Microfinance in Africa and Kenya versus the rest of the world

Microfinance services

Micro finance Services refer mainly to small loans; savings mobilization and training in micro enterprise investment services extended to poor people to enable them undertake self employment projects that generate income (Onuaman, 2002). Micro finance came into being from the appreciation that micro entrepreneurs and some poorer clients can be ‘bankable’, that is, they can repay both the principal and interest, on time and also make savings, provided financial services are tailored to suit their needs (Coetze, 2003)).

Micro finance is perceived as the provision of financial and non financial services by micro finance institutions (MFIs) to low income groups without tangible collateral but whose activities are linked to income generating ventures (Sinha, 2008). These financial services include savings, credit, payment facilities, remittances and insurance. The non-financial services mainly entail training in micro enterprise investment and business skills. There is also a belief that micro finance encompasses micro credit, micro savings and micro insurance (CGAP, 2004).

Micro finance is not a new development. Its origin can be traced back to 1976, when Muhammad Yunus set up the Grameen Bank, as experiment, on the outskirts of Chittagong University campus in the village of Jobra, Bangladesh. The aim was to provide collateral free loans to poor people, especially in rural areas, at full-cost interest rates that are repayable in frequent installments. Borrowers were organized into groups and peer pressure among them reduced the risk of default (Khan and Rahaman, 2007).

In many cases, basic business skill training should accompany the provision of micro loans to improve the capacity of the poor to use funds (UN, 20005). Micro financing should addresses capital investment decisions, general business management and risk management. In the world over, provision of micro finance services to the youth has been considered an innovative and sustainable approach to youth financial and micro enterprise activities empowerment leading to generation of income so as to improve their livelihoods and contribute to economic growth.

Debates on extending the reach of microfinance to the very poorest people increasingly focus on savings facilities. For many youth, savings facilities are essential in increasing the amount of income under their control and in building assets. In remote areas, mobilization and intermediation of member savings may be crucial first steps before accessing external loan funds. A number of studies have observed that savings-led groups perform better than credit-led ones (Allen 2005; Murray and Rosenberg 2006; Ritchie 2007).

Access to micro-finance has the potential to assist the poor in earning income from microenterprises, smooth their income and consumption (Brennan, 2008), help households diversify their income sources. (Anand et al., 2005).According to Kodheka (2003) microfinance makes a considerable contribution to the reduction of poverty. It helps increase income earning and asset building opportunities which make households less reliant on a single asset type and consequently deal with disasters. (Anand et.al., 2005).

According to Hassan (2002), many Grameen Bank borrowers were actually building larger houses. Sinha (2008) advances that the income of borrowers has risen and their assets base has widened. Investments made by loans appear to have been extremely productive and to have contributed significant improvements in household output, income and consumption (CGAP, 2004).

In Tegucigalpa and Cholteca in Honduras in 2003, effect assessment studies revealed that 60% and 50% of the recipients had their sales and incomes increase respectively one year after receipt of credit for working capital. Agricultural Finance Cooperation Limited in 2008 in India, assessed development effect of microfinance programmes. Clients reported increase in income from 76% of activities. There is therefore reason to believe microfinance services in its entirety should report effect on savings, income and investments alongside non financial effect such as change in skills through training. This study was specific in investigating these aspects.

Microfinance Services in the World

The current global youth population is very large. Of the world’s more than 3 billion people estimated to be under the age of 25, approximately 1.3 billion are between the ages of 15 and 24. Just under half of these young people live on less than two dollars a day, as estimated by the UN (Youth Save, 2010). Yet young people the world over are aware of the inequities of the global system, which leaves them vulnerable in many ways. Unemployment, especially amongst them, also leads to high risk behaviour – crime, drugs and spread of HIV/AIDs.

Moreover in line with most cultures in developing countries, the employed have to look after the unemployed extended family members, thereby reducing their ability to save and opportunities for wealth creation that is needed to spur economic growth. To this end, microfinance, the provision of a wide range of financial services, has proved immensely valuable to poor people, especially the youth and women on a sustainable basis. Access to financial services has allowed many families throughout the developing world to make significant progress in their own efforts to escape poverty (Onuman, 2005).

The provision of credit has increasingly been regarded as an important tool for raising the incomes of youths, mainly by mobilizing resources to more productive uses. As development takes place, one question that arises is the extent to which credit can be offered to the youths to facilitate their taking advantage of the developing entrepreneurial activities.

The generation of self-employment in non-farm activities for example, requires investment in working capital. However, at low levels of income, the accumulation of such capital may be difficult. Under such circumstances, loans, by increasing family income, can help the youth to accumulate their own capital and invest in employment-generating activities (Schreiner, 2010).

Microfinance Services in Africa

Many diverse institutional models of micro financing are functioning in Africa, but most clients are served by credit unions and co-operatives members sell (e.g. coffee, tea, cotton etc.) or the nature of their employment (Onuman, 2005). In West and Central Africa however, savings and credit cooperatives are generally more community-based. In contrast to Asia, the lack of population density means that rural and agricultural finance is particularly challenging, and thus many MFIs are urban-based and focused.

Perhaps as a result the July 2003 Micro Banking Bulletin identified only 8 sustainable institutions and estimated that only around 25 million clients are being served throughout the continent. However, these numbers may under-estimate or ignore the large numbers being served by cooperatives and postal banks. Nonetheless both international and domestic banks are starting to take an interest in the potential of the low-income market in Africa.

The last twenty years have seen significant improvements in micro financing through advances in understanding and providing financial services to better advance development and eradicate poverty. This includes providing the financial means to save, access credit, and start small businesses, with the potential to enhance community development, as well as local and national policy making. When properly harnessed and supported, microfinance can scale-up beyond the micro-level as a sustainable part of the process of financial empowerment by which the poor can lift themselves from poverty.

The micro financing revolution effectively demonstrates that when poor households have access to financial services, not only do they save, but, they also have high repayment rates when they borrow. It is noted that, microfinance institutions have made financial services available to millions of poor households worldwide but this still represents a tiny fraction of the population in developing countries where the majority lack access to formal financial services. 2.6 Microfinance Services in Kenya

In Kenya, the youth is defined within the age 15-35 years are about 13 million which is equivalent to 56% of the population (Ministry of Youth and Sports, 2008). Of the 13 million youth, less than 50% are in gainful economic activities in the formal, informal and public sectors of the economy while majority are unemployed, (Simeyo et al.2011). They comprise 61% of the unemployed. This trend is worrying and calls for intervention measures. Micro finance lending and associated services are one such intervention.

However, lack of collateral and high interest rates are an impediment to access to loans from Micro finance institutions (MFIs) by the youths (Mushimiyimana, 2008). The youths who secure funds from such institutions spend the bulk of their returns on investment in paying the cost of capital, thus leaving them with none or little savings for reinvestment. As a result, majority of the youths in the youth investments fail to grow into Small and eventually Medium enterprises.

Therefore, to bring the youth on board, the Kenyan government with the support of development partners in 2006 established a youth enterprise development fund that is channeled to Micro finance Institutions and other financial intermediaries for onward lending to the youth without collateral. Such a fund attracts a greatly reduced cost of capital which stands at 8% per annum as a strategy to make the fund affordable to the youth who in many cases do not have collateral and therefore ideal for start-ups.

Given that the vision of micro finance is to promote the growth of micro enterprises, MFIs and other financial intermediaries have experienced rapid growth to support the youth financial requirements. Institutions such as the Kenya Rural Enterprise Program (K-REP), a non-governmental organization that was started in 1984 under the funding of the USAID are some microfinance institutions. Today, K-REP is fully licensed as a bank and offers a wide range of banking services in addition to its micro finance specialty (Dondo, 1991).

K-REP operates two major loan programs for micro and small entrepreneurs, Jihudi and Chikola. Each Jihudi group consists of three to eight individuals. The Chikola loan program works through existing rotating savings and credit self help groups (ROSCAS) that comprise of individual micro entrepreneurs (Kioko, 1995). A number of MFIs and financial intermediaries including K-REP, Equity bank, Kenya Women Finance Trust (KWFT), Fauluetc have since then come up to provide micro finance services to the low income groups for purposes of
starting or developing income generating activities.

These groups include youth and women. Related to this is the indication that MSEs access to credit has increased greatly from 7.5% in 2006 to 17.9% in 2009. (Simeyo et al. 2009) In view of the increasing microfinance services in the world targeting the poor with anticipation of an increase in positive outcomes, particularly in developing countries, as is evidenced by the efforts above; this research sought to establish the effect of micro finance lending and related services on financial empowerment of youth in Nairobi County.

Impact of Microfinance

Microfinance institutions offer several services to their clients who in most cases are the economically less privileged. According to Bennett (1994) and Ledgerwood (1999) microfinance clients who are mostly men and women slightly below or above the poverty line can be able to access variety of products and services which are mostly financial. Microfinance institutions offer services to the low income earning groups because these groups are ignored by large financial institutions since they are considered less profitable.

Olaitan (2001) and Akanji (2001) argue that products and services that make microfinance institutions different from large financial institutions include increased provision of credit, increased provision of savings, repositories and other financial services to low income earners or poor households. The impact of microfinance can be described in a triangle where it has effect on financial sustainability, outreach to the poor, and institutional performance/impact.

Economic impacts

Income is one of the important elements of living standard of the poor people as well as saving. Mohammed and Mohammed (2007) The Microfinance Banks are to provide loans to the poor not only the increase their income but also to mobilize their savings CBN, (2005). According the report by the United Nations Development Programme, microfinance has over the years proven to be a major tool which is effective in alleviating poverty (UNDP, 2001). Microfinance therefore empowers those individuals who are financially disadvantaged.

Morduch et al. (2003) and Alegiemo and Attah (2005) also asserts that microfinance institutions help in financial empowerment of the economically activebut poor individuals by the providing microcredits and other assets to enhance production. Micro financing therefore enhances the latent capacity of the poor for entrepreneurship, enabling them engage in economic activities, be self-reliant and also enhancing the household income as well as creating wealth.

According to Christabell (2009), when reaching out to those who are poor, there are costs that every financial institution expects to incur especially when reaching them with small loans. To every finance institutions it is viable only if these costs are kept to the minimum as possible. However when the targeted people are in a vast geographical area, the cost of reaching them increases. The provision of financial services to the poor is expensive and to make the financial institutions sustainable requires patience and attention to avoid excessive cost and risks (Adam and Fitchett, 1992).

The economic impact of microfinance originate from the assumption that those who are in need of economic support (borrower) are sole operators of an income generating activity and the output of their businesses is constrained by lack of enough capital or the high marginal cost of credit relative to the marginal returns from the credit. In a bid to increase their financial capability and ease their capital constraints, the business operators will work hard to improve on their output, net income, profits, and hence their own welfare (McKernan, 2002).

The economic impacts of microfinance stretch to the livelihoods of the targeted individuals. Microfinance institutions target poor individuals whose management of livelihood related to resource allocation, uncertainties and risks cannot be completely separated from their decisions about their household’s production (Gertler et al. 2009).Moreover since credit is a factor affecting the management of diversified and is seasonally volatile to household economic portfolios (Sebstad et al. 1995),by a large extent it has effect on the promotion of enterprise (Morduch1995, Rutherford 2001, Collins et al. 2009).

According to Shahidur (1998), poverty is regularly the effect of low economic growth, high population growth, and exceptionally uneven spreading of resources. The determinants of poverty can be traced to unemployment and low productivity amongst the poor. This type of poverty requires to be solved by the creation of jobs (Cameron and Trivedi, 2005).

Poverty is as well a result of low productivity and low income which can only be alleviated by putting more investments on human and physical capital so as to be able to increase the productivity of the workers’. In many countries, such as Bangladesh, poverty is caused by lack of both physical and human capital. From the above analysis solving the problem of poverty therefore demands the increase in productivity by creating employment and developing human capital as well.

Microfinance institutions which in the past were considered to be informal lenders therefore play an important role in many low-income countries (Adams and Fitchett 1992; Ghate 1992), by providing the poor with enough capital to start off and expand their business and improve on their livelihoods. Microfinance institutions, such as such as Rotating Savings and Credit Associations, can meet the occasional financial needs of rural households in many societies (Webster and Fidler, 1995).

Since microcredit programs from microfinance institutions are able to reach the poor at affordable cost, the programs are in a position to ensure that the poor become self-employed. Microcredit services are supported by microfinance institutions so as to enable the poor access institutional credit hence playing an important role in alleviating poverty (Yunus, 1983).

They argue that by virtue of their design such programs can reach the poor and overcome problems of credit market imperfections. In their view improved access to credit smoothens consumption and eases constraints in production, raising the incomes and productivity of the poor. Empirical studies support the view that microfinance institutions provide credit market interventions that ensure that the consumption and production of the poor is improved and the lack of credit do not deter them from improving their livelihoods (Foster 1995; Rosenzweig and Wolpin 1993).

Several researches in Bangladesh have shown that microfinance institutions have positive effects on the economic lives of the poor people. For example, in his study on participants of Grameen Bank in Bangladesh, Hossain (1988) found significant impacts of the effect of microcredit programmes on alleviating poverty in Bangladesh. This was reflected in higher income, capital accumulation and employment among loan recipients.

Khandker (1998) carried out a similar study in Bangladsh. From his study he found that 5% of those who received the loans were able to get out of poverty. Another research in Bangladesh was carried out by Mustafa (1996). He found out that microcredit programmes enabled the loan recipients to enhance their economic wellbeing which was reflected in indicators such as wealth, revenue earning assets, the level of cash earned, value of house structure, per capita expenditure on food, and total household expenditure.

Similarly, Zaman (1999) found out that credit from microfinance institutions aim at enhancing the abilities of the recipients to build assets while reducing their vulnerability to poverty by ensuring that their consumption is smooth through balancing of their consumption and spending.

In Thailand, Kaboski and Townsend (2005) found the positive impacts of microcredit when they evaluated the impacts of microfinance institutions in rural Thailand. They found out that micro-financing enhances asset growth, consumption smoothing and occupational mobility. The microfinance services as well help in decreasing borrowers’ vulnerability, especially if women are the main recipients.

Another study by Kaboski and Townsend (2005) found that income, consumption and agricultural investment increased among recipients as well as overall wages levels in a village in Thailand. In Mexico a study by Bruhn and Love (2009) identified the positive impacts of havng a microfinance institution as improving business ownership, income and employment. Positive impacts of microfinance on the economic wellbeing of the people have been documented by researchers who determined the effects through randomized experimental research.

Karlan & Zinman (2009) carried out their randomized experimental research in Manila Philippines and found out that microfinance institutions increased business profits but only for male entrepreneurs not females. Another study by Banerjee (2010) using similar approach in India also indicated that found that only the expenditure on durable goods and number of new businesses increased in the treated areas while expenditure per capita per month did not change.

Social Impacts

Studies indicate that microfinance programs do not have a positive impact on the poor household income and consumption level only but on their social wellbeing as well. The improvement in the social well-being is reflected on recipients’ level of education, health and children nutrition. Furthermore it extends to women feelings of empowerment and independence. For example a study by Khander (1998) found that there are significantly higher levels of schooling for children especially that of girls for credit program participants.

According to Ghalib (2007), all microfinance program targets one thing in general; human development that is geared towards both the economic and social uplift of the people they cater for. Ghalib (2007) argued that tackling poverty points to multidimensional concepts that emphasizes on reducing unemployment, infant mortality, maintaining essential healthcare, sanitation, food, nutrition basic hygiene, and establishing gender equality. Microfinance programs have positive impacts on households’ wellbeing which is indicated in the recipient of the microcredit’s children’s education, health and household nutrition especially when the recipients are women (Zaman, 1999; Panjaitan-Drioadisuryo & Cloud, 1999; Pitt et al., 2003).


Health intervention has been an integral part of the MFIs. Different organizations apply different or similar policy to identify the health problems, undertake rigorous experimentation and try to explore and then apply suitable, affordable and culturally acceptable technology. Throughout the work process, they measure and monitor its implementations and recommends corrective actions to modify methods of implementation of program, health message, training and management, where needed (Annual Report, 2005).

Education program

Another important goal of all MFIs is to spread the light of education throughout the society. Development through this program, along with the health program, indicates human development among the people. Their effort and mission is to build up a society free of poverty, illiteracy and disease. Their goals are to expand education opportunities for disadvantaged children and provide them with necessary technical and financial support (Annual Report, 2005). Generally provision of credit demands a lot of knowledge on credit by the borrower. This is because the imperfect knowledge from the borrower and their limited capacity to compute changes when they borrow credit since the forms of credit will have an important impact on the mental models that guide their business decisions (Nino-Zarazua and
Copestake, 2009).

Food security programe

In the developing countries, achieving household food security remains a critical objective of rural development. This can be done in principle by escalating agricultural productivity and off-farm income, thus improving the capability of households to steady their income and food purchasing power. Food security, at the household level, is defined in its most basic form as access, by all people at all times, to the food needed for a healthy life (Zeller M. & Meyer L. (2002).

The literature review in this study will cover the previous studies that have been done on microfinance and its effects. However there will be need to have a clear understanding on microfinance which will call for concise definition to microfinance concepts such as microfinance itself, microfinance institutions, economic development and SACCOs.


Future research should also undertake an in-depth study on the microfinance sector, including a formal estimation of total supply and demand estimation for the whole microfinance sector (enterprise and non-enterprise). Results from such a study shall assist the various public agencies involved to develop adequate prudential norms and enforceable guidelines as well as reporting procedures and help them liaise with MFIs.

Source: Impact of Microfinance awareness in Kenya Essay Example | GraduateWay

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