. These new methods included providing very small loans without collateral at

full-cost interest rates that were repayable in frequent instalments. They demonstrated that

the poor majority, who are generally excluded from the formal financial sector, can, in fact,

be a market niche for innovative banking services that are commercially sustainable. As a

result, current microfinance has made a major shift from subsidized microfinance projects

of the past, which ended up serving few people, to the development of sustainable financial

institutions specialized in serving the low-income market Yunus et al (2003)

2.7 Theoretical framework

Business Theor: B anking and Finance linkages with MFIs

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Banks Outsourcing retail operations through MFIs

Banks outsourcing retail operations through MFIs involves a situation where the bank

under specialized special contracts with the MFIs has its microfinance activities (micro

loan appraisal, processing, disbursement and loan monitoring) done by the MFI for fee or a

share of interest income (Isem and Porteous,2005). Under this model, the Bank engages

the MFIs that maintain a history of high quality portfolio financed from its own fund. The

model allows for microfinance products such as loans, insurance, money transfer to be

branded by the bank or the

MFI or be in a joint branch. Isem and Porteous,(2005) point out that there is risk sharing

between the banks and the MFI contributing a portion of the loan portfolio or ensuring fast

class guarantee on the loan portfolio. A good example spandana, an MFI-based in

Guntur,Andhra Pradesh acting as service agent for ICICI Bank and AMEEN an MFI inLebanon carrying out lending operation for credit Libanais,Jammal Trust Bank and

Lebanese Canadian Bank (Isem and Porteous,2005).

2.8 Conceptual Framework

In the study conceptual framework adopted is where the components of micro finance

institutions are taken as independent variables and the components of the local economy

are taken as the dependent variables and the intervening variables are the strategies to

improve the use of microfinance institutions, shown in figure 1 below:

Figure 1 Conceptual Framework For the impact of microfinance institution and local

economy.

Independent Variable Dependent Variable

26

Microfinance

-Formal institutions-Informal sources-Semiformal institutions

Local economy

-Loans to women and the youth

-Poverty eradication strategies

-SMEs business expansion loans.

-Expensive loans from banks


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Intervening

Variables

Source: author, 2011

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Regulatory

Endorsements

Capacity Building

Organizational Structure

and Legal Status

Innovation

Funding microfinance

institutions


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CHAPTER THREE

RESEARCH DESIGN AND METHODOLOGY

3.1 Introduction

This chapter described the methodology and procedure used to obtain research data. It

outlines the research design, target population, sample size, sample size procedure data

collection instruments reliability and validity of the study and data collection procedure and

analysis.

3.2 Research Design

The study applyed a case study method. The design allowed for and a holistic in depth

study of the Bomet municipality, which was similar in many aspects in a single outfit and

the findings, were hoped to be generalized to other areas. This design was chosen because

it involved investigation of the impact of microfinance institution on the growth of local

economy. It had the ability to in-depth information.

3.3 Target Population

The target population was the people directly involved in the management and running of

the microfinance the government staff and the SMES who acquire the loans for business

development thus making up a target population of 120. The subject of the study was

drawn from the entire population.

3.4 Sample size and sampling procedure

According to Mugenda, 1998 a sample of about 30% can be used to determine a sample

size of a large target population.

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3.4.1 Sample size

The sample size of 36 respondents was selected.

The research used stratified random sampling method where the respondents were selected

from all the Administrative Divisions and various offices within the child trafficking

initiatives. This is shown in table 3.2

Table 3.2: Sample size

Respondents Target population Procedure Sample size

Government

Administrative

8 10*30 3

Residents 74 126*0.3 22Microfinance staff 24 20*0.3 7SMES staff 14 20*0.3 4Total 120 36

Source: (Author, 2011)

3.4.2 Sampling procedure

To sample the respondent from the stratum, the names of the subject are put in a basket and

shaken then the required numbers are picked where each subject had an equal chance to be

selected. The researcher will administer the instruments to the respondents.

3.5 Research instruments

The study used one set of simple structured questionnaires and administered them to thevarious categories of respondents by physical dropping and picking by research assistance.The instrument contained closed and open-ended questions. They were to be administeredto the departmental managers and other staff.

The choice of structured questionnaire was selected due to there ease administration,analysis and time saving. According to Mugenda and Mugenda (1999) the questionnairetool was most appropriate since a questionnaire data capture is a necessity, which can onlybe obtained directly from the respondents. Closed-ended questions in the questionnairewere used to standardize and qualify responses from the research. The open-endedquestions in the questionnaire ensured that an in-depth data that is detailed and explorativeof all aspects of the variable(s) under the study was obtained. It also took care of humannature of the respondent of wanting to express their personal views and feeling importantas a participant of the research. Interviewing is a defined as a two- way systematicconversation between an investigator and informants initiated for obtaining informationrelevant to a specific study (Krishnaswami, 1993). It involves not only conversation, but

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also learning from the respondents gestures, facial expression, pauses and his/herenvironment. This technique was used to interview respondents at different levels whichincluded interviewing Government Administrative, Microfinance staff, SMES staff, andresidents of Bomet Municipality. This helped during data presentation.

3.5.1 Piloting of the instruments

In planning a research study, appropriate research tool or instrument were chosen which

were very important in data collection. Research instruments were selected or developed

carefully to fit the research design and the plan of data analysis so that the data collected

could have facilitated the answering of research questions. Validity and reliability often are

caned psychometric properties of the research instruments, which mean they represent how

well instruments measure the variables of interest to the researcher.

3.5.2 Validity of research instruments

According to Mugenda and Mugenda (1999) the validity of research is concerned with the

extent to which that data measures what they are supported to measure. To test the

validity of the research instruments, the questionnaire was prepared and submitted to the

supervisor and other research experts for cross checking and also to assess the reliance of

the content. The questionnaire was pre-tested through a pilot study; the findings were

modified to free them from ambiguity. The pilot study was carried out one week earlier in

the organization.

3.5.3 Reliability of the instruments

While the rest of reliability is concerned with the extent to which the researcher can depend

confidently on the information gathered through various sources of data, adopted to obtain

the study and clarifying numerical data collected.

3.6 Data collection procedures

After sampling the staff, the researcher formulated research instruments and collect data.

Data was collected according to the following procedure: (I) a letter was sent to the staff of

sample facilities informing them of the research and the fact that, interviewer would

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conduct them for appointment. Letter of endorsement by the College was send with

introductory information to urge the manager of the facility to participate in the case

study/research. Also included in this introductory letter was how data would be displayed.

(II) After mailing of the letters, the interviewer telephoned the sample facility and made an

appointment with the manager. (III) At the time of appointment, the following procedures

were followed: The facility Questionnaire was completed by the interviewer who

interviewed the manager or designee, departmental heads, officers and staff. Sampling was

accomplished by using tables showing sets of sample line numbers for each possible

sample in the facility. After data collection, it was converted into machine-readable forms.

Extensive editing was conducted by computer to ensure that all responses were accurate,

consistent, logical, and complete.

3.7 Data analysis.

The data was collected for the purpose of the study, adopted and coded for completeness

and accuracy. Statistical method was used for data analysis and interpretation. The

observation and respondents from closed-ended questions was tabulated and analyzed.

Frequency distribution table was prepared for open-ended questions so as to convey the

meaning of data.

3.8 Ethical consideration

An introduction letter was provided indicating the area of research to be undertaken by the

researcher and confirming that the research information was treated confidentially and is

for academic purposes.

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CHAPTER FOUR

Data Analysis, Presentation and Interpretation

Introduction

This chapter deals with data analysis, presentation and interpretation. The data obtained

was coded and presented into frequencies and then converted into percentages. Most of the

questions were closed ended making the questions easy to summarize. The open ended

comments served to enrich the closed ended questions.

4.1 Data Analysis and Presentation

It was necessary to seek generalization in order to build information and assess the

demographic data such as the gender of respondents, age bracket, level of education and

working experience.

4.1.1 Gender of Respondents

The research sought to find out the sex of the respondents as it was necessary to determine

if the gender played a great a role in determining the impact of microfinance institution on

the growth of local economy at Bomet municipality. The results are shown in the table 4.1

below: The findings revealed that, 61.1% of the respondents were male and 38.9% of the

respondents were female.

Table 4.1: Gender of Respondents

Respondent frequency percentageMale 22 61.1Female 14 38.9Total 36 100

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4.1.2 Age of the Respondents

The age of the respondents was important to assess the impact of microfinance institution

on the growth of local economy at Bomet municipality. Among the different age brackets;

the findings are summarized in the Table 4.2 below

Table 4.2 age of the respondents

Age of respondents frequency percentage16 24 4 11.125 34 10 27.835 45 15 41.7

45 Over 7 19.4

Total 36 100

It therefore implies that majority 15(41.7%) of the respondents are aged between 35 45

years as cited by the response. This indicates that the respondents are rather mature and are

the business holders and the other people that are looking for loans and aware of the

impacts of microfinance institution on the growth of the local economy. The minority

group 4(11.1%) of the respondents cited are aged between 16 24 years and they are the

young people that are taking loans to start their business. The majority group of

respondents cited 10(27.8%) are aged between 25 34 and are mostly the employees of the

microfinance institutions and the other youths that want to develop their business and

7(19.4%) of the respondents are aged 45 years and over this therefore shows that they are

people that want to retire and they are taking the loans to start their own business.

4.2.3 The Level of Education

The education of the respondents was important since the study is concerned with the

impacts of microfinance institution on the growth of local economy at Bomet municipality

and education has a major role to play in determining the awareness of the loans and the

other services that are offered by microfinance institutions. The findings are summarized in

the Table 4.3below.

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Table 4.3 Education level

Educational level frequency PercentagePrimary 1 2.8Secondary 2 5.6College 19 52.8University 14 38.9Total 36 100

it indicates that majority 19(52.8%) of the respondents are college level and are the SMES

holders and other people planning to start a business. 14(38.9%) are university graduates

and they are employees and the administrators of the micro finance and others who are

planning to start a business or develop their business by taking a loan. 2(5.6%) are

secondary level and 1(2.8%) are primary level.

4.1.4 Working experience of employees and duration lived in the region

Data was collected to ascertain the working experience of employees since this will

determine the working condition of the employees and their know how and the duration

that the respondents have lived in the region and the development of the local economy that

they have witnessed. The study shows that the majority of the respondents have lived in the

region for a period of 3 5 years as shown in table 4.4 below

Table 4.4 Working experience of employees and duration lived in the region

Working experience Frequency PercentageLess than 3 years 4 11.13 5 years 8 22.25 10 years 10 27.8More than 10 years 14 38.9Total 36 100

The table shows that 14(38.9%) of the respondents have lived in the region for a period ofmore than 10 years. 10(27.8%) have lived in the region for a period of for 5 - 10 years,

8(22.2%) have lived for a period of 3 - 5 years and 4(11.1%) for less than 3 years

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4.2 Background Information

4.2.1 Current state of the microfinance

The researcher sought to find out current state of the microfinance since it shows how

much the institutions are growing and how much the public at large are embracing them.

The study found out that rapid growth of MFIs is the current state and that the institutions

are growing. The table shows that 14(38.9%) of the respondents cited rapid growth

8(22.2%) cited poorly managed MFIs 10(27.8%) cited lack of funds 4(11.1%) cited

untrained personnel as shown in table 4.5 below

Table 4.5 current state of the microfinance

Current state of the

microfinance

Frequency Percentage

Rapid growth 14 38.9Poorly managed MFIs 8 22.2Lack of funds 10 27.8Untrained personnel 4 11.1Total 36 100

4.2.2 Current state of the economy

The researcher sought to find out current state of the economy since it shows how much the

economy is growing and the rate at which the public is prepared to take microfinance loans.

The study found out that expensive loan from the bank is the current state of the local

economy. The table shows that 14(38.9%) of the respondents cited rapid number of SMEs

8(22.2%) cited expensive loans from the bank 10(27.8%) cited fear of loans from the bank

4(11.1%) cited lack of trusted loan creditors as shown in table 4.6 below

Table 4.6 current state of the economy

Current state of the economy Frequency PercentageRapid number of SMEs 8 22.2Expensive loans from the

bank

16 44.4

Fear of loans from the bank 8 22.2Lack of trusted loan 4 11.1

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creditorsTotal 36 100

4.2.3 The services of microfinance institutions

The researcher sought to find out the services of microfinance institutions since it shows

the services that the institutions are offering and it identifies what the public needs are. The

study found out that Provision of loans is the most offered service of the micro finance

institutions. The table shows that 14(38.9%) of the respondents cited Provision of loans

8(22.2%) cited Credit to farmers 10(27.8%) cited Organized financial service 4(11.1%)

cited Micro credit 3(8.6%) cited SMES business support and 2(5.6%) cited Economic

stability to the poor as shown in table 4.7 below,

Table 4.7 Services of microfinance institutions

Services if microfinance

institutions

Frequency Percentage

Provision of loans 18 50Credit to farmers 6 16.7Organized financial service 2 5.6Micro credit 5 13.9SMES business support 3 8.3

Economic stability to thepoor

2 5.6

Total 40 100

4.2.4 Challenges faced by microfinance

The researcher sought to find out the challenges microfinance institutions face since it

shows how much and where the problem is and where to start when addressing the issues.

The study found out that the poor inability to offer marketable collateral for loans is the

most faced challenge by the micro finance institutions. The table shows that 14(38.9%) of

the respondents cited The poor inability to offer marketable collateral for loans 3(8.3%)

cited Lack of knowledge about microfinance services 5(13.9%) cited Low bargaining

power 2(5.6%) cited Vulnerability to economic shocks 4(11.1%) cited Perceived High Risk

of Micro 5(13.9%) cited High Costs Involved in Small Transactions /Microlending 1(2.8%)

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cited Mixing Charity With Business and 2(5.6%) cited Lack of Customized Solutions for

the Poor as shown in table 4.8 below,

Table 4.8 Challenges microfinance face

Challenges microfinance face Frequency PercentageThe poor inability to offer

marketable collateral for loans

14 38.9

Lack of knowledge about

microfinance services

3 8.3

Low bargaining power 5 13.9Vulnerability to economic

shocks

2 5.6

Perceived High Risk of Micro 4 11.1High Costs Involved in Small

Transactions/Microlending

5 13.9

Mixing Charity With Business 1 2.8Lack of Customized Solutions

for the Poor

2 5.6

Total 40 100

4.2.5 Possible strategies to improve the running of microfinance

The researcher sought to find out the possible strategies to improve the running of

microfinance since this proposes the measures that can be adopted to improve microfinance

running. The study found out that Organizational Structure and Legal Status is the most

proposed possible strategy to improve the running of micro finance institutions. The table

shows that 12(33.3%) of the respondents cited Organizational Structure and Legal Status

8(22.2%) cited Regulatory Endorsements 4(11.1%) cited Innovation and technology 6(16.7

%) cited Funding for Microfinance Institutions 4(11.1%) cited Capacity Building and

2(5.6%) cited Microfinance as a Strategy in Disaster Situation

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