In recent years, governmental and nongovernmental organizations in many low-income countries have introduced credit programs targeted to the poor. Many of these programs specifically target the poor on the premise that they are more likely to be credit constrained and have restricted access to the wage labour market. Though participation is by choice, little is known about the role of credit on welfare. The purpose of this study was then to assess the role of credit service on welfare of the microfinance clients. It was also to enable the microfinance institutions assess if they are achieving the intended objectives of their program. The study area was Bomet District and the sample was drawn from Mulot and Silibwet “village banks”. A sample of 125 “village bank” members was selected, out of which 91 had used the credit service and the other 34 had not. Primary data on the selected respondents were collected using a structured interview schedule and secondary data were obtained from the selected “village banks” operating in the study area and relevant government departments in the district. The study used analysis of variance and Heckman’s selection model which corrects for selectivity bias in the sample. This consists of a probit equation (borrowing participation equation) and target equation of household expenditure. The results from the study indicated that farm income, off- farm income, distance to market and household assets influences the probability to participate in “village bank” credit. The household income of credit participants was also higher than that of the non-participants. There was a positive relationship between the amount borrowed and household expenditure. Age of the household head, farm income, distance to market and off- farm income also plaid a significant role in influencing the wellbeing of a household.

Overview of “Village banks” 
“Village banks” are semi-formal, member-based model that are promoted by international nongovernmental organizations (NGOs), first by Foundation for International Community Assistance (FINCA) and then later – with modifications to the original model with respect to complementary services or greater decision autonomy granted to members - by Freedom from Hunger International (FHI), Catholic Relief Services (CRS), Save the Children, and others (Zeller and Johannes, 2006). The village bank is owned by the members, but ownership is not formally registered. Members can decide on interest rates for internally generated savings deposits and on-lending their internal fund, and usually attracts high interest rates on loans and savings deposits compared to going rates in the commercial banking sector. The banks serve a poorer clientele compared to credit unions and have a high share of female members. Village banks are promoted with the ultimate objective of reducing poverty. Emphasis is therefore on depth of outreach and effect on welfare, and NGOs often provide complementary services such as education or business training to enhance impact. 

A village bank is less complex in structure and administration than a credit union, thus enabling less educated members to manage the bank. They are intended to be the building blocks for a network of institutions that offer financial services where no traditional Grameen Bank/FINCA-inspired system will ever reach (Wright et al, 2000). They seek to do this through business-oriented membership-based organizations. However, start-up costs for formation and training are believed to be relatively high and are externally financed by the supporting NGO and its donors. The main form of credit guarantee relies on social pressure. One of the major comparative advantages of village banks – especially for rural areas - is that they can eventually operate as autonomous institutions and thus are highly flexible in determining rules of admission and the level of savings and loan interest rates adapted to local socio-economic conditions. The expectation is that the village banks accumulate and retain sufficient equity capital to become self-reliant. 

Collateral-free lending, proximity, timely delivery and flexibility in loan transactions are some of the attractive features of informal credit. However, informal finance may not be as conducive to development as formal finance because: (i) it is expensive; (ii) it is short-term and largely used for consumption; and (iii) it is not generally large enough to spur investment and growth (Khandker and Faruque, 2003). Notwithstanding the limitations of informal finance, many governments have attempted in the past to develop alternative financial institutions to provide credit to farmers and other rural producers. Many such attempts have failed not only in delivering credit to target households but also in promoting a viable credit delivery system. High covariate risk of agricultural production, the asymmetric information, lack of enforcement of loan contracts, government imprudent interference in credit markets, and rent-seeking as a result of credit rationing are some of the factors alleged to be responsible for the poor performance of the government-directed credit schemes in many countries (Khandker and Faruque, 2003). With the dismal picture of state-owned rural finance organizations, non-governmental micro-finance institutions have been growing to meet the credit needs of small producers in many countries. Many of these organizations are subsidized not for absorbing high loan default costs but for covering high transaction costs associated with group-based lending and other social intermediation costs (Khandker and Faruque, 2003). 

“Village banks” otherwise known as Financial Service Associations (FSAs) are a model that K-Rep Development Agency (KDA) has used to reach further into rural areas (Johnson et al, 2005). Members buy shares and the capital is used for on-lending. When the membership reaches at least 300 members, an FSA (“village bank”) elects a board of directors, employs a locally recruited manager and cashier, and commences lending. K-Rep Development Agency is promoting the model in Bomet District and currently there are six (6) “village banks” operating in the district. 

Background of the Study 
Many scholars have argued that micro enterprise development can be an effective means of assisting the poor in developing countries (Zeller and Sharma, 2000). Micro enterprises have the potential to create employment especially given that, in Africa, the agricultural sector has a limited ability to absorb new job seekers (Pretes, 2002). In the World Bank’s “World Business Environment Survey” (WEBS) of more than 10,000 firms in 80 countries, Small and Micro Enterprises (SMEs) worldwide on average named financial constraints as the second most severe obstacle to their growth, while large firms on average placed finance only fourth. Firms in Central and Eastern Europe, the former Soviet Union, and Africa were most likely to cite finance as their most severe constraint, followed by those in South Asia and Latin America. World Bank researchers Beck, Demirguc-Kunt, and Maksimovic (2003) concur that SMEs are more financially constrained than larger firms. There have been some striking experiments mostly from outside Africa and have allegedly produced impressive results; usually measured in terms of outreach and repayment rates, and have been driven largely by the perceived demand for credit (Buckley, 1997). 

Food insecurity had and also continued to be a major development problem across the globe, undermining people’s health, productivity and often their very survival (Smith, 2007). Efforts to overcome the development challenges posed by food insecurity necessarily begin with accurate measurement of key indicators at the household level. This is due to the fact that identification of household behaviors relating to food access serves as a critical building block for the development of policies and programs for helping vulnerable populations, the effective targeting of assistance, and evaluation of impact (ibid). The biggest challenge facing Kenya today is high levels of poverty among its citizens. Poverty has been persistent in Kenya despite government’s effort to combat it through national development programs. This is reflected in the rising number of people without food, and with inadequate access to other basic necessities (Mango et al., 2009). Kenya’s current Poverty Reduction Strategy Paper (PRSP) perceives poverty as inadequacy of incomes and deprivation of basic needs and rights, and lack of access to productive assets, as well as social infrastructure and markets. The minimum level of consumption at which basic needs are assumed as satisfied is known as the poverty line (Mango et al., 2009). Most of the poor live in the rural areas and include subsistence farmers and pastoralists (Mango et al., 2009).The majority of Kenyans however live in rural areas with agriculture as their main occupation (Owuor et al., 2001). Poverty is still largely a rural phenomenon and prevalence of absolute poverty in rural Kenya is 49.1%, while the ratio for male-headed households at 48.8% was slightly lower than for female- headed households at 50.0% (GOK, 2007).

In the past, only pockets of privileged cash-crop producers had access to formal financing and women are typically excluded from formal finance regardless of their activities (Mknelly and Kevane, 2002). Extension of financial services into remote rural areas has been difficult and there are few examples of successful attempts to do so (Wright et al., 2000). It is in this context that Financial Services Associations (FSAs) otherwise known as “village banks” are intended to be building blocks for a network of institutions that offer financial services where no traditional Grameen Bank inspired system will ever reach. 

Kenya maintains a mixed economy in which the government is actively involved in development planning motivated by the need to optimize the use of the country’s limited resources to meet the national policy priorities. Poverty reduction has been a major goal of the government of Kenya since independence (GOK, 2007). The fundamental policy priorities which have been identified since independence are poverty, ignorance and poor health. Rural financial services help the poor, low-income households increase their incomes, and built the assets that allow them to mitigate risk, smoothen consumption, plan for future, increase food consumption, invest in education, and other lifecycle events (Kibaara, 2006). Lack of adequate access to credit have had significant negative consequences for various aggregate and household-level outcomes, including technology adoption, agricultural productivity, food security, nutrition, health, and overall household welfare (Diagne and Zeller, 2001). Studies and evaluation spend less effort on measuring impact on borrowers and more attention to analyzing the performance of the financial systems (Meyer and Larson, 1996). The second KEPIM (Kenya Participatory Impact Monitoring) report examines the perspectives of the poor on credit and extension services in the six districts of Kisumu, Butere/Mumias, Bomet, Murang’a, Mwingi and Malindi. The study, which was carried out during October-December 2002, revealed that access to credit and extension services is limited. The majorities are excluded from the formal financial sector due to lack of collateral and bankable proposals, and thus mainly rely on merry-go-rounds. The provision of government-based extension services is also fraught with delays due to reduced workforce of extension workers and lack of financial resources. 

Statement of the Problem 
In Kenya, the proportion of rural poor is 49% (as per adult equivalent) (GOK, 2007). Lack of access to credit has had a negative impact on education, employment opportunities and health services, hence perpetuating the vicious cycle of poverty and adverse vulnerability. Many organizations are thus now using microfinance strategies as a way of providing affordable financial services targeting the vulnerable in a bid to improve on their welfare. The “village bank” model is one of such strategies. Despite concerted efforts by various microfinance organizations to mitigate problems facing the rural poor in Bomet District, the plight of the poor still remain unabated. However, since the implementation of the “village bank” strategy began in the district little is known about the effect of credit on welfare of the beneficiaries in question and the area at large. 

The overall objective was to evaluate the role of “village bank” credit service in influencing the household welfare in Bomet District. 

The specific objectives were to: 
i. Establish the difference of incomes of the household who are participants and non- participants in “village bank” credit in Bomet District. 
ii. Determine the effect of the “village bank” credit on household expenditure in Bomet District. 

i. The income of the households that accessed “village bank” credit does not differ from the income of those that have not accessed. 
ii. The “village bank” credit accessed does not lead to increase in household expenditure (i.e. education, food consumption and housing). 

The first Millennium Development Goal (MDG) targets to reduce the proportion of people whose income is less than 1$ a day and who suffer by hunger by halve by the year 2015 (UN, 2006). Also in June 2003, Kenya Government launched an Economic Recovery Strategy for Wealth Creation and Employment in order to halt and reverse further economic degeneration and poverty (GOK, 2004). Hence, credit programs given their mission to reach out to the poor by enabling them access financial services have attracted large sums of funds. Because government, donor and charitable institutions/foundations subsidize micro credit programs, impact assessment of their products form a basis for asking additional funds. The providers of funds however have wanted to know whether microfinance programs have impacted positively on participants, financial institutions and economies. Understanding welfare status changes within the household and the households’ basis of making rational decisions helps the policy makers in knowing who the poor are, and what makes them poor. 

Micro credit contributes to mitigating a number of factors that contribute to vulnerability whereas the effect on income-welfare is a function of borrowing beyond a certain loan threshold and to a certain extent contingent on how poor the household is to start with. Smoothing of consumption, building assets, providing emergency assistance during natural disaster and contributing to female empowerment are some of the ways that micro credit reduces vulnerability. Given the cost effective nature of the program, it is imperative to assess the effect of their services to guide on expansion of their operation. It is also imperative to know the degree of correlation that exists between the services offered by the micro-credit programs (savings, credit and other services), and the change in the quality of life of their members. The rationale behind establishing the role of credit on welfare is the expectation that the findings will be used to bring about improvements in policies, programs, and thereby contribute to economic and social betterment. This knowledge will strengthen intervention strategies for credit programs and identify the main reasons for the dropout of members from the credit programs. It will help the credit programs to learn the effectiveness of their products and services and thus forms a basis to improve them in order to maximize impact on social and economic development on the members. There is thus a justified need for an evaluation study of the effect of access to credit as a way of getting feedback from the borrowers. In addition, it will assist policy makers in identifying the right financial policies for rural areas, thereby improving the welfare of the rural poor. This will be an important step in policy formulations to aid in tackling the challenges of poverty by better directing and targeting credit services. With the aforementioned issues therefore, this study was not only relevant but also necessary. 

Scope and Limitations 
The parameters of interest are household income and expenditure as they influence and determine the welfare of households. The assets considered include only the movable assets which had a market value for example electronics and furniture. The expenditure expenses pertained to the recurrent expenses for consumables within the household. 

The limitation of the study was lack of time series data, limited resources being time, finances, and accessibility of the clients given their locations and road infrastructure status in the rural areas in Bomet District. 

Definition of Terms 
Household: A group of people bound together by ties, kinship, or joint financial decision; who live together under single roof or compound, answerable to one person as the head and share the same eating arrangement. 

Poverty: It includes lack of access to productive assets, lack of access to social services, dependency and inability to participate and lack of access to basic infrastructure. 

Village Bank: This is a user-owned, user-financed and user-managed microfinance model with members having symmetrical information on each other’s credit worthiness. 

Food security: Access by all people at all times to enough food for an active, healthy life (Bickel et al, 2000). 

Credit: A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some later date. In this study valuable item in transaction is money either in cash or cheque. 

Vulnerability: Vulnerability of a person is conceived as the prospect a person has now of being poor in the future, i.e. the prospect of becoming poor if currently not poor, or the prospect of continuing to be poor if currently poor.

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