Background of the Study
The need for development that saw the Kenya develop several strategies and plans such as the vision 2030 and the millennium development goals has led to development of the finance sector. The need for financing of the development projects has developed microfinance institutions in the country. Microfinance has received a lot of attention since its inception in the early 1970s perhaps, as argued by Okiocredit (2005: 30-32), due to the ability of microfinance to enable poverty alleviation and economic development through provision of credit and savings services to those earning low income.
The attention has seen development of different definitions to microfinance. According to Otero (1999: 8) microfinance is “the provision of financial services to low-income poor and very poor self-employed people”. On the other hand, Schreiner and Colombet (2001: 339) define microfinance as “the attempt to improve access to small deposits and small loans for poor households neglected by banks.” Independent of the definition provided to microfinance it is a general agreement in the economic field that micro financing alleviates economic development.
The money or funds that are provided by microfinance institutions in terms of credit and micro loans enables those who are poor to invest into productive activities that are bound to earn them income helping them boost their economic level and alleviate poverty in the entire economy. Microfinance institutions therefore are an opportunity for sustainable development.
The extent opportunities available to generate income and the ability of citizens to respond to the available opportunities are to a large extent determined by the degree or ability to access financial services that are affordable. Microfinance being able to provide such financial services is being pursued by every economy worldwide. Initially microfinance aimed at providing donor finances and financing experimental projects. This has developed to financial institutions that provide a wide range of services and several routes to opportunities that are significant for economic development and expansion (Khan, 2005:131-142).
The concept of microfinance in most instances has been used interchangeably with microcredit imploring that they have the same meaning. However microcredit and microfinance are two different concepts. In an attempt to describe the difference between microcredit and microfinance, Sinha (1998: 2) states that, “microcredit refers to small loans, whereas microfinance is appropriate where non-governmental organizations (NGOs) and microfinance institutions (MFIs) supplement the loans with other financial services (savings, insurance, etc)”.
This definition indicates that microcredit is part of microfinance since it involves providing credit to the poor. Microfinance is an overall concept as it involves both credit and non-credit financial services such as insurance, savings, pensions and other payment services. Microfinance institutions, given the nature of their objective of ensuring that the prop are able to access financial services, operate in several models.
The most commonly identified models of operations of microfinance institutions include the Rotating Savings and Credit Association (ROSCAs), the Grameen Bank and the Village Banking models. Rotating Savings and Credit Association are formed when a group of individuals come together and form an agreement to make regular cyclical contributions with an aim of developing to a common fund. After some period of specified time the lump sum of the contributions is given to one member of the group in each cycle.As argued by Schreiner (2010: 112-119), this model is a very common form of savings and credit. The solidarity group model is based on based on group peer pressure. Loans are made available to individuals who are in organized groups of four to seven peoples (Berenbach and Guzman, 1994: 119).
The advantage of being in groups is that the members collectively guarantee loan repayment. They are therefore able to access subsequent loans depending on successful repayment by all group members. These payments are usually made after a specific period of time, usually one week (Ledgerwood, 1999: 137). This model of micro financing is the most commonly used by banks. It has proven to be more effective in the long run as there are few loan defaulters as each member of the group is a guarantor of the other.
Berenbach and Guzman (1994: 119-139) argues that, solidarity groups have proved effective in deterring defaults as evidenced by loan repayment rates attained by organizations. Village banking model are based on village banks which are normally community-managed. The banks are established and managed by credit and savings associations established by NGOs to provide access to financial services, build community self-help groups, and help members accumulate savings (Schreiner, 2003: 118–136). This is perhaps the oldest model of micro financing, considering their formation in the mid-1980s. Usually these village banks normally consist of 25 to 50 members who majorly low-income earning individuals are seeking to improve their lives through self-employment activities.
In Kenya, the need for economic development has seen the development of micro finance institutions which in normal cases start as Chamas. Chamas are small groups of individuals, who come together, collect money in a pool through continuous contributions with an aim of accomplishing an investment objective. According to Onumah (2002), the development of Chamas has led to the development of banks in Kenya.
For example, equity bank developed from a micro finance institution where its major purpose was to help customers get mortgage loans for individuals who are low income earners in the society. It was initiated as equity building society (Coetzee, Kamau and Andrew, 2003). There has been other current deposit taking microfinance institutions in Kenya such as Rafiki and Jammii Bora who are also in the same path. The rapid development of micro finance institutions in Kenya has helped the country develop economically with the current rate standing at 5% improvement annually(CGAP, 2004). This has shown that there are several impacts of the financial institutions to the economy.
There are also business that were majorly part of the institutions that have flopped in the economy. Independent of the connection of economic development to these financial institutions many Kenyans residents are not members of the microfinance institutions, let alone being aware of their existence (Kodhek, 2003). It is in line with this background that the study wishes to determine the level of awareness and impact on microfinance institutions among the residents of Nairobi County.
Statement of the Problem
Microfinance institutions have been identified to be the major component to economic development. In her study on Rural Financial Services in Kenya: What is Working and Why? Betty (2006) possess that micro financing institutions have in a large extent helped the development of the Kenyan rural community; “microfinance institutions will continue serving the rural people and will transform themselves into community based micro-credit units. This will most likely reduce unemployment in the rural areas”.
Development practitioners and policy makers have as well identified efficient microfinance services as important for a variety of reasons; helping the poor manage their risks, build their assets, enhance their income earning capacity, be able to develop small enterprises to generate income, and these in turn will ensure improved life.
Microfinance has also positive impacts on poverty alleviation and specific economic indicators such as nutrition status, women empowerment and children schooling. Despite the several merits attributed to micro financial services, the level of poverty in Kenya is still high with 40% of Kenyans leaving below a dollar, businesses are performing poorly and this is indicated by the slow economic development of below 5%, many Kenyans are still not members of any microfinance institution.
This may be attributed to lack of information on the positive impacts of micro financing and the lack of awareness by the general public on the existence of microfinance institutions and the services such institutions offer. Few studies have been done in Kenya revolving around microfinance. However none of these studies provide direct information on the impacts of microfinance institutions in Kenya.
Mjomba (2011) studied micro-finance in Kenya by specifically considering micro finance on financial empowerment of women in Kenya. This study though identified the impact of micro financing as empowering women positively, it majored on Kenya Women Finance Trust and was also bias to women only. Therefore it lacked evidence on other impacts of microfinances in Kenya. A similar study by Joy (2007) majored on the impact of microfinance on rural development with a setting of Makueni County.
Although this study was a great milestone to the studies on the field of impact of micro financing services, it narrowed down to poor households, income and poverty eradication. The setting was also rural. This study therefore lacks enough evidence to ascertain the awareness and impacts of microfinance in Kenya. Therefore, we remain unable to judge the validity of this tentative explanation. That is, there remains insufficient empirical evidence to assess this claim. Several questions therefore remain unanswered.
Who largely benefit from micro financing services? What is the level of awareness of microfinance services in Kenya? What are the impacts of microfinance in Kenya? What strategies are employed by microfinance institutions to ensure they meet their objectives? What kinds of policy questions do these findings raise for microfinance institutions and for national government? This study proposed to interrogate the data that was collected in residents of Nairobi County in relation to these broad questions that are emerging around the issue of awareness and impacts of microfinance in Kenya, and suggests areas of purposeful focus for policy attention.
- What is the level of awareness of Nairobi County residents on microfinance institutions and the services they offer?
- What are the impacts of microfinance to Nairobi County residents?
- Nairobi County residents are unaware of microfinance institutions within the county and the services such institutions offer
- Microfinance has positive impact to economic and social development of Nairobi County residents
Significance of the Study
To the government
In line with the ability of micro financing services to ensure economic development by providing savings and credit to low income earners, the government has been pushed to support the development of microfinance institutions. This has seen a lot of investment by the government in providing financial support to the microfinance institutions. The information from this study on the impact of microfinance may help the government in determining the viability of their investments.
Microfinance institution’s management
The microfinance institutions are formed with the objective of ensuring that low income earners have access to financial services. There are several Kenyans who fall under the bracket of low income earners. Microfinance institutions aim at ensuring that all these citizens who are low income earners are catered for in terms of provision of financial services. It is therefore necessary for the institutions to understand the perceptions of the citizens on the impact of the microfinance services they are offering and the level of awareness of the public on the existence of microfinance institutions and their services. This information may be used by the management of the microfinance institutions in determining areas for improvement so as to ensure their success.
Little research has been done in sub-Saharan Africa to directly identify the impacts of microfinance. Considering the benefits attributed to microfinance institutions in economic development and the rapid development of these institutions, impact of microfinance has received attention of researchers and academicians. Therefore a study on the awareness and the impact of microfinance in Kenya, with major focus on Nairobi County, may therefore attract researchers and academicians who are in need of educating more and providing solutions to lack of access to financial services in sub-Saharan Africa. The information from the study will also form basis for literature for other researchers and academicians who are willing to carry out studies in the same field in Sub Saharan Africa. Next, the study will be a starting point for further studies on microfinance in Kenya.
Scope of the Study
The study was carried out in Nairobi County. The respondents included the Nairobi County residents. Data was collected from the Nairobi residents who formed the population of the study, with an aim of determining their level of awareness to microfinance in Kenya and the impacts of microfinance in Kenya.
Assumptions of the Study
The researcher made the following assumptions regarding this study:
- Respondents answered the survey questions about the awareness and impacts of microfinance truthfully.
- Respondents were familiar enough with the microfinance services to answer the survey questions.
- The researcher expected the entire exercise to move on smoothly relying on the maximum cooperation of all those who were involved.
That the sample properly represented the population, the data collection instruments had validity and measured the desired parameters and that the respondents truthfully and correctly answered the questions.
Limitations of the Study
Limitations are potential weaknesses or problems with the study identified by the researcher. The limitations often relate to inadequate measures of variables, loss or lack of participants, small sample sizes, errors in measurement, and other factors typically related to data collection and analysis. These limitations are useful to other potential researchers who may choose to conduct a similar or replication study (Creswell, 2005). The limitations of this study include;
- The study involved the perception of residents on the impacts of microfinance. The data was collected from individuals who are self-reporting their perceptions.
- Perceptions of those who participated are not factual information and are biased based on the respondent’s own experiences and attitudes.
- The geographical expanse of the study area, inadequate financial resources and time constraints also reduced the chances of contacting more respondents.
These limitations were mitigated by making sure that, there is purposive sample selection, piloting and careful scrutiny of the perceived parameters of measurement in the microfinance institution, population and sample.
Delimitations to the Study
Delimitation narrows the scope of the study. The follow were delimitations of this study:
- Participation in this study was voluntary.
- The population was limited to microfinance institutions in Nairobi County
- Respondents involved in the study were from the same large urban area
- There could be other impacts of microfinance that may not be exclusively addressed in this study.
The study was bound to have a reasonable degree of success because the population and the sample are readily available in Nairobi County. The use of the SPSS programme in analyzing the collected data was helpful in making reasonable deductions. Some of the respondents’ concerns connected with the impacts of microfinance were quantitatively measured and appropriate records made. Such parameters included number of people registered with the microfinance institutions and the number of microfinance institutions within the county.
Definition of terms
Microfinance Otero (1999: 23) defined microfinance as the provision of financial services to low income poor and very poor self-employed people. On the other hand Schreiner and Colombet (2001:339) argues that microfinance is generally the attempt to improve access to small deposits and small loans for poor households which have been neglected by banks. Microfinance in this study is the concept by which financial institutions avail savings and credit opportunities to the poor or those who cannot access bank services.