IMPACT OF MICROFINANCING ON THE PERFORMANCE OF

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

CENTRAL BUSINESS DISTRICT- A STUDY OF KISUMU LAKE

MARKET.

GROUP MEMBERS

BY:

NAMES REG. NO. SIGN

1. MOHAMMED JAFFER BA/0345/06……………………...

2. KENNEDY NYABWALA BA/3150/06………………………
3. SANDA DAVID WASONGA BA/3147/06………………………
4. ARNOLD MBALANYA
BA/3164/06……………………….
5. PATRICK NYIKA BA/3203/07………………………
6. JEREMIAH .O. MOKAYA
BA/3149/06………………………..
7. STEPHEN MWANGI
BA/0216/06……………………….
8. ODOTE DENNIS
BA/3197/06……………………….
9. ELSA ODENY
BA/3110/06……………………….
10.GITU DICKSON GATHU BA/0350/02……………………….

1
A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILMENT
FOR THE DEGREE OF BACHELOR OF BUSINESS
ADMINISTRATION WITH INFORMATION TECHNOLOGY

DEPARTMENT OF ECONOMICS AND BUSINESS STUDIES

FACULTY OF ARTS AND SOCIAL SCIENCE

MASENO UNIVERSITY

FEB 2010

2
 DECLARATION
We declare that this is our original work and has not been
presented in any other university or college for
examination/academic purposes.

Signature: …………………….... ……………………

Students: Date

This research project proposal has been submitted for oral

presentation with my approval as the University Supervisor

Signature: ……………………………. ………………………

Supervisor: Mr. Nelson Obange Date

Maseno University
Department of Economics and Business studies

3
 TABLE OF CONTENTS

DECLARATION.......................................................................................3
DEDICATION..........................................................................................4
ACKNOWLEDGEMENT..........................................................................8
ABSTRACT...............................................................................................

CHAPTER ONE.........................................................................................
INTRODUCTION......................................................................................
1.1 Research background.....................................................................
1.2 Statement of the Problem...............................................................
1.3 Research Questions........................................................................
1.4 Objectives of the Study..................................................................
1.5 Significance of the Study...............................................................
1.6 Scope of the study..........................................................................
1.7 Definition of key terms..................................................................

CHAPTER TWO........................................................................................
LITERATURE REVIEW...............................................................................
2.1 Introduction....................................................................................
2.2 Theoretical Review........................................................................
2.2.1 Micro credit theory...................................................................
2.2.2 Realities of Microfinance........................................................

4
 2.3 Empirical review..........................................................................
2.3.1 Formal Banking in India.......................................................
2.3.2 Grameen Bank in Bagladesh.................................................
2.3.3 Linking Banks with self-help group.....................................
2.3.4 A Pilot proje ct from Indonesia...........................................
2.4 Conceptualization..........................................................................

CHAPTER THREE......................................................................................
RESEARCH METHODOLOGY....................................................................
3.1 Introduction....................................................................................
3.2 Research Design............................................................................
3.3 Research Area................................................................................
3.4 Target Population...........................................................................
3.5 Sample and Sampling techniques.................................................
3.6 Data Collection Techniques...........................................................
3.6.1 Questionaire and schedulle method.......................................
3.6.2 Interviews methods...............................................................
3.6.3 Observation methods................................................................
3.6.4 Documentary Reviews.........................................................
3.7 Data Analysis and Presentation .......................................................

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CHAPTER FOUR.......................................................................................
DATA ANALYSIS AND FINDINGS..............................................................
4.1 Introduction....................................................................................
4.2 Business Management...................................................................

CHAPTER FIVE.........................................................................................
CONCLUSIONS AND RECOMMENDATION..............................................
5.1 Summary of the Findings...............................................................
5.2 Conclusion.....................................................................................
5.3 Recommendations..........................................................................
5.4 Suggestions for further research....................................................

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

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

6
 DEDICATION
We dedicate this project to our family members who have always
stood with us and to the entire body of Department of Economics
and Business Studies for the academic inspiration.

7
ACKNOWLEDGEMENT
We acknowledge our supervisor Mr. Nelson Obange who guided
us throughout the research period.

We also acknowledge the spirit and willingness in terms of

cooperation of our esteemed respondents to our research. Without
your cooperation our research could not have been successful.

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

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 LIST OF ABBREVIATIONS

TERMINOLOGY OF TERMS

 SME’s :Small and Medium size Entrepreneurs

 MFI :Micro-financial Institution

 SHG :Self Help Group

 NGO :Non Governmental Organization

 GB :Gremeen Bank

 DCCB :District Central Co-op Bank

 UCCS :Urban Credit Co-op Society

 UCB :Urban Co-op Bank

 HFI :Housing Finance Institution

 RDB :Rural Development Bank

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 CHAPTER ONE

1.0 INTRODUCTION

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

problem statement, research objectives and questions and rationale
for the study.
1.1 RESEARCH BACKGROUND

Micro-finance concept has operated for centuries in different

parts of the world. Notable in Indonesia, “cheetu” in Srilonka,
“tontines in Ghana west Africa and “pasanaku” in Bolivia.

One of the earliest and longest serving micro-credit organization

providing small loans to rural poor dwellers with no collateral is
the Irish loan Fund system initiated in the early 1700”s by
Jonathan swift. His idea began slowly in 1840s and became a
widespread institution of about 300 branches all over Ireland in
less than one decade. The principal purpose was to advance small
loans based on some trust for short periods. The iris loan fund
attracted about 20 percent of all Irish SME’s leading to growth of
small and medium sized enterprises every year.
In the 1800”s various types of longer and more formal savings
and credit institutions began to emerge in Europe organized
primarily among the rural and urban people. These institutions

10
were known as people’s banks credit unions and savings and credit
cooperative. The credit unions and cooperatives were motivated by
concern to assist the rural population to break out of their
dependence on money leaders and to improve their welfare.
From 1870 the unions expanded rapidly over a large cooperative
movement and quickly spread to other countries in Europe and
North America and eventually supported by the cooperative
movement in developed countries and donors and also to
developing countries. In the early 1900”s various adoptions of
these models began to appear in parts of rural Latin America.
While the goal of such rural finance intentions was usually defined
in terms of modernizing the agricultural sector, they usually had
two specific objectives: first, Increase the commercialization of the
rural sector and second, Increase the investment through credit. It
is against such background and the second objective that this study
sought to investigate the impact of micro financing on performance
of SMEs in Kisumu.
The micro finance industry in Kenya has experienced rapid growth
over the years in an attempt to meet the large demand from the
estimated 38 percent of Kenyans lacking access to financial
services (www.kenya bureau of statistics.com).The demand for
micro-finance service in Kenya is high yet the industry is only able
to meet about 20 percent of their demand because of lack of

11
financial resources and the capacity to assess risk process and
monitor loans.
SME’s are dynamic entities where some grow into larger
enterprises, some stabilize without changing the scale of operation,
while others disappears (Bhalla A.S,1992). Micro financial sectors
in Kenya have rapidly expanded as a source of credit for small
scale businesses. An example in Kenya is Faulu Kenya which is
one of the largest MFI’s (MFI) in Kenya. Initially Faulu Kenya
focused on micro enterprise lending in Mathare slums of Nairobi.
However, over the last 17 years, as lending methodologies and
systems were improved, Faulu Kenya grew to become a company
with 31 branches and a presence in most districts of Kenya

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

transforms from a credit only institution to a regulated deposit

taking institution. This transformation is characterized both by the

development of a broader product offering as well as by the

formalization of the shareholding structure and regulatory

framework the institution adheres to. The addition of liability

products will provides secure savings to SMEs as well as more

control over funding and asset liability management for them , this

12
thus improves the performance of SME’s by making them to

expand their businesses from saving and also acquiring huge loans.

1.2 STATEMENT OF THE PROBLEM

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

obtaining funds from large and formal financial institutions, thus

opt for loans from micro-financial institutions to fund their

business projects. This Research seeks to explore the impact of

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

District.

1.3 RESEARCH QUESTIONS

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

MFI’s or not?

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

the terms and conditions of the MFI’s?

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

from the MFI’s?

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1.4 OBJECTIVES OF THE STUDY

1.4.1 General Objective

The general objective of this research is to determine the impact of

microfinance on the growth of SME’S in kisumu central business
district.

Specific objectives

1) To establish whether the SMEs have been financed by

Microfinance institutions or not

2) To determine if the financed SMEs have managed to

repay their loans according to terms and conditions of the

microfinance institutions

3) To determine if the financed SMEs have realized business

growth since acquisition of credit from the microfinance

institutions

4) To formulate policy recommendations that would enhance

micro financing for positive performance of SMEs

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 1.5 SIGNIFICANCE OF THE STUDY

The study is geared towards the recognition of the importance of

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

from microfinance institutions through the provision of

equity/capital for start ups Moreover micro finance institutions also

offer

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

business proposal of their choice and helping them in developing a

saving scheme.

Micro finance can benefit from this study by determining how fast

they can provide funding and motivation towards spreading their

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

When analyzed well this study broadens our level of thinking in

sourcing equity/capital through financial institutions and develop

saving scheme skills for our businesses thereby broadening our

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

15
raise our living standard by enabling us develop business that may

be of an increment to our normal income.

Since the government is the backbone of the economy,

microfinance will enable the government to establish the tax rates

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

deploy to other sectors of the economy and check the economic

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

institutions It is also relevant to the government for the formulation

of regulatory policies regarding MFI. Besides, commercial banks

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

collection of various statistics on their performance.

Also the awareness that created on the challenges facing MFI

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

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

profitable ventures creating employment opportunities and

uplifting the living standard of SME’s.

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 1.6 SCOPE AND LIMITATIONS OF THE STUDY

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

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

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

Limitations of the study

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

for the transport around Kisumu west district, access to

information in Kisumu west district concerning the impact of

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

got the information relevant to our study from the Kenya national

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

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

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

also experienced hostile weather condition and this made us to

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

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1.7 DEFINITION OF KEY TERMS

Micro-financing

Micro-financing is the provision of financial services to low

income clients including customers and self employed that

traditionally lack access to banking and related services.

SME

The research will consider a small enterprise to be that consisting

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

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

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

500,000.

MFI (micro finance institutions)

These are financial institution that offer credit facilities to

individuals and businesses for an agreed period of time

CBD (central business district)

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

of business activities take place

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SMEs performance

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

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

CHAPTER TWO

LITERATURE REVIEW

2. 1 Introduction

This chapter discusses literature related to micro financing and

SMEs growth. It focuses on two substantive literature aspects.
First, theoretical reviews of the conceptual theories so far advanced
in the field of microfinance and SMEs and second, the empirical
review for evidences about micro financing and SMEs
performance in various parts of the world.

2.2 Theoretical Review

2.2.1 Micro credit theory

The psychological component of the micro credit theory - known

as social consciousness-Driven capitalism - has been advanced
by the most ardent promoter of micro finance, Muhammad Yunus

19
(1998). His theory argues that a species of profit-making private
venture that cares about the welfare of its customers can be
conceived. In other words, it is possible to develop capitalist
enterprises that maximize private profits subject to the fair interests
of their customers. (Journal of political and military sociology,
summer by Elahi, Khandakar Q, Danopoulos, Constantine P-
2004 edition)

The rationale of the theory is straightforward. Although altruism is

not totally absent, Capitalism is founded mainly on the premise
that human beings are selfish by nature. Accordingly, individuals
interested in businesses are naturally motivated by the principle of
profit-maximization, with little consideration for the interests of
their clients. This premise is too limited to be a general model for
capitalism, however, because it excludes individuals who are
concerned about the welfare of their fellow human beings. A more
generalized principle would assume that an entrepreneur
maximizes a bundle consisting of financial return or profit and
social return. This assumption creates three groups of
entrepreneurs (Elahi, 2002). The first group consists of traditional
capitalists who mainly maximize financial returns or profits. The
second group consists of philanthropic organizations (like
traditional microcredit NGOs) and public credit agencies that
mainly maximize social returns. The third group consists of

20
entrepreneurs who combine both rates in making their investment
decisions under the additional constraint that financial return
cannot be negative. This group includes the microfinance
enterprisers who are to be treated as socially concerned people, and
microfinance, which is to be treated as a social consciousness-
driven capitalistic enterprise. Microfinance theoreticians have
advanced two theories regarding their aims-an economic and a
psychological. The economic theory treats microfinance
institutions (MFIs) as infant industries, while the psychological
theory differentiates microfinance entrepreneurs from traditional
money lenders by portraying them as "social consciousness driven
people." According to Remenyi (2000:65), the gist of the economic
argument is that success in any business venture, including MFIs,
is determined by the entrepreneurs' ability to deliver appropriate
services and profitably. However, studies conducted in different
parts of the TW show that there are no successful MFIs by this
definition. At best, some MFIs cover their operating costs while
some of the better known among them are able to cover in part the
subsidized cost of capital employed. This situation suggests that
the MFIs will not become financially viable in the long run. One
solution to this problem is to treat MFIs as infant industries, so that
micro-lending businesses can be subsidized during their initial
stages of operation. This subsidization would be beneficial to both

21
the economy and society because this will help micro lenders
realize economies of scale and the productivity fillip that comes
with profitability. The logic goes as follows: Over time, as clients
of MFIs, micro entrepreneurs will establish their economic
contracts with banks, retailers, government employees, and
suppliers of production inputs, which will improve their skills
dealing with money management, contractual obligations, and
resource management. These skills should reduce the cost of
transaction, disseminate information, and increase the micro
entrepreneurs' ability to assess effectively available information to
make sound business decisions. In this respect, society benefits
from what is, in effect, a productive process leading to the creation
of public goods as spin-offs from the growth of microfinance. To
the extent that these public goods have value, they are a legitimate
basis on which to provide subsidies to MFIs while the transition to
widespread outreach to poor households is ongoing (Remenyi,
2000: 46).The Wealth of Nation says little about the psychological
aspect of the theory. Smith articulates the psychological
components in his other book, The Theory of Moral Sentiments.
Published seventeen years before is Wealth of Nations, this book
deals with moral theory. Smith advances the maxim that human
self-interest acts as a prime mover of the capitalist development.
Moral Sentiments is an inquiry into moral psychology, for which

22
the main concern is the nature of moral judgment (Raphael, 1985;
Sprague, 1967).

Smith finds the original source of moral judgment in the

conception of sympathy, which he makes sufficiently clear in the
first paragraph of the book: How selfish so ever, man may be
supposed, there are evidently some principles in his nature, which
interest him in the fortune of others, and render their happiness
necessary to him, though he derives nothing from it except the
pleasure of seeing it. Of this kind is pity or compassion, the
emotion, which we feel for the misery of others, when we either
see it, or are made to conceive it in a very lively manner. That we
often derive sorrow from the sorrow of others is a matter of fact
too obvious to require any instances to prove it; for this sentiment,
like all other original passions of human nature, is by no means
confined to be virtuous and humane, though they perhaps may feel
it with the most exquisite sensibility. The greatest ruffian, the most
hardened violators of the laws of society, is not all together without
it. (Smith, 1976:9)

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

Thomas Hobbes and Bernard Mandeville and an indication of the
central idea of his work on moral philosophy (Weinstein, 2001). In
The Leviathan, Hobbes, a die-heart materialist in his methods of

23
philosophical investigation, paints a very negative picture of
human nature. His materialistic conception of human nature may
be understood from his interpretation of human life. He sees
human life simply as motion of limbs. The human heart is simply a
spring; nerves are nothing but a complex system of strings; and
joints are just wheels which give motion to the whole body
(Hobbes, 1960). In other words, Hobbes conceives human beings
as nothing more than living machines.

National development is the fundamental objective of trade policy.

Accordingly, international trade theory and policy are basically
founded on a normative criterion that seeks to improve the
economic health of society. Trade policies either facilitate or
impede the flows of voluntary exchanges of goods and services
between nations undertaken by private nationals. The generic term,
free trade policy, is used to describe government measures that
facilitate these exchanges. Government measures aiming to do the
opposite go by the generic term "protectionism". It follows that
discourses in international trade theory and policy revolve around
two thematic ideas-free trade and protectionism-both of which seek
the same objective, national development.

Historically, protectionism is regarded as a conservative economic

idea that precedes the liberal economic idea of free trade.

24
Protectionism is often traced to the 16th century, while the history
of free trade definitely begins in the 18th century (Ellsworth,
1950). The original protectionist argument is mercantilism, while
the French Physiocrats are the original authors of free trade that
received its fuller exposition in the able hands of Adam Smith. The
infant-industry argument was developed later to accommodate
mercantilist sentiments within the framework of Smith's liberal
economic theory. Since the infant-industry argument has been
invoked to justify the establishment of the microfinance industry in
the TW, the following brief discussion of the theory of
mercantilism is in order.

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

Blaug, 1978). First, bullion and treasure are the essence of wealth
of nations. Second, foreign trade should be regulated to produce an
inflow of specie. Third, domestic industries are to be promoted by
inducing cheap raw-material imports. Fourth, the importation of
manufactured goods is to be discouraged through custom duties,
while the exportation of domestic manufactured goods is to be
encouraged by exempting them from such duties. Finally,
population growth is to be encouraged to keep wages low. These
features suggest that the core doctrine of this trade theory is the
favorable balance of trade as desirable and essential for national
prosperity. This theory, however, clearly involves a dual policy

25
regime of taking advantages from trading partners. This is the
reason mercantilism is popularly described in economic literature
as the "beggar thy neighbors" policy.

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

it might, and it did, trigger trade wars. In addition to its negative
political implications, the theory is economically unsound as a
policy for national development. Adam Smith was the first to
expose this weakness. He argued that "mercantilism is nothing but
a tissue of protectionist fallacies foisted upon a venal Parliament
by our merchant and manufacturers, grounded upon the popular
notion that wealth consists in money. Like an individual, a country
must spend less than its income if its wealth is to increase. What
tangible form does this surplus over consumption take? The
mercantilist authors identified it with the acquisition of hard
money or treasure. Money was falsely equated with capital and the
favorable balance of trade with the annual balance of income over
consumption” (Blaug, 1978: 10-11).

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

mercantilist idea of improving national economic welfare through
protection. Yet, this idea soon reappeared under different
designations, the most influential of which is the infant-industry
argument. Modern writers (Chacholides, 1978; Ellswoth, 1950)

26
credit John Stuart Mill with the clearest articulation of this
influential protectionist trade policy argument, which can be
summarized as follows: "temporary" protective duties may be
justified in cases where foreign suppliers' comparative advantages
lie mainly in starting the production of these items sooner. This
suggests that the present superiority is due to acquired skill and
experience. Under certain conditions, a protecting duty might be
the least inconvenient method for national development. However,
Mill warns very emphatically about the use and abuse of his
theory. He states that "it is essential that the protection should be
confined to cases in which there is good ground of assurance that
the industry which it fosters will after a time be able to dispense
with it; nor should the domestic producer ever be allowed to expect
that it will be continued even beyond the time necessary for a fair
trial of what they are capable of accomplishing" (Mill, 1961: 922).

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

of MFI are complicated by the fact many institutions are involved
in providing MF services under different legal structures. The
present a challenge in identifying an appropriate regulating
approach, which is conducive to the development of the sector
while providing adequate facility to the MFI activities. The tiered
approach recommended for Kenya recognizes the

27
inappropriateness of the existing banking legalization for the
regulation of specialized activities of MFI and the diversity of the
institutions engaged in the less regulated sector. However MFI
operating as banking institutions, SACCOs and Kenya Post Office
Saving Bank are already regulated by the act of parliament that
specifies their different supervisory authority

28
2.2.2 Realities of microfinance

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

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

borrow from local money lenders at exorbitant interest rates. Many

innovative institutional mechanisms have been developed across

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

mortgage. The present paper discusses conceptual framework of a

microfinance institutions in India, Bangladesh and Indonesia.

2.3 Empirical Reviews

2.3.1 Formal banking in India

Traditionally, the formal sector Banking Institutions in India have

been serving only the needs of the commercial sector and
providing loans for middle and upper income groups. Similarly, for
housing, the HFI’s have generally not evolved a lending product to
serve the needs of the Very LIG primarily because of the perceived
risks of lending to this sector. The following risks are generally
perceived by the formal sector financial institutions: Credit Risk,
High transaction and service cost, Absence of land tenure for
financing housing, irregular flow of income due to seasonality,

29
Lack of tangible proof for assessment of income and Unacceptable
collaterals such as crops, utensils and jewellery

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

Commercial Banks, Housing Finance Institutions (HFIs),
NABARD, Rural Development Banks (RDBs), Land Development
Banks and Co-operative Banks (CBs).

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

(UCB) or Urban Credit Co-op Societies (UCCS) are the two
primary co-operative financial institutions operating in the urban
areas. There are about 1400 UCBs with over 3400 branches in
India having 14 million members, their total lending outstanding in
1990-91 has been reported at over Rs 80 billion with deposits
worth Rs 101 billion.

Similarly there exist about 32000 credit co-op societies with over
15 million members with their total outstanding lending in 1990-91
being Rs 20 billion with deposits of Rs 12 billion. Few of the
UCCS also have external borrowings from the District Central Co-
op Banks (DCCBs) at 18-19%. The loans given by the UCBs or
the UCCS are for short term and unsecured except for few which
are secured by personal guarantees. The most effective security
being the group or the peer pressure.

30
The Government has taken several initiatives to strengthen the
institutional rural credit system. The rural branch network of
commercial banks have been expanded and certain policy
prescriptions imposed in order to ensure greater flow of credit to
agriculture and other preferred sectors. The commercial banks are
required to ensure that 40% of total credit is provided to the
priority sectors out of which 18% in the form of direct finance to
agriculture and 25% to priority sector in favour of weaker sections
besides maintaining a credit deposit ratio of 60% in rural and semi-
urban branches. Further the IRDP introduced in 1979 ensures
supply of credit and subsidies to weaker section beneficiaries.
Although these measures have helped in widening the access of
rural households to institutional credit, vast majority of the poor
rural have still not been covered. Also, such lending done under
the poverty alleviation schemes suffered high repayment defaults
and left little sustainable impact on the economic condition of the
beneficiaries.

2.3.2 The Grameen Bank in Bangladesh

The concept is the brainchild of Dr Muhammad Yunus of

Chittagong University who felt concern at the pittance earned by
landless women after a long arduous day's work labouring for
other people. He reasoned that if these women could work for

31
themselves instead of working for others they could retain much of
the surplus generated by their labour, currently enjoyed by others.

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

branches (a branch covers 25-30 villages, around 240 groups and
1200 borrowers) in every province of Bangladesh, borrowing
groups in 28,000 villages, 12 lakh borrowers with over 90% being
women. It has an annual growth rate of 20% in terms of its
borrowers. The most important feature is the recovery rate of
loans, which is as high as 98%. A still more interesting feature is
the ingenious manner of advancing credit without any "collateral
security".

The Grameen Bank lending system is simple but effective. To

obtain loans, potential borrowers must form a group of five, gather
once a week for loan repayment meetings, and to start with, learn
the bond rules and "16 Decisions" which they chant at the start of
their weekly session. These decisions incorporate a code of
conduct that members are encouraged to follow in their daily life
e.g. production of fruits and vegetables in kitchen gardens,
investment for improvement of housing and education for children,
use of latrines and safe drinking water for better health, rejection of
dowry in marriages etc. Physical training and parades are held at
weekly meetings for both men and women and the "16 Decisions"

32
are chanted as slogans. Though according to the Grameen Bank
management, observance of these decisions is not mandatory, in
actual practice it has become a requirement for receiving a loan.

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

The organization of members in groups and centers serves a
number of purposes. It gives individuals a measure of personal
security and confidence to take risks and launch new initiatives.

The formation of the groups - the key unit in the credit programme
- is the first necessary step to receive credit. Loans are initially
made to two individuals in the group, who are then under pressure
from the rest of the members to repay in good time. If the
borrowers default, the other members of the group may forfeit their
chance of a loan. The loan repayment is in weekly instalments
spread over a year and simple interest of 20% is charged once at
the year end.

The groups perform as an institution to ensure mutual

accountability. The individual borrowing member is kept in line by
considerable pressure from other group members. Credibility of
the entire group and future benefits in terms of new loans are in
jeopardy if any one of the group members defaults on repayment.

33
There have been occasions when the group has decided to fine or
expel a member who has failed to attend weekly meetings or
willfully defaulted on repayment of a loan. The members are free
to leave the group before the loan is fully repaid; however, the
responsibility to pay the balance falls on the remaining group
members. In the event of default by the entire group, the
responsibility for repayment falls on the centre.

The Grameen Bank has provided an inbuilt incentive for prompt

and timely repayment by the borrower i.e. gradual increase in the
borrowing eligibility of subsequent loans.

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

from Indonesia.

In Indonesia, financial liberalization since 1988, disenchantment

with traditional subsidized credit programs and an openness to
innovative approaches led the Central Bank to support a pilot
project in which 13 participating banks, with the assistance of 12
NGOs, have lent to about 420 self-help groups (SHGs) in the first
phase, to be onlent to their members.

Some of the principles underlying the project and the guidelines

that were issued to the implementing groups are listed below:

34
 The SHGs are to use part of their funds (almost 60%) for
lending to their members and the rest for depositing in a bank
to serve as the basis for refinancing from the bank.
 Savings are to come first: no credit will be granted by the
SHG without savings by the individual members of the SHG.
These savings are to serve as partial collateral for their loans.
 The joint and several liabilities of the members are to serve
as a substitute for physical collateral for that part of loans to
members in excess of their savings deposits.
 Credit decisions for on lending to members are to be taken by
the group collectively.
 Central Bank refinance is to be at an interest rate equal to the
interest rate at which the savings are mobilized.
 All the intermediaries (the Central Bank, banks, NGOs and
SHGs) will charge an interest margin to cover their costs.
 Interest rates on savings and credit for members are to be
market rates to be determined locally by the participating
institutions.
 Instead of penalties for arrears, the banks may impose an
extra incentive charge to be refunded in the case of timely
repayments.
 The ratio of credit to savings will be contingent upon the
credit worthiness of the group and the viability of the projects

35
 to be implemented, and is to increase over time with
repayment performance.
 SHGs may levy an extra charge on the interest rate for
internal fund generation (which would be self-imposed
forced savings).

Within the first ten months of the implementation period, by

March 1990, 7 private banks and 11 branches of government banks
had made 229 group loans to SHGs, which had retailed them to
about 3500 members. Loans totalling about $0.4 million had been
disbursed, on an average of about $2000 per group and $118 per
member. SHG savings deposits with the bank amounted to about
$400 per group, giving a credit to savings ratio of about 5. NGOs
have received loans from the banks at 22 to 24 per cent which is
only slightly higher than the refinancing rate of large to small
banks. Rates to end users have been between 30 to 44 per cent after
the NGOs and SHGs have added their margins to cover costs and
build funds to cover joint and several liability. Only one of the
participating banks had sought a guarantee under the scheme from
the Central Bank.

36
 2.4 CONCEPTUAL FRAMEWORK

Figure 1

MFI
 loans
 repayment
period.
 capital Advisory services

STRATEGY
ENVIRONMENT  Borro
Micro- w Sal
 Political Security
loan  Intern es
 Economic PERFORMANCE
 Social economic al  Profit
 Legal financ
ing

Investment
Expand
SMALL SCALE
BUSINESS
 License
 Employment

37
 In developing this proposal, we came up with the above conceptual
framework which shows the environment in which the SME’s and
micro financial institution are set up.
The government regulates SME’s through issuance of licenses. The
government will also impose limits on the minimum capital that the
micro finance institutions are supposed to maintain at any period.
In advancing the loans to SME’s, the micro finance institutions require
securities for the business like title deed, Business registration
certificates, certificate of life insurance policy etc.

The business may also borrow or use internal funds in their financing. In
return, the microfinance institutions will offer advisory services to
business such as viable projects to invest in. From funds acquired by
SME’s they may opt to expand the business or to invest in new line of
business. This will result into higher sales to increase in demand and
expansion from the economies of scale. This will results into increased
profits resulting to higher level of performance of the business and hence
contribute to the economic development.
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 INTRODUCTION

This chapter presents a detailed descriptions of the methodology used in

the study. It includes research design, description of the study area,
target population, sample population, sampling procedure, data
collection methods and data analysis methods.

3.2 RESEARCH DESIGN

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

SMEs that have accessed loans from microfinance institutions.

3.3 RESEARCH AREA

The research will be conducted in the central business district kisumu

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

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

3.4 TARGET POPULATION

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

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

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

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

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

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

3.5 SAMPLE AND SAMPLING TECHNIQUES

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

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

because of limited time and resources.

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

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

managed to get a loan from the MFI this year.

Table

SME (members of population) Population Sample size

Salons 20 10
Electronics 40 15
Hotels(food joints) 20 8

Totals 80 33

Chart view

40
35
30
25
salon
20
electronics
15
hotels
10
5
0
population sample size

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

3.6.1 QUESTIONAIRE AND SCHEDULE METHOD

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

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

questionnaire will be self administered while the schedule will be

administered by trained interviewers to the respondents.

3.6.2 INTERVIEW METHOD

The researcher will use interviews to obtain required information orally

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

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

hold a conversation. The researcher may apply individual interview by

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

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

focused group interview that will involve all stakeholders.

3.6.3 OBSERVATION METHODS

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

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

observation without asking from the respondents.

3.6.4 DOCUMENTARY REVIEWS

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

autobiography, diaries, compositions, periodicals, bulletins, court

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

3.7 DATA ANALYSIS AND PRESENTATION

Both descriptive and inferential methods that will be used include;

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

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

measures of relative position and measures of relations and associations,

correlation and regression.

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

PowerPoint presentation will be designed for presentation etc.

CHAPTER FOUR

DATA ANALYSIS AND PRESENTATION

4.1 INTRODUCTION
This chapter presents the findings of the study and the analysis of the
data collected from questionnaire which was distributed to the small
and medium size entrepreneurs. The questionnaire was distributed to
33 SME’s out of which all were fully completed with few difficulties
experienced here and there and collected by the researcher for data
analysis. This gives a response rate of 95%.

4.2 BUSINESS MANAGEMENT

The respondents’s were asked to state their relation with the business in
existence. It was found that 33 per cent of the respondents were
employees while 67 per cent were owner of the business. This is
presented in the figure below.

Figure 4. 1: Respondents relation to the Business

f %
Employee 11 33
owner 22 67
Total 33 100

33%

67%

OWNERS EMPLOYEE

The study also found out that 33 per cent of the respondents’s are
partnership while 50 per cent are sole proprietorship. Only 17 per cent of
the respondents’s are in form of joint venture. This is presented in the
figure below.
Figure 4. 2: Business Formation

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

(%)
Joint venture 7. (17) 0.(0) 0.(0) 0.(0)
Sole 17. (50) 30. (91) 32. (97) 28. (85)
proprietorship
Partnership 9. (33) 3.(9) 1.(3) 5.(15)
Total 33 (100%) 33.(100) 33. (100) 33.(100)

17%
33%

50%
joint venture sole proprietorship partnership

The researcher also sought to know the line of operation of the business.
From the analysis, it was found that 37% of the respondents’ dealt with
electronic kind of business, 36% indulged in hair dressing whereas 27%
operated hotel businesses. The analysis of the line of business of
respondents’s can be observed from the figure below.

Figure 4. 3: Line of business of the respondents

27%
37%

36%
electronic hair dressing hotel
The researcher sought to find out the source of capital for their business
before the start or operation of the business. Statistically in the
perception of the respondents’s, 75%, said that the business obtained its
capital from micro-financial institutions while 25% from other financial
institutions that were stated. The results are shown in the table below.

Table 4. 1: source of capital

Response Frequency Percent (%)

Micro-financial institution 20 75%
Other financial institution 13 25%
Total 33 100%

The researcher also sought to investigate whether the respondents have

ever benefited from the services of micro-financial institutions and those
who had obtained their capital from MFI had some reasons, major ones
being the offer of cheap loans and financial services advices.
As to what measures would you like the MFI’s to implement so that
loans repayment can be favorable to all SME’s, the study found out from
the respondents’s opinions that MFI’s should a little flexible towards the
members who do not meet the MFI’s deadline of loan repayment and
this they should do by lengthening their repayment periods. It was also
proposed that they should also adjust their loan interest charges, relaxing
their security requirements and offer proper training to the illiterate
citizens to be acquainted with their terms and conditions.
25 respondents’ who said that they have benefitted from the services of
the micro-financial institutions as to obtaining loans claimed to have
experienced a favorably shorter loan repayment period as per the
conditions of the MFI’s. This is illustrated in the table below whereby,
25% were subjected to 2-5 years, and 62.5% were subjected to 6
months-1 year, while 12.5% were subjected to 5 years and above.

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

Loan Repayment Period Frequency Percent (%)

2 – 5 years 8 25%
6 months – 1 year 13 62.5%
Above 5 years 4 12.5%
Total 25 100%

As evident from the table below, 83.3% of the respondents claimed that
although they have benefitted from MFI’s, they also faced some
challenges as loan beneficiaries, majority with the reason being long
periods of waiting for the loan processing, while the remaining 16.7%
were of the suggestion of having experienced no challenges as loan
beneficiaries.
Table 4. 3: challenges as loan beneficiaries

Response Frequency Percent (%)

 Yes 20 83.3%
No 5 16.7%
Total 25 100%

The findings presented in the table below are based on the question,
“rate the performance of your business operation?” 85% of the
respondents’ answered average, 10% answered high, while 5% answered
that their business performance was yet to regain its stands after facing
stiff competition thus rated their performance to be low.

Table 4. 4: Rate of performance of the business

Answer Frequency Percent (%)
High 3 10%
Moderate 28 85%
Low 2 5%
Total 33 100%

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

making savings in their business operation through realization of profits
when extracting their business balance sheets and profit and loss
account, while the remaining 33.7% are yet to realize profits thus no
savings since they are fresh in the business field.
Table 4. 5: Impact of political environment on the company

Response Frequency Percent (%)

Yes 25 66.6
No 8 33.7
Total 33 100.0

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

business outlet apart from their business thus attaining business diversity
and expansion through the realized savings, while the remaining 41.7%
had no any business outlet apart from the one in existence. This is
presented in the table below.

Table 4. 6: Other Business outlets

Response Frequency Percent (%)

Yes 15 58.3%
No 18 41.7%
Total 12 100%

The findings on the table below are based on the question, “How do you
rate the loan services from the MFI’s?” 8% of the respondents answered
excellent, 25% of the respondents answered very good, 55% of the
respondents’s answered good while 12% answered poor. All these were
based on the terms and conditions laid upon before accessing loan by the
MFI’s.
Table 4. 7:

Response Frequency Percent (%)

 Excellent 5 8
Very good 10 25
Good 14 55
Poor 4 12
Total 33 100%

The findings on table 4.10 below are based on the question, “What
would you wish the MFI’s to do so as to improve your business
performance?” 33.3% of the respondents’ opted for MFI’s in offering
training, while 66.7% of the respondents’ opted for MFI’s in increasing
their lending rate.

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

Response Frequency Percent (%)

Increase lending rate 18 33.3%
Offer training 15 66.7%
Total 33 100.0%
CHAPTER FIVE

CONCLUSIONS AND RECOMMENDATION

5.1 Summary of the Findings

This study was designed with three main objectives. One, to establish
whether the SME’s have been financed by MFI’s, two, to determine if
the financed SME’s have managed to repay their loans according to the
terms and conditions of MFI’s and three to determine if the financed
SME’s have realized business growth since acquisition of credit from
MFI. The general objective formulated was to find out the impact of
MFI’s on the performance of SME’s.
From the study, the researcher found out that
……………………………………………………………………………

5.2 Conclusion

Some valuable lessons can be drawn from the experience of

successful Microfinance operation. First of all, the poor repay their loans
and are willing to pay for higher interest rates than commercial banks
provided that access to credit is provided. The solidarity group pressure
and sequential lending provide strong repayment motivation and
produce extremely low default rates. Secondly, the poor save and hence
microfinance should provide both savings and loan facilities. These two
findings imply that banking on the poor can be a profitable business.
However, attaining financial viability and sustainability is the major
institutional challenge. Deposit mobilization is the major means for
microfinance institutions to expand outreach by leveraging equity
(Sacay et al 1996). In order to be sustainable, microfinance lending
should be grounded on market principles because large scale lending
cannot be accomplished through subsidies

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

solving the problem of inadequate housing and urban services as an
integral part of poverty alleviation programmes. The challenge lies in
finding the level of flexibility in the credit instrument that could make it
match the multiple credit requirements of the low income borrowers
without imposing unbearably high cost of monitoring its end-use upon
the lenders. A promising solution is to provide multi-purpose loans or
composite credit for income generation, housing improvement and
consumption support. Consumption loan is found to be especially
important during the gestation period between commencing a new
economic activity and deriving positive income. Careful research on
demand for financing and savings behavior of the potential borrowers
and their participation in determining the mix of multi-purpose loans are
essential in making the concept work (tall 1996).
5.3 Recommendations
For MFI’s to succeed in the global sector, it should loosen their terms
and conditions for SME’s to easily access loans and also create
awareness to the people through civic education on the services offered
by them.

5.4 Suggestions for further research

The research proposes that a similar research be undertaken focusing on
strategies adopted by MFI’s in bringing their services to the rural
population .Further, the research proposes a study on the impact of
MFI’s on savings.
REFERENCES

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

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

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

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

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

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

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

Emerging Lessons of Successful Programs," September IMCC,

Arlington, Virginia.

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

Microfinance: Supervision and Regulation, Financing Sources,

Expansion of Microfinance Institutions," Microfinance Network,

Washington, D.C. February

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

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

enterprise Finance -Building Healthy Financial Institutions for the

Poor, Kumarian Press, West Harford, Connecticut.

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

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

Maryland.

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

on Women and Finance," New York.

 QUESTIONAIRE

LETTER OF TRANSMITTAL

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

respondents of this questionnaire to participate fully and your

cooperation will be highly appreciated, This questionnaire is aimed at

collecting data required for the study entitled: IMPACT OF MICRO

FINANCE ON THE PERFORMANCE OF SME’S IN KISUMU CBD

LAKE MARKET

The data collected would be strictly for academic purposes and any

correspondence given be treated as confidential. Respondents are

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

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

information. Thanks
This questionnaire is aimed at collecting data required for the study

entitled: IMPACT OF MICRO FINANCE ON THE PERFORMANCE

OF SME’S IN KISUMU CBD LAKE MARKET.

Name of the

interviewer…………………………………………………

Please give the following details

1) Name of business…………………………………………….

2) Ownership

a. Employee

b. Owner

3) Year of establishment………………………

4) Type of Business

a. Joint venture

b. Sole proprietorship

c. Partnership
Others state……………………………………………………………….

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

SECTION 1

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

a. Micro financial institutions

b. Other financial institutions

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

2) Do you benefit from micro financial institutions?

a. Yes

b. No

If Yes, how

……………………………………………………………..

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

assistance from the MFI’s

a. Easy loan repayment

b. Good services

Others state……………………………………

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

 a. 6 months-1 year

b. - 5 yrs

c. Above 5 yrs

SECTION 2

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

MFI’s (tick one)

a) 1-3yrs

b) 4 – 10 yrs

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

a. Poor

b. Good

c. Very good

d. Excellent

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

(tick one)

a) Yes

b) No

If yes state………………………………………..
SECTION 3

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

operation?

a) 1-10

b) Above 10

8) How many employees are there currently?

……………………………………………………..

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

business?

a) Yes

b) No

If yes (tick one)

a) 1 -5

b) 6-10

c) Above 10

10) Do you make any savings from your business?

a) YES

b) NO
If no, what could be the reasons?

……………………………………………………………………

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

a) High

b) Low

c) Average

SECTION 4

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

performance? (Tick one)

a. Increase lending rates

b. Offer training

Others specify………………………………………………………..

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

award loans to any SME

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

MFI’s?(tick )

a) Lack of security

b) Lack of proper knowledge

c) Conditions on repayment

Others state………………………………………………………

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

Thank you very much for participating!!!!