Micro Finance Institutions Industry in Kenya

ABSTRACT:

There are a number of studies in the MF industry because it has got the attention of academicians and practitioners as an innovative method of fighting poverty. The attention in financial sustainability of MF industry is gaining momentum in the recent past. Historically MF has started operation with donor funds and now the industry has almost aged around 30 years. There is an intense debate on whether MFIs should continue to be donor supported or get relived from donation and stand on their own leg. There is one school of thought which say MF can be sustainable with donor funds (called welfarists) and the others say the MF should generate enough revenue to cover their own costs as donors funds are unpredictable (called institutionsist) (Basu &Woller, 2004). Hence the issue of building a sustainable MF industry that can operate without a donor funds is of an empirical enquiry.

In numerous studies done across the world, it is generally believed that various microfinance initiatives have been able to make a difference in the target population's lives. However, increasing doubts have been raised over the financial sustainability of microfinance institutions. MFIs need to be economically viable and sustainable in the long run but economic implications of long term sustainability are not being considered (Srinivasan et al., 2006).

However there does not seem to be any working model of analyzing the financial performance and thereby sustainability of microfinance institutions in Kenya. This problem is compounded by the absence of a dedicated legislation on working and management of microfinance institutions. The lack of a regulatory mechanism for financial disclosures by microfinance institutions also abets the problem.

This study will attempt to analyze the financial performance of various microfinance institutions operating in Kenya. It assumes significance because it is imperative that these institutions need to be run efficiently given the fact that they are users of marginal and scarce capital and the intended beneficiaries are the marginalized sections of society. MFIs must be able to sustain themselves financially in order to continue pursuing their lofty objectives, through good financial performance. Hence this study, by using statistical test of significance, will try to analyze the performance of these institutions using many indicators such as capital structure, asset allocation, breadth of outreach, depth of outreach, profitability and sustainability, revenue performance, expense management, efficiency, productivity and portfolio quality.

In light of this, this paper attempted to look at MFIs performance in the country from financial sustainability angles using secondary data obtained from MIX MARKET website. There are 29 Kenyan MFIs in the MIX market website to which I have access to their data, although the central bank reported that as of December 2008, the 36 retail MFIs (excluding commercial banks) registered with the Association of Microfinance Institutions (AMFI). The 29 MFIs will be stratified for analysis based on their size because the Kenyan MFIs shows high variability (measured by coefficient of variation as different unit of measurement exist for different variables such as age is measured in years whereas GLP in dollar terms) in terms of size rather than age, legal status, financial intermediation, and lending method. The standard classification of MFIs in terms of size according to the Micro banking Bulletin (MBB) is those having a GLP of less than 2 million dollars are small, those having a GLP of between 2 and 8 million dollars are medium and those above 8 million dollar GLP are large.

The data obtained will be run using SPSS data analyzing package and results to be compared with different ratios chosen again from the reporting format of Mix Market.

TABLE OF CONTENTS

DECLARATION 2

ABSTRACT: 3

CHAPTER 1: INTRODUCTION 7

1.1 INTRODUCTION 7

1.2 BACKGROUND 9

1.2.1 Microfinance and the Financial Services Sector in Kenya 12

1.3 PROBLEM STATEMENT 14

1.4 OBJECTIVES OF THE STUDY 15

1.5 RESEARCH QUESTIONS 15

1.6 SIGNIFICANCE OF THE STUDY 16

1.7 JUSTIFICATION FOR THE STUDY 16

1.7 ASSUMPTIONS OF THE STUDY 17

1.8 SCOPE OF THE STUDY 17

1.9 LIMITATIONS 17

CHAPTER 2: REVIEW OF LITERATURE 18

2.1 LITERATURE REVIEW 18

2.1.1 THEORETICAL FRAMEWORK. 18

2.2 EMPIRICAL LITERATURE REVIEW 22

2.3 DEFINITION OF TERMS 24

CHAPTER 3: METHODOLOGY 26

3.1 RESEARCH DESIGN 26

3.2 POPULATION AND SAMPLE 26

3.3 DATA COLLECTION TECHNIQUES 26

3.4 DATA ANALYSIS TECHNIQUES 27

REFERENCE 28

APPENDICES 30

CHAPTER 1: INTRODUCTION

1.1 INTRODUCTION

Several micro finance institutions (MFIs) have established and have been operating towards resolving the credit access problem of the poor. The MF industry as a whole is challenged by the need to reach the poorest customers and at the same time being financially self sufficient. Although the industry as a whole is growing at a faster pace still the two critical questions of reaching the poor and building a financially sustainable MF industry that walk on their own freely are empirical questions. This research, although will not solve these crucial questions, but will at least contribute to researchers, practitioners and policy makers by showing where the Kenyan MFIs are lying on the outreach to the poor, sustainability, and a couple of other performance dimensions.

There are a number of studies in the MF industry because it has got the attention of academicians and practitioners as an innovative method of fighting poverty. The studies mostly concentrate on three key areas. The first one is impact assessment of the MF programs