MASENO UNIVERSITY FACULTY OF ARTS AND SOCIAL SCIENCE DEPARTMENT OF ECONOMICS AND BUSINESS STUDIES MAR 2010IMPACT OF MICROFINANCING ON PERFORMANCE OF SMALL ANDMEDIUM ENTERPRISES (SMES’) IN KISUMU CENTRAL BUSINESSDISTRICT- A STUDY OF KISUMU LAKE MARKET BUSINESSES. BY: KENNEDY NYABWALA BA/3150/06A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILMENT FOR THEDEGREE OF BACHELOR OF BUSINESS ADMINISTRATION WITHINFORMATION TECHNOLOGY 1
TABLE OF CONTENTSDEDICATION.................................................................................2ACKNOWLEDGEMENT..............................................................3CHAPTER FOUR.........................................................................25DATA ANALYSIS AND PRESENTATION..............................25 4.1 INTRODUCTION.................................................................25 4.2 BUSINESS MANAGEMENT...............................................25 The study found out that the highest number of respondents were in the line of electronics. This was attributed to the technological advancement and the respondents life styles and culture.................................................................................27CHAPTER FIVE...........................................................................32CONCLUSIONS AND RECOMMENDATION........................32 5.1 Summary of the Findings......................................................32 5.2 Conclusion .............................................................................32 5.3 Recommendations .................................................................33 5.4 Suggestions for further research..........................................33 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. 2
ACKNOWLEDGEMENTWe acknowledge our supervisor Mr. Nelson Obange who guided us throughout theresearch period.We also acknowledge the spirit and willingness in terms of cooperation of our esteemedrespondents to our research. Without your cooperation our research could not have beensuccessful.Finally, we thank the Almighty God for the life and strength He has given unto us allthrough. Amen 3
LIST OF ABBREVIATIONSABBREVIATIONS SMEs’ :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 4
DEFINITION OF KEY TERMSMicro-financingMicro-financing is the provision of financial services to low income clients who includecustomers and self employed individuals that traditionally lack access to banking andrelated services.SMEThe research considered a small enterprise to be that consisting of 10-50 employees, aturnover of Kshs 0.5 million annually and an asset base of Kshs 100,000. A mediumenterprise was assumed to consist of less than 250 employees, a turnover of Ksh5million annually and an asset base of Kshs 500,000.MFI (micro finance institutions)These are financial institution that offer credit facilities to individuals and businesses foran agreed period of time.CBD (central business district)The CBD in kisumu is the main center of kisumu town where majority of businessactivities take place.SMEs’ performanceThis is the measure of growth, profits and stability of the SMEs’ in relation to businessenvironment in which they operate. 5
CHAPTER ONE1.0 INTRODUCTIONThis chapter provides the background to the study. It details the problem statement,research objectives and questions and rationale for the study.1.1 BACKGROUND OF THE STUDYMicro-finance concept has operated for centuries in different parts of the world forexample, “Notable” in Indonesia, “cheetu” in Srilanka, “tontines” in Ghana West Africaand “pasanaku” in Bolivia.One of the earliest and longest serving micro-credit organization providing small loansto rural poor dwellers with no collateral is the Irish loan Fund system initiated in theearly 1700”s by Jonathan swift. His idea began slowly in 1840s and became awidespread institution of about 300 branches all over Ireland in less than one decade. Theprincipal purpose was to advance small loans based on some trust for short periods. TheIrish loan fund attracted about 20 percent of all Irish SMEs’ leading to growth of smalland medium enterprises every year. In the 1800”s various types of longer and more formal savings and credit institutionsbegan to emerge in Europe organized primarily among the rural and urban people. Theseinstitutions were known as people’s banks credit unions and savings and creditcooperative. The credit unions and cooperatives were motivated by concern to assist therural population to break out of their dependence on money leaders and to improve theirwelfare. From 1870 the unions expanded rapidly over a large cooperative movement and quicklyspread to other countries in Europe and North America and eventually supported by thecooperative movement in developed countries and donors and also to developingcountries. In the early 1900”s various adoptions of these models began to appear in partsof rural Latin America. While the goal of such rural finance intentions was usuallydefined in terms of modernizing the agricultural sector, they usually had two specificobjectives: first, Increase the commercialization of the rural sector and second, Increasethe investment through credit. It is against such background and the second objective that 6
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 anattempt to meet the large demand from the estimated 38 percent of Kenyans lackingaccess to financial services (www.kenyabureauofstatistics.com).The demand for micro-finance service in Kenya is high yet the industry is only able to meet about 20 percent oftheir demand because of lack of financial resources and the capacity to assess risk processand monitor loans.SMEs’ are dynamic entities where some grow into larger enterprises, some stabilizewithout changing the scale of operation, while others disappear (Bhalla A.S, 1992).Micro financial sectors in Kenya have rapidly expanded as a source of credit for smallscale businesses. An example in Kenya is Faulu Kenya which is one of the largest MFIin Kenya. Initially Faulu Kenya focused on micro enterprise lending in Mathare slums ofNairobi. However, over the last 17 years, as lending methodologies and systems wereimproved, Faulu Kenya grew to become a company with 31 branches and a presence inmost districts of KenyaThe objective of this Institution is to support SMEs’ in Kenya as it transforms from acredit only institution to a regulated deposit taking institution. This transformation ischaracterized both by the development of a broader product offering as well as by theformalization of the shareholding structure and regulatory framework the institutionadheres to. The addition of liability products will provides secure savings to SMEs’ aswell as more control over funding and asset liability management for them , this thusimproves the performance of SMEs’ by making them to expand their businesses fromsaving and also acquiring huge loans.1.2 STATEMENT OF THE PROBLEMSmall and medium enterprises (SMEs’) face challenges in obtaining funds from largeand formal financial institutions thus opt for loans from micro-financial institutions tofund their business projects. This Research sought to explore the impact of microfinancing on performance of SMEs’ in Kisumu West district. 7
1.3 THIS STUDY SOUGHT TO ANSWER THE FOLLOWING QUESTIONS;1) Have the existing SMEs’ been financed by the MFI’s?2) Have the financed SMEs’ been able to repay their loans as per the terms andconditions of the MFI’s?3) Do financed SMEs’ realize growth on acquisition of loans from the MFI’s?1.4 OBJECTIVES OF THE STUDY 1.4.1 General ObjectiveThe general objective of this research was to determine the impact of microfinancing ongrowth of SMES’ within Kisumu central business district. 1.4.2 Specific objectives1) To establish whether the SMEs’ have been financed by Microfinance institutions.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’. 1.5 SIGNIFICANCE OF THE STUDYThe study was geared towards the recognition of the importance of micro financing onthe growth of SMEs’. SMEs’ have benefited from microfinance institutions through theprovision of equity/capital for start ups, moreover, micro finance institutions also offerBusiness support to the SMEs’ before start up by developing a business proposal of theirchoice and helping them in developing a savings scheme.Micro finance institutions can benefit from this study by determining how fast they canprovide funds and motivate the business owners towards spreading their ability infunding the SMEs’ thereby justifying their essentiality.When analyzed well this study broadens our level of thinking in sourcing equity/capitalthrough financial institutions and develop saving scheme skills for our businesses thereby 8
broadening our scope and ability to fund our own businesses. It will thereafter raise ourliving standard by enabling us develop business that may be of an increment to ournormal income.Since the government is the backbone of the economy, microfinance institutions willenable the government to establish the tax rates to levy on the SMEs’ thus generatingincome which they can deploy to other sectors of the economy and check the economicgrowth level e.g. by checking the lending rates of micro finance institutions. It is alsorelevant to the government for the formulation of regulatory policies regarding MFIs’.Besides, commercial banks also get motivated in considering funding of SMEs’ throughthe collection of various statistics on their performance.Also the awareness that is created on the challenges facing MFIs’ would help create agood saving culture in Kenya thus leading to the creation of a strong capital base whichcan be invested in profitable ventures creating employment opportunities and upliftingthe living standard of SMEs’.1.6 SCOPE AND LIMITATIONS OF THE STUDYThis research study targeted SMEs’ in CBD of Kisumu town .The scope of the studywas to research on the impact of micro financing on performance of SMEs’ for the past5 years.Limitations of the study Due to lack of time and access to resources e.g. bus fare to cater for the transport aroundKisumu west district, access to information in Kisumu west district concerning theimpact of micro finance on performance of SMEs’ proved difficult. To curb thislimitation we got the information relevant to our study from the Kenya national bureauof statistics (KNBS) thus easening our work. It was also difficult to access informationfrom the MFI’s thus we managed to get detailed information through questionnaires tothe SMEs’. We also experienced hostile weather condition and this made us to carry outour survey in the morning hours and in the evening. CHAPTER TWO 9
LITERATURE REVIEW2. 1 IntroductionThis chapter discusses literature related to micro financing and SMEs’ growth. It focuseson two substantive literature aspects. First, theoretical reviews of the conceptual theoriesso far advanced in the field of microfinance and SMEs’ and second, the empirical reviewfor evidences about micro financing and SMEs’ performance in various parts of theworld.2.2 Theoretical Review 2.2.1 Micro credit theoryThe psychological component of the micro credit theory - known as socialconsciousness-Driven capitalism - has been advanced by the most ardent promoter ofmicro finance, Muhammad Yunus (1998). His theory argues that a species of profit-making private venture that cares about the welfare of its customers can be conceived. Inother words, it is possible to develop capitalist enterprises that maximize private profitssubject to the fair interests of their customers. (Journal of political and militarysociology, summer by Elahi, Khandakar Q, Danopoulos, Constantine P- 2004edition)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 principleof profit-maximization, with little consideration for the interests of their clients. Thispremise is too limited to be a general model for capitalism, however, because it excludesindividuals who are concerned about the welfare of their fellow human beings. A moregeneralized principle would assume that an entrepreneur maximizes a bundle consistingof financial return or profit and social return. This assumption creates three groups ofentrepreneurs (Elahi, 2002). The first group consists of traditional capitalists who mainlymaximize financial returns or profits. The second group consists of philanthropicorganizations (like traditional micro credit NGOs) and public credit agencies that mainlymaximize social returns. The third group consists of entrepreneurs who combine bothrates in making their investment decisions under the additional constraint that financial 10
return cannot be negative. This group includes the microfinance enterprisers who are tobe treated as socially concerned people, and microfinance, which is to be treated as asocial consciousness-driven capitalistic enterprise. Microfinance theoreticians haveadvanced two theories regarding their aims-an economic and a psychological. Theeconomic theory treats microfinance institutions (MFIs) as infant industries, while thepsychological theory differentiates microfinance entrepreneurs from traditional moneylenders by portraying them as "social consciousness driven people." According toRemenyi (2000:65), the gist of the economic argument is that success in any businessventure, including MFIs, is determined by the entrepreneurs ability to deliver appropriateservices and profitably. However, studies conducted in different parts of the TW showthat there are no successful MFIs by this definition. At best, some MFIs cover theiroperating costs while some of the better known among them are able to cover in part thesubsidized cost of capital employed. This situation suggests that the MFIs will notbecome financially viable in the long run. One solution to this problem is to treat MFIs asinfant industries, so that micro-lending businesses can be subsidized during their initialstages of operation. This subsidization would be beneficial to both the economy andsociety because this will help micro lenders realize economies of scale and theproductivity fillip that comes with profitability. The logic goes as follows: Over time, asclients of MFIs, micro entrepreneurs will establish their economic contracts with banks,retailers, government employees, and suppliers of production inputs, which will improvetheir skills dealing with money management, contractual obligations, and resourcemanagement. These skills should reduce the cost of transaction, disseminate information,and increase the micro entrepreneurs ability to assess effectively available information tomake sound business decisions. In this respect, society benefits from what is, in effect, aproductive process leading to the creation of public goods as spin-offs from the growth ofmicrofinance. To the extent that these public goods have value, they are a legitimate basison which to provide subsidies to MFIs while the transition to widespread outreach to poorhouseholds is ongoing (Remenyi, 2000: 46).The Wealth of Nation says little about thepsychological aspect of the theory. Smith articulates the psychological components in hisother book, The Theory of Moral Sentiments. Published seventeen years before hisWealth of Nations, this book deals with moral theory. Smith advances the maxim that 11
human self-interest acts as a prime mover of the capitalist development. MoralSentiments is an inquiry into moral psychology, for which the main concern is the natureof moral judgment (Raphael, 1985; Sprague, 1967).Smith finds the original source of moral judgment in the conception of sympathy, whichhe makes sufficiently clear in the first paragraph of the book: How selfish so ever, manmay be supposed, there are evidently some principles in his nature, which interest him inthe fortune of others, and render their happiness necessary to him, though he derivesnothing from it except the pleasure of seeing it. Of this kind is pity or compassion, theemotion, which we feel for the misery of others, when we either see it, or are made toconceive it in a very lively manner. That we often derive sorrow from the sorrow ofothers is a matter of fact too obvious to require any instances to prove it; for thissentiment, like all other original passions of human nature, is by no means confined to bevirtuous 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 togetherwithout it. (Smith, 1976:9)This opening paragraph is both an attack on the ethical theories of Thomas Hobbes andBernard 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 ofphilosophical investigation, paints a very negative picture of human nature. Hismaterialistic conception of human nature may be understood from his interpretation ofhuman life. He sees human life simply as motion of limbs. The human heart is simply aspring; nerves are nothing but a complex system of strings; and joints are just wheelswhich give motion to the whole body (Hobbes, 1960). In other words, Hobbes conceiveshuman 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 thatseeks to improve the economic health of society. Trade policies either facilitate or impedethe flows of voluntary exchanges of goods and services between nations undertaken byprivate nationals. The generic term, free trade policy, is used to describe government 12
measures that facilitate these exchanges. Government measures aiming to do the oppositego by the generic term "protectionism". It follows that discourses in international tradetheory and policy revolve around two thematic ideas-free trade and protectionism-both ofwhich seek the same objective, national development.Historically, protectionism is regarded as a conservative economic idea that precedes theliberal economic idea of free trade. Protectionism is often traced to the 16th century,while the history of free trade definitely begins in the 18th century (Ellsworth, 1950). Theoriginal protectionist argument is mercantilism, while the French Physiocrats are theoriginal authors of free trade that received its fuller exposition in the able hands of AdamSmith. The infant-industry argument was developed later to accommodate mercantilistsentiments within the framework of Smiths liberal economic theory. Since the infant-industry argument has been invoked to justify the establishment of the microfinanceindustry in the TW, the following brief discussion of the theory of mercantilism is inorder.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 beregulated to produce an inflow of specie. Third, domestic industries are to be promotedby inducing cheap raw-material imports. Fourth, the importation of manufactured goodsis to be discouraged through custom duties, while the exportation of domesticmanufactured 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 thecore doctrine of this trade theory is the favorable balance of trade as desirable andessential for national prosperity. This theory, however, clearly involves a dual policyregime of taking advantages from trading partners. This is the reason mercantilism ispopularly 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 iseconomically unsound as a policy for national development. Adam Smith was the first toexpose this weakness. He argued that "mercantilism is nothing but a tissue of 13
protectionist fallacies foisted upon a venal Parliament by our merchant andmanufacturers, grounded upon the popular notion that wealth consists in money. Like anindividual, a country must spend less than its income if its wealth is to increase. Whattangible form does this surplus over consumption take? The mercantilist authorsidentified it with the acquisition of hard money or treasure. Money was falsely equatedwith capital and the favorable balance of trade with the annual balance of income overconsumption” (Blaug, 1978: 10-11).The publication of The Wealth of Nations was a severe blow to the mercantilist idea ofimproving national economic welfare through protection. Yet, this idea soon reappearedunder different designations, the most influential of which is the infant-industryargument. Modern writers (Chacholides, 1978; Ellswoth, 1950) credit John Stuart Millwith the clearest articulation of this influential protectionist trade policy argument, whichcan be summarized as follows: "temporary" protective duties may be justified in caseswhere foreign suppliers comparative advantages lie mainly in starting the production ofthese items sooner. This suggests that the present superiority is due to acquired skill andexperience. Under certain conditions, a protecting duty might be the least inconvenientmethod for national development. However, Mill warns very emphatically about the useand abuse of his theory. He states that "it is essential that the protection should beconfined to cases in which there is good ground of assurance that the industry which itfosters will after a time be able to dispense with it; nor should the domestic producer everbe allowed to expect that it will be continued even beyond the time necessary for a fairtrial of what they are capable of accomplishing" (Mill, 1961: 922).In Kenya like in many other countries, approaches to the regulation of MFI arecomplicated by the fact many institutions are involved in providing MF services underdifferent legal structures. The present a challenge in identifying an appropriate regulatingapproach, which is conducive to the development of the sector while providing adequatefacility to the MFI activities. The tiered approach recommended for Kenya recognizes theinappropriateness of the existing banking legalization for the regulation of specializedactivities of MFI and the diversity of the institutions engaged in the less regulated sector. 14
However MFI operating as banking institutions, SACCOs and Kenya Post Office SavingBank are already regulated by the act of parliament that specifies their differentsupervisory authority 2.2.2 Realities of microfinanceApart from subsidies the poor need access to credit. Absence of formal employmentmake them non `bankable. This forces them to borrow from local money lenders atexorbitant interest rates. Many innovative institutional mechanisms have been developedacross the world to enhance credit to poor even in the absence of formal mortgage. Thepresent paper discusses conceptual framework of a microfinance institutions in India,Bangladesh and Indonesia.2.3 Empirical Reviews 2.3.1 Formal banking in IndiaTraditionally, the formal sector Banking Institutions in India have been serving only theneeds 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 servethe needs of the Very LIG primarily because of the perceived risks of lending to thissector. The following risks are generally perceived by the formal sector financialinstitutions: Credit Risk, High transaction and service cost, Absence of land tenure forfinancing housing, irregular flow of income due to seasonality, Lack of tangible proof forassessment of income and Unacceptable collaterals such as crops, utensils and jewelleryAs 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 CreditCo-op Societies (UCCS) are the two primary co-operative financial institutions operatingin the urban areas. There are about 1400 UCBs with over 3400 branches in India having 15
14 million members, their total lending outstanding in 1990-91 has been reported at overRs 80 billion with deposits worth Rs 101 billion.Similarly there exist about 32000 credit co-op societies with over 15 million memberswith their total outstanding lending in 1990-91 being Rs 20 billion with deposits of Rs 12billion. Few of the UCCS also have external borrowings from the District Central Co-opBanks (DCCBs) at 18-19%. The loans given by the UCBs or the UCCS are for short termand unsecured except for few which are secured by personal guarantees. The mosteffective security being the group or the peer pressure.The Government has taken several initiatives to strengthen the institutional rural creditsystem. The rural branch network of commercial banks have been expanded and certainpolicy prescriptions imposed in order to ensure greater flow of credit to agriculture andother preferred sectors. The commercial banks are required to ensure that 40% of totalcredit is provided to the priority sectors out of which 18% in the form of direct finance toagriculture and 25% to priority sector in favour of weaker sections besides maintaining acredit deposit ratio of 60% in rural and semi-urban branches. Further the IRDPintroduced in 1979 ensures supply of credit and subsidies to weaker section beneficiaries.Although these measures have helped in widening the access of rural households toinstitutional credit, vast majority of the poor rural have still not been covered. Also, suchlending done under the poverty alleviation schemes suffered high repayment defaults andleft little sustainable impact on the economic condition of the beneficiaries. 2.3.2 The Grameen Bank in BangladeshThe concept is the brainchild of Dr Muhammad Yunus of Chittagong University who feltconcern at the pittance earned by landless women after a long arduous days worklaboring for other people. He reasoned that if these women could work for themselvesinstead of working for others they could retain much of the surplus generated by theirlabor, currently enjoyed by others.Established in 1976, the Grameen Bank (GB) has over 1000 branches (a branch covers25-30 villages, around 240 groups and 1200 borrowers) in every province of Bangladesh, 16
borrowing groups in 28,000 villages with over 90% being women. It has an annualgrowth rate of 20% in terms of its borrowers. The most important feature is the recoveryrate of loans, which is as high as 98%. A still more interesting feature is the ingeniousmanner of advancing credit without any "collateral security".The Grameen Bank lending system is simple but effective. To obtain loans, potentialborrowers 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 oftheir weekly session. These decisions incorporate a code of conduct that members areencouraged to follow in their daily life e.g. production of fruits and vegetables in kitchengardens, investment for improvement of housing and education for children, use oflatrines 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 andthe "16 Decisions" are chanted as slogans. Though according to the Grameen Bankmanagement, observance of these decisions is not mandatory, in actual practice it hasbecome a requirement for receiving a loan.Numbers of groups in the same village are federated into a Centre. The organization ofmembers in groups and centers serves a number of purposes. It gives individuals ameasure of personal security and confidence to take risks and launch new initiatives.The formation of the groups - the key unit in the credit programmes - is the firstnecessary 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 theborrowers default, the other members of the group may forfeit their chance of a loan. Theloan repayment is in weekly installments spread over a year and simple interest of 20% ischarged once at the year end.The groups perform as an institution to ensure mutual accountability. The individualborrowing 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 ifany one of the group members defaults on repayment. 17
There have been occasions when the group has decided to fine or expel a member whohas failed to attend weekly meetings or willfully defaulted on repayment of a loan. Themembers are free to leave the group before the loan is fully repaid; however, theresponsibility to pay the balance falls on the remaining group members. In the event ofdefault 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 bythe 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 traditionalsubsidized credit programs and an openness to innovative approaches led the CentralBank to support a pilot project in which 13 participating banks, with the assistance of 12NGOs, have lent to about 420 self-help groups (SHGs) in the first phase, to be on Lent totheir members.Some of the principles underlying the project and the guidelines that were issued to theimplementing groups are listed below: • 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. 18
• 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 creditworthiness of the group and the viability of the projects 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 banksand 11 branches of government banks had made 229 group loans to SHGs, which hadretailed them to about 3500 members. Loans totaling about $0.4 million had beendisbursed, on an average of about $2000 per group and $118 per member. SHG savingsdeposits with the bank amounted to about $400 per group, giving a credit to savings ratioof about 5. NGOs have received loans from the banks at 22 to 24 per cent which is onlyslightly higher than the refinancing rate of large to small banks. Rates to end users havebeen between 30 to 44 per cent after the NGOs and SHGs have added their margins tocover costs and build funds to cover joint and several liability. Only one of theparticipating banks had sought a guarantee under the scheme from the Central Bank. 19
2.4 CONCEPTUAL FRAMEWORK Figure 1 MFI loans Repayment period. Capital Security ENVIRONMENTMicro-loan Political Advisory Economic services Social economic Legal SMALL SCALE BUSINESS sales business expansion profits 20
In developing this proposal, we came up with the above conceptual framework whichshows the environment in which the SME’s and micro financial institutions are set up. The credibility of the SME’s can be determined by their sales volumes, profits realizedand their expansion. Achievement of these factors depicts a favorable performance. In advancing the loans to SME’s, the micro finance institutions require securities for thebusiness like title deed, Business registration certificates, certificate of life insurancepolicy etc. In return, the microfinance institutions will offer advisory services to business such asviable projects to invest in. From funds acquired by SME’s they may opt to expand thebusiness or to invest in new line of business. This will result into higher sales to increasein demand and expansion from the economies of scale. This will results into increasedprofits resulting to higher level of performance of the business and hence contribute tothe economic development.In the set up between MFIs’ and SMEs’ there exists a number of factors that arise fromthe operating environment. The components of the operating environment includePolitical, legal, economic and social factors. These factors may favour or hinder theperformance of the SMEs’
CHAPTER THREE RESEARCH METHODOLOGY3.1 INTRODUCTIONThis chapter presents a detailed descriptions of the methodology used in the study. It includesresearch design, description of the study area, target population, sample population, samplingprocedure, data collection methods and data analysis methods.3.2 RESEARCH DESIGNThe research was carried out in form of a cross section survey of SMEs’ that have accessed loansfrom microfinance institutions.3.3 RESEARCH AREAThe research was conducted in the central business district kisumu town, the CBD covers an areaof about 300 sq meters the research focused on SMEs’ at lake market within the CBD.3.4 TARGET POPULATIONThe target area of this research was small and medium enterprises in kisumu CBD Lake marketthat receive credit from the microfinance institutions. Lake market has about 110 SMES’ and thetarget population of the research are 80 SMEs’ consisting of 20, 40 and 20 salons, Electronicsand hotels respectively. The research targeted 80 SMEs’ who have actively been in their areas ofbusiness for the last 5 years.3.5 SAMPLE AND SAMPLING TECHNIQUES
For convenience, the target population was clustered into groups of similar SMES’, 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 focused on the SME who have managed to get a loan from the MFI this year. TableSME (members of population) Population Sample sizeSalons 20 10Electronics 40 15Hotels(food joints) 20 8Totals 80 33 x Chart view 40 35 30 25 salon 20 electronics 15 hotels 10 5 0 population sample size
There are a total of 80 SMES’ targeted, and the survey aims at investigating 33 of these.3.6 DATA COLLECTION TECHNIQUES 3.6.1 QUESTIONAIRE AND INTERVIEW SCHEDULE TOOLSThe researchers used the questionnaire and the schedule in form of questions in a set form todraw information from respondents. The questionnaire was self administered while the schedulewas administered by trained interviewers to the respondents. 3.6.2 INTERVIEW METHODThe researcher used interviews to obtain required information orally or face to face. It was easyto apply since it would only require a notepad, a sound tape recorder and the part of researchersthe skill to hold a conversation. The researcher applied individual interview by meeting face toface with the respondents. Also group interview may be used, in particular the focused groupinterview that involved all stakeholders. 3.6.3 OBSERVATION METHODSThis involved the researchers to draw direct evidence of the eye by witnessing events first hand.Information was sought by way of direct observation without asking the respondents. 3.6.4 DOCUMENTARY REVIEWSThe researcher used data from records, reports, printed forms, letters, autobiography, diaries,compositions, periodicals, bulletins, court decisions, and academic works such as books andjournals and other reliable sources.3.7 DATA ANALYSIS AND PRESENTATIONBoth descriptive and inferential methods were used this included; measures of central tendency(mean, median, mode), measures of dispersion (range, variance, standard deviation,), measuresof relative position and measures of relations and associations, correlation and regression.
Data analyzed is presented in form of graphs, charts and tables, a PowerPoint presentation willbe designed for final presentation. CHAPTER FOUR DATA ANALYSIS AND PRESENTATION4.1 INTRODUCTIONThis chapter presents the findings of the study and the analysis of the data collected fromquestionnaire which was distributed to the small and medium entrepreneurs. Thequestionnaire was distributed to 33 SMEs’ out of which all were fully completed with fewdifficulties experienced here and there and collected by the researcher for data analysis. Thisgives a response rate of 95%.4.2 BUSINESS MANAGEMENTFigure 4. 1: Respondents relation to the BusinessThe respondents were asked to state their relation with the business in existence. It was foundthat 33 per cent of the respondents were employees while 67 per cent were owner of thebusiness. This is presented in the figure below.Category f (frequency) % (percentage)Employee 11 33Owner 22 67Total 33 100 70 60 50 40 30 Employee 20 owner 10 0 f (frequency) % (percentage)
From the graphical representation above, the higher number of owner respondents vis-a-vis theemployees respondents can be attributed to the fact that owners prefer to run the businessesthemselves.Figure 4. 2: Business FormationThe study also found out that 33 per cent of the respondent’s are partnerships while 50 per centare sole proprietorship. Only 17 per cent of the respondent’s are in form of joint venture. This ispresented in the figure below.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) 7 6 5 4 sole proprietorship, 3 6 2 partnership, 4 1 joint venture, 2 0 joint venture sole proprietorship partnershipThe study found out that respondents preferred sole proprietorship because the legalrequirements and fast decision making.
Figure 4. 3: Line of business of the respondentsThe researcher also sought to know the line of operation of the business. From the analysis, itwas found that 37% of the respondents’ dealt with electronic kind of business, 36% indulged inhair dressing whereas 27% operated hotel businesses. The analysis of the line of business ofrespondent’s can be observed from the figure below. 9% 36% 55% electronic hair dressing hotelThe study found out that the highest number of respondents were in the line of electronics. Thiswas attributed to the technological advancement and the respondents life styles and cultureTable 4. 1: source of capitalThe researcher sought to find out the source of capital for their business before the start oroperation of the business. Statistically in the perception of the respondent’s, 75%, said that thebusiness obtained its capital from micro-financial institutions while 25% from other financialinstitutions that were stated. The results are shown in the table below.
Response Frequency Percent (%)Micro-financial institution 20 75%Other financial institution 13 25%Total 33 100%The study found out many people preferred seeking loans from MFIs’ as opposed to otherfinancial institutions because of the red tape involved in acquiring loans from other financialinstitutions.Table 4. 2: Loan repayment period as per the conditions of MFI’sLoan 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%Table 4. 3: challenges as loan beneficiariesThe researcher also sought to investigate whether the respondents have ever benefited from theservices of micro-financial institutions and those who had obtained their capital from MFI hadsome 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 befavorable to all SMEs’’, the study found out from the respondents’ opinions that MFI’s should alittle flexible towards the members who do not meet the MFI’s deadline of loan repayment andthis they should do by lengthening their repayment periods. It was also proposed that they shouldalso adjust their loan interest charges, relaxing their security requirements and offer propertraining to the illiterate citizens to be acquainted with their terms and conditions.25 respondents’ who said that they have benefited from the services of the micro-financialinstitutions as to obtaining loans claimed to have experienced a favorably shorter loan repaymentperiod 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% weresubjected to 5 years and above.
Response Frequency Percent (%)Yes 20 83.3%No 5 16.7%Total 25 100%As evident from the table above, 83.3% of the respondents claimed that although they havebenefited from MFI’s, they also faced some challenges as loan beneficiaries, majority with thereason being long periods of waiting for the loan processing, while the remaining 16.7% were ofthe suggestion of having experienced no challenges as loan beneficiaries.Table 4. 4: Rate of performance of the businessAnswer Frequency Percent (%)High 3 10%Moderate 28 85%Low 2 5%Total 33 100%The findings presented in the table above are based on the question, “rate the performance ofyour business operation?” 85% of the respondents’ answered average, 10% answered high, while5% answered that their business performance was yet to regain its stands after facing stiffcompetition thus rated their performance to be low.Table 4. 5: Impact of political environment on the companyAs evident from the table below, 66.6% of the respondents’ said to be making savings in theirbusiness operation through realization of profits when extracting their business balance sheetsand profit and loss account, while the remaining 33.7% are yet to realize profits thus no savingssince they are fresh in the business field.Response Frequency Percent (%)Yes 25 66.6No 8 33.7
Total 33 100.0Table 4. 6: Other Business outlets58.3% of the interviewed clients claimed to be having an external business outlet apart fromtheir business thus attaining business diversity and expansion through the realized savings, whilethe remaining 41.7% had no any business outlet apart from the one in existence. This wasattributed to additional finances they get from the MFIs’.This is presented in the table below.Response Frequency Percent (%)Yes 15 58.3%No 18 41.7%Total 12 100%Table 4. 7:The findings on the table below are based on the question, “How do you rate the loan servicesfrom the MFI’s?” 8% of the respondents answered excellent, 25% of the respondents answeredvery good, 55% of the respondents’ answered good while 12% answered poor. All these werebased on the terms and conditions laid upon before accessing loan by the MFI’s.Response Frequency Percent (%)Excellent 5 8Very good 10 25Good 14 55Poor 4 12Total 33 100%
Table 4.9: Perception on the type of strategy adopted by the companyThe findings below are based on the question, “What would you wish the MFI’s to do so as toimprove your business performance?” 45.5%of the respondents’ opted for MFI’s in offeringtraining, while 54.5%of the respondents’ opted for MFI’s in increasing their lending rate.Response Frequency Percent (%)Increase lending rate 18 54.5%Offer training 15 45.5%Total 33 100.0%
CHAPTER FIVE CONCLUSIONS AND RECOMMENDATION5.1 Summary of the FindingsThis study was designed with three main objectives. One, to establish whether the SMEs’ havebeen financed by MFI’s, two, to determine if the financed SMEs’ have managed to repay theirloans according to the terms and conditions of MFI’s and three to determine if the financedSMEs’ have realized business growth since acquisition of credit from MFI. The general objectiveformulated was to find out the impact of MFI’s on the performance of SMEs’.From the study, the researcher found out that most SMEs’ financed by the MFIs’ are forindividuals who are experiencing financial difficulty in getting capital to run their business andits also notable that SMEs’ that repay their loans according to terms and conditions of the MFIs’are likely to be favored next time they want access to loans from the MFIs’.Most SMEs’ are not comfortable with the terms and conditions that have been put in place by theMFIs’ to access loans, this is because they find it difficult to have security for the loans and alsothe ability to repay the loans before their businesses experience growth, the owners of the SMEs’are therefore proposing that loans be repaid according to the line of business and also theoperating environment this is because some SMEs’ experience a high growth rate than others.From this research it has also been established that the owners of the SMEs’ prefer to run thebusinesses themselves and then employ others to run it when the business has picked up,according to respondents this is practiced in order to make the business be inline so that loanrepayment can be done easily, due to high returns on investment.5.2 Conclusion Some valuable lessons can be drawn from the experience of successful Microfinanceoperation. First of all, the poor repay their loans and are willing to pay for higher interest ratesthan commercial banks provided that access to credit is provided. The solidarity group pressureand sequential lending provide strong repayment motivation and produce extremely low defaultrates. 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 byleveraging equity (Sacay et al 1996). In order to be sustainable, microfinance lending should begrounded on market principles because large scale lending cannot be accomplished throughsubsidiesA main conclusion of this paper is that microfinance can contribute to solving the problem ofinadequate housing and urban services as an integral part of poverty alleviation programmes. Thechallenge lies in finding the level of flexibility in the credit instrument that could make it matchthe multiple credit requirements of the low income borrowers without imposing unbearably highcost of monitoring its end-use upon the lenders. A promising solution is to provide multi-purposeloans or composite credit for income generation, housing improvement and consumptionsupport. Consumption loan is found to be especially important during the gestation periodbetween commencing a new economic activity and deriving positive income. Careful research ondemand for financing and savings behavior of the potential borrowers and their participation indetermining the mix of multi-purpose loans are essential in making the concept work (tall 1996).5.3 RecommendationsFor MFI’s to succeed in the global sector, it should loosen their terms and conditions for SMEs’to easily access loans and also create awareness to the people through civic education on theservices offered by them.5.4 Suggestions for further researchThe research proposes that a similar research be undertaken focusing on strategies adopted byMFI’s in bringing their services to the rural population .Further, the research proposes a studyon the impact of MFI’s on savings.
REFERENCESBarry, N.(1995), "The Missing Links: Financial System that Works for the Majority," Womens World Banking, New York.Barry, Nancy, Armacost, Nicola and Kawas Celina (1996) "Putting Poor peoples Economics at the Center of Urban Strategies," Womens 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. FebruaryGrameen 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.Womens World Banking (1994) "United Nations Expert Group on Women and Finance," New York.
APPENDIX ONEQUESTIONAIRELETTER OF TRANSMITTALWe the students of Maseno University would like to appeal to the respondents of thisquestionnaire to participate fully and your cooperation will be highly appreciated, thisquestionnaire aims at collecting data required for the study entitled: IMPACT OF MICROFINANCE ON THE PERFORMANCE OF SMES’ IN KISUMU CBD LAKE MARKETThe data collected would be strictly for academic purposes and any correspondence given betreated as confidential. Respondents are requested to give any information that is necessary forthe topic. The interviewer is in any case not allowed to force any respondent to give information.ThanksThis questionnaire is aimed at collecting data required for the study entitled: IMPACT OFMICRO FINANCE ON THE PERFORMANCE OF SMES’ IN KISUMU CBD LAKEMARKET.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. PartnershipOthers state……………………………………………………………….5) State your line of business……………………..SECTION 11) Select sources of capital to your business (tick any appropriate) a. Micro financial institutions b. Other financial institutionsIf none of the above state……………………………………2) Do you benefit from micro financial institutions? a. Yes b. NoIf 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 servicesOthers state……………………………………What is the loan repayment period as per the conditions of MFI? a. 6 months-1 year b. - 5 yrs c. Above 5 yrsSECTION 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 yrs5) How do you rate the loan services from the MFI’S? (Tick one) a. Poor b. Good c. Very good d. Excellent6) Do you face any challenges as a loan beneficiary from the MFI’s? (tick one)a) Yesb) NoIf yes state………………………………………..SECTION 37) How many employees did the business employ at the start of its’ operation? a) 1-10 b) Above 108) How many employees are there currently?……………………………………………………..9) Do you have any other business outlet (branch) that is part of this business?a) Yesb) NoIf yes (tick one)a) 1 -5b) 6-10c) Above 1010) Do you make any savings from your business?a) YESb) NOIf no, what could be the reasons?……………………………………………………………………11) How do you rate the performance of your business?
a) Highb) Lowc) AverageSECTION 412) What would you wish the MFI’s to do so as improve your business performance? (Tick one) a. Increase lending rates b. Offer trainingOthers specify………………………………………………………..13) What do you think should be done so that the MFI’s can easily award loans to any SMEequally? .............................................................................................14) What challenges do you face when trying to access loans from the MFI’s?(tick )a) Lack of securityb) Lack of proper knowledgec) Conditions on repaymentOthers state……………………………………………………… End*************End************* End ************* End Thank you very much for participating!!!!