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

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 L123/14400/2011 Signature_______________________ Date________________________

This proposal has been submitted for examination with our approval as university supervisor Signature___________________ MR YONAH SAKAJA LECTURER UNIVERSITY OF NAIROBI Date_____________________________

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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 sampling techniques 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 The studies

statistics to use were the frequency distribution tables and percentages.

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.

TABLE OF CONTENTS DECLARATION.....................................................................................................................ii DEDICATION........................................................................................................................iii ABSTRACT.............................................................................................................................v TABLE OF CONTENTS.......................................................................................................vi LIST OF TABLES..................................................................................................................ix LIST OF ABREAVIATIONS.................................................................................................x OPERATION DEFINITION OF TERMS............................................................................xii CHAPTER ONE: INTRODUCTION.....................................................................................1 1.0 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..............................................................8 2.3 Role of microfinance...............................................................................................10 2.4 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 vi

CHAPTER FOUR..................................................................................................................32 Introduction............................................................................................................................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..................................................................................................35 4.2.1 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...................................................................................................................39 SUMMARY 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 vii

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 Society FSA 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 Institution NCCK 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 x

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 bilateral aid 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 1

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 longrunning 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 over the 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 nonstate 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.

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 in developing 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. 3 About 90% of the

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) ii) iii) iv) 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 propose possible strategies to improve the running of microfinance

1.5

Research Questions

To address the above objectives, the following research questions were be used i) ii) iii) iv) What is the current state of the economy? What are the services if microfinance institutions? What challenges microfinance face in a local economy? 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 impact role 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 interviews will result to reliable informations while the respondents will take the questionnaires form to 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; 5

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 going from one respondent to another. Transport The means of transport was another challenge which forced the researcher to arrive late at the field of research, there scarce vehicles. Secrecy. Access to data was a challenge since the respondents could not diverge some information due to their confidentiality and also the strict code of conduct in their employment agreement.

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

1.10 DEFINITION OF SIGNIFICANT TERMS AS USED IN THE STUDY

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. 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 7

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 more comprehensive 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)

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 9

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 emerging microfinance 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 antipoverty 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 the universal 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) 10

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 oldfashioned 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 11

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 12

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 poor people 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 to those 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 complicated process 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 MicroCrop 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 16

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 sociallyintegrated 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 17

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 18

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 individual micro 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, the prospects 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 highgrowth, 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, obtain legal 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 is mobile 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 22

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 development training 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, BosniaHerzegovina 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 23

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 in managing 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 key economic 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 24

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-governmental organizations (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 25

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 in Lebanon 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 Microfinance -Formal institutions -Informal sources -Semiformal institutions 26

Dependent Variable Local economy -Loans to women and the youth -Poverty eradication strategies -SMEs business expansion loans. -Expensive loans from banks

Intervening Variables Regulatory Endorsements Capacity Building Organizational Structure and Legal Status Innovation Funding microfinance institutions

Source: author, 2011

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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 Government Target population 8 Procedure 10*30 126*0.3 20*0.3 20*0.3 Sample size 3 22 7 4 36

Administrative Residents 74 Microfinance staff 24 SMES staff 14 Total 120 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 the various categories of respondents by physical dropping and picking by research assistance. The instrument contained closed and open-ended questions. They were to be administered to 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 questionnaire tool was most appropriate since a questionnaire data capture is a necessity, which can only be obtained directly from the respondents. Closed-ended questions in the questionnaire were used to standardize and qualify responses from the research. The open-ended questions in the questionnaire ensured that an in-depth data that is detailed and explorative of all aspects of the variable(s) under the study was obtained. It also took care of human nature of the respondent of wanting to express their personal views and feeling important as a participant of the research. Interviewing is a defined as a two- way systematic conversation between an investigator and informants initiated for obtaining information relevant to a specific study (Krishnaswami, 1993). It involves not only conversation, but 29

also learning from the respondents gestures, facial expression, pauses and his/her environment. This technique was used to interview respondents at different levels which included interviewing Government Administrative, Microfinance staff, SMES staff, and residents 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 30

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 Male Female Total frequency 22 14 36 percentage 61.1 38.9 100

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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 16 24 25 34 35 45 45 Over Total frequency 4 10 15 7 36 percentage 11.1 27.8 41.7 19.4 100

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 Primary Secondary College University Total frequency 1 2 19 14 36 Percentage 2.8 5.6 52.8 38.9 100

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 Less than 3 years 3 5 years 5 10 years More than 10 years Total Frequency 4 8 10 14 36 Percentage 11.1 22.2 27.8 38.9 100

The table shows that 14(38.9%) of the respondents have lived in the region for a period of more 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 Frequency 14 8 10 4 36 Percentage 38.9 22.2 27.8 11.1 100

microfinance Rapid growth Poorly managed MFIs Lack of funds Untrained personnel Total

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 Rapid number of SMEs 8 Expensive loans from the 16 bank Fear of loans from the bank 8 Lack of trusted loan 4 35 Percentage 22.2 44.4 22.2 11.1

creditors Total

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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 Frequency 18 6 2 5 3 2 40 Percentage 50 16.7 5.6 13.9 8.3 5.6 100

institutions Provision of loans Credit to farmers Organized financial service Micro credit SMES business support Economic stability to the poor Total

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 The poor inability to offer 14 marketable collateral for loans Lack of knowledge about 3 microfinance services Low bargaining power 5 Vulnerability to economic 2 shocks Perceived High Risk of Micro 4 High Costs Involved in Small 5 Transactions/Microlending Mixing Charity With Business 1 Lack of Customized Solutions 2 for the Poor Total 40 Percentage 38.9 8.3 13.9 5.6 11.1 13.9 2.8 5.6 100

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 Situations as shown in table 4.9 below Table 4.9 Possible strategies to improve the running of microfinance Services if microfinance Frequency Percentage 33.3

institutions Organizational Structure and 12 37

Legal Status Regulatory Endorsements 8 Innovation and technology 4 Funding for Microfinance 6 Institutions Capacity Building 4 Microfinance as a Strategy 2 in Disaster Situations Total 40

22.2 11.1 16.7 11.1 5.6 100

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CHAPTER FIVE

SUMMARY OF FINDING CONCLUSSION AND RECOMENDATION INTRODUCTION The cumulative data that was collected by the researcher was analyzed and the finding represented in tables for easier interpretation. Recommendations will be made on how to improve the impact of microfinance institution on the growth of local economy at Bomet Municipality. This chapter brings the discussion of major finding. It deals with conclusion based on study findings of chapter four. The researcher later having established the impact of microfinance institution on the growth of local economy at Bomet municipality will provide and suggest other ways and measures that can be adopted in order to ensure that micro finance institutions are well developed and established so as to ensure that there impacts are well realized and they also help on the growth of the local economy 5.1 Discussion of findings 5.1.1 Current state of the microfinance The researcher sought to find out current state of the microfinance since it showed how much the institutions were growing and how much the public at large were embracing them. The study found out that rapid growth of MFIs was the current state of the economy and that the institutions were growing. It found out 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. 5.1.2 Current state of the economy The researcher sought to find out current state of the economy since it showed how much the economy was growing and the rate at which the public was prepared to take microfinance loans. it showed 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. 39

5.1.3 The services of microfinance institutions The researcher sought to find out the services of microfinance institutions since it showed the services that the institutions were offering and it identified what the public needs were. The study found out that Provision of loans was the most offered service of the micro finance institutions. It showed 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 stability to the poor. 5.1.4 Challenges faced by microfinance The researcher sought to find out the challenges microfinance institutions faced since it showed how much and where the problem was and where to start when addressing the issues. It showed 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%) cited Mixing Charity With Business and 2(5.6%) cited Lack of Customized Solutions for the Poor. 5.1.5 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 proposed the measures that could be adopted to improve microfinance running. The table showed 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 Situations. 3(8.6%) cited SMES business support and 2(5.6%) cited Economic

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5.2 Conclusions The study identified the current state of the microfinance at Bomet municipality. The study found out that rapid growth, poorly managed MFIs, lack of funds and untrained personnel was the current state of microfinance in the economy. The study investigated the current state of the economy at Bomet municipality. The study found out that rapid number of SMEs, expensive loans from the bank, fear of loans from the bank and lack of trusted loan creditors was the current state of the economy. The study investigated the services of microfinance institutions at Bomet municipality. The study found out that Provision of loans, Credit to farmers, organized financial service, Micro credit, SMES business support and Economic stability to the poor were the services that the microfinance institutions offered. On establishing the challenges microfinance institutions faced at Bomet municipality. The study found the challenges were The poor inability to offer marketable collateral for loans, Lack of knowledge about microfinance services, Low bargaining power, Vulnerability to economic shocks, Perceived High Risk of Micro finance, High Costs Involved in Small Transactions /Microlending, Mixing Charity With Business and Lack of Customized Solutions for the Poor. On proposing the possible strategies to improve the running of microfinance at Bomet municipality the study proposed the following strategies; Organizational Structure and Legal Status, Regulatory Endorsements, Innovation and Technology, Funding for Microfinance Institutions, Capacity Building and Microfinance as a Strategy in Disaster Situations.

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5.3 Summary of the findings This section provides the summary of the findings of the study in view of what other scholars had to say about the same topic the section is broken into; 5.3.1 General information The general information represented includes gender, age, educational level and working experience. 5.3.2 Gender of the respondent The researcher revealed through the respondents data the gender levels at Eldoret town. The findings revealed that the majority of the respondent 61.1% were male and 38.9% of the respondents were female.

5.3.3 Age of the respondents It implied that majority 15(41.7%) of the respondents were aged between 35 45 years as cited by the response. This indicated that the respondents were rather mature and were the business holders and the other people that were looking for loans and they were aware of the impacts of microfinance institution on the growth of the local economy. The minority group 4(11.1%) of the respondents cited were aged between 16 24 years and they were the young people that were taking loans to start their business. The majority group of respondents cited 10(27.8%) were aged between 25 34 and were 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 were people that want to retire and they were taking the loans to start their own business. 5.3.4 The Level of Education It indicated that majority 19(52.8%) of the respondents were college level and were the SMES holders and other people planning to start a business. 14(38.9%) were university graduates and they were employees and the administrators of the micro finance and others who were planning to start a business or develop their business by taking a loan. 2(5.6%) were secondary level and 1(2.8%) were primary level. 42

5.3.5 Working experience of employees and duration lived in the region It showed that 14(38.9%) of the respondents had lived in the region for a period of more than 10 years. 10(27.8%) had lived in the region for a period of for 5 - 10 years, 8(22.2%) had lived for a period of 3 - 5 years and 4(11.1%) for less than 3 years 5.4 Recommendations The impact of micro finance on the local economy has been felt in countries throughout the world and many have considered micro finance to be a major player in boosting the local economy, the researcher recommends that Bomet municipality to come up with powerful strategies that are going to ensure that the impact of micro finance institutions are felt in the local economy so as to reap from the well perceive benefits of the institutions. These can be done in a number of ways like the management training their employees who in turn will acquire the required knowledge hence improving their skills and the technical know how; also the management can take the employees to benchmarking to other countries and other local towns that have a well managed local economy policies and strategies.

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RERFERENCE Harper (2002). Self-help groups and Grameen Bank groups: What are the differences? In T. Fisher & M.S. Sriram (Eds.), Beyond micro-credit: Putting development back into microfinance. New Delhi: Vistaar. High Power Committee. (2002). Report of the High Power Committee on Urban Cooperative Banks. RBI Bulletin. Mumbai: Reserve Bank of India. Klaus (1999) Report of working group on savings mobilization, Bank Rakyat Indonesia (BRI). Washington DC: Consultative Group to Assist the Poorest (CGAP), World Bank. M-Cril (2002) Micro finance rating: Risk assessment of Bank Dagang Ba l i. Washington DC: Consultative Group to Assist the Poorest. Available at www.cgap.org Montgomery, R., Bhattacharya, D., & Hulme, D. (1996). Credit for the poor in Bangladesh. In D. Hulme & P. Mosely, Finance against poverty. London: Routledge. Rhyne (2001). Mainstreaming microfinance. Connecticut: Kumarian Press. Robinson, M. (2001). The microfinance revolution: Sustainable finance for the poor. Washington DC: World Bank. Rutherford (2000). The poor and their money. New Delhi: Oxford University Press.

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Sa-Dhan (2002). Enhancing Financial Flows to the Poor: The Way Forward. Summary of the sub-group reports presented to the empowered committee on financial flows to the unorganised sector. New Delhi: Sa-Dhan. Sinha (2001). The role of central banks in microfinance in Asia and the Pacific. Manila: Asian Development Bank. Sriram (2001). Case study of SHARE group. In S Datta & M. S. Sriram, Flow of Credit to Small and Marginal Farmers in India (report submitted to the Ministry of Agriculture, Government of India). Ahmedabad: Indian Institute of Management. (2002). Information asymmetry and trust: A framework for studying Microfinance in India (WP No. 2002-09-02). Ahmedabad: Indian Institute of Management. Wardhana (2001). Int roduction. In M. Robins on (Ed. ) The micro finance revolution: Sustainable finance for the poor. Washington DC: World Bank. Yunus et al (2003). Some suggestions on legal framework for creating microcredit banks. Dhaka: Grameen Bank.

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APPENDIX: 4

QUESTIONNAIRE

Questionnaire section A: personal information 1. What is your sex? Male Female 2. What is your age bracket? 1 - 15 16 - 24 25 34 35 45 45 Over 3. What is your educational level? Primary Secondary College University 4. How long have you been engaged in the organization? Less than 3 years 3 5 years 5 10 years More than 10 years

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SECTION B 5) What is the current state of the microfinance? current state Rapid growth Poorly managed MFIs Lack of funds Untrained personnel Strongly agree Agree Undecided Disagree Strongly disagree

Any other specify .. 6)What is the current state of the economy? current state Rapid number of SMEs Expensive loans from the bank Fear of loans from the bank Lack of trusted loan creditors Strongly agree Agree Undecided Disagree Strongly disagree

Any other specify 47

 .. 7)What are the services of microfinance institutions? Services Provision of loans Credit farmers Organized financial service Micro credit SMES business support Economic stability the poor to to Strongly agree Agree Undecided Disagree Strongly disagree

Any other specify ..

8) What are the challenges microfinance faces in a local economy? Challenges The poors inability to 48 Strongly agree Agree Undecided Disagree Strongly disagree

offer marketable collateral for loans Lack of knowledge about microfinance services Low bargaining power Vulnerability to economic shocks Perceived High Risk of Micro High Costs Involved in Small Transactions/Microlending Mixing Charity With Business Lack of Customized

Solutions for the Poor

Any other specify ..

9) What are possible strategies to improve the running of microfinance? strategies Strongly agree Agree Undecided Disagree Strongly disagree

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Organizational Structure and Legal Status Regulatory Endorsements Innovation and technology Funding Microfinance Institutions Capacity Building Microfinance as a Strategy in Disaster Situations for

Any other specify ..

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