EFFECT OF FIRM CHARACTERISTICS ON PERFORMANCE OF THE MICROFINANCE SECTOR IN NAKURU, KENYA

ABSTRACT 
The development of entrepreneurship is an important economic development but is challenged by lack of capital. Microfinances are set up with the main objective of financing small enterprises but still they are not capable to meet the capital needs of the businesses. In spite of the importance of this sector, the provision and delivery of financial services by these firms has been below expectation. Literature suggests that firm characteristics determine performance of microfinances. However it is not clear to what extent these firm characteristics affect the performance of MFIs in Kenya. The aim of this study was to investigate the effect of firm characteristics on the performance of microfinance sector in Kenya. The study adopted correlational research design. A census study of the 48 institutions offering microfinance services and registered with Association of Microfinance Institution (AMFI) operating in Nakuru town was done. Primary data was collected using questionnaires. This was supplemented with secondary data. Data on firm characteristics and organizational performance was summarized using descriptive statistics. The relationship between firm characteristics and performance of MFIs was examined using Pearson’s product moment correlation coefficient. The effect of firm characteristics on performance of MFIs was determined by multiple regression analysis. The findings revealed that firm characteristics have a significant positive effect on the performance of MFIs. Structure related characteristics had the greatest effect; market related had moderate effect while capital related had the least effect on performance of MFIs. Therefore to improve on organizational performance of MFIs, it was recommended that practitioners need to address firm characteristics. The study also suggests areas of further research.

CHAPTER ONE 
INTRODUCTION 
Background of the Study 
The growing global concern about persistent stagnation and decline in economic growth, accompanied by chronic unemployment, poverty and its resultant social problem have led to increased search for strategies which can stimulate economic growth. One strategy that has been growing in importance is entrepreneurship development. Both developed and developing countries have therefore focused on this strategy. In almost all economies, small businesses are critical for sustained growth. They have been the means through which accelerated economic growth and rapid industrialization have been achieved (Arinaitwe, 2002). 

Kenya has thus created conditions for private sector growth but is still held back by an inadequate financial system (Lafourcade et al., 2005). Various analyses (Sauser, 2005; Harris & Gibson, 2006) have identified the challenges of the sector as lack of capital, inhibiting enabling environment and poor non-financial promotional programs. This means that it is difficult for the poor to elevate out of poverty due to lack of finance for their productive activities. About 60% of the population are poor and mostly out of the scope of formal banking services (Omino, 2005). The formal banking sector in Kenya over the years has regarded the informal sector as risky and not commercially viable. Therefore, new, innovative, and pro-poor modes of financing low-income households based on sound operating principles have been developed by the microfinance sector. 

Firm Characteristics 
Various business settings have specific and unique attributes that make them distinguishing. According to Golan et al., (2003) firm’s resources and objectives summarized as firm characteristics, influence success and failures associated to performance of organizations. Firm characteristics refer to the enterprise and related variables which play an important role on the business success. These include Structure, Market and Capital-related variables. 

Structure-related variables include firm size, leverage, ownership dispersion, firm age, debt, corporate strategy. These variables are thought to be fairly stable and constant over time (Wallace et al., 2004). Market-related variables include industry type, environmental uncertainty, market environment, production technology. These variables could be either time-period specific or relatively stable over time. They may be under or out of the control of the firm (Wallace et al., 2004). Leading firms operating in a particular industry could produce a bandwagon effect on the level of performance adopted by other firms working in the same industry. Capital-related variables include liquidity, profit margin, return on equity, capital intensity. Firms enjoying a sound financial position, more specifically higher liquidity are more inclined to better performance (Wallace et al., 2004). 

Organizational Performance 
Daft (1995) defined performance as the evaluation of achievement of the company target. Organizational performance refers to the firm’s success in the market, which may have different outcomes. Organizational performance is a focal phenomenon in business studies. However, it is also a complex and multidimensional phenomenon. It can be characterized as the firm’s ability to create acceptable outcomes and actions. Success, in general, relates to the achievement of goals and objectives in whatever sector of human life. In business life, success is a key term in the field of management, although it is not always explicitly stated (Papadopoulos & Giama, 2007). 

However, there is no universally accepted definition of success, and business success has been interpreted in many ways (Foley & Green 1989).There are at least two important dimensions of success that is financial vs. other success and short- vs. long- term success. Hence, success can have different forms, e.g. survival, profit; return on investment, sales growth, number of employees, happiness, reputation, and so on. 

Microfinance 
To meet unsatisfied demand for financial services, a variety of microfinance institutions have emerged over time in Africa. Some of them concentrate only on providing credit, others are engaged in providing both deposit and credit facilities, and some are involved only in deposit collection (G.O.K, 2006). In Sub-Saharan Africa microfinance sector include a broad range of diverse and geographically dispersed institutions that offer financial services to low-income clients that is, nongovernmental organizations (NGOs), non-bank financial institutions, cooperatives, rural banks, savings and postal financial institutions, and an increasing number of commercial banks (Lafourcade, et al., 2005). According to Omino (2005) microfinance is the provision of financial services to the low-income households and micro and small enterprises (MSEs) which provide an enormous potential to support the economic activities of the poor and thus contribute to poverty alleviation. He further says widespread experiences and research have shown the importance of savings and credit facilities for the poor and MSEs. This puts emphasis on the sound development of microfinances as critical ingredients for investment, employment and economic growth. 

Microfinances play a critical role in the economic development of many developing countries. They offer loans and/or technical assistance in business development to low-income community (Hartungi, 2007). They have a variety of products including micro loans, savings and other deposit products, remittances and transfers, payment services, insurance, and any other financial product or service that a commercial bank may not offer to low-income clients in the banking system (Hoque & Chisty, 2011). 

Since its birth in the 1970s, microfinance has endeavored to develop sustainable enterprises and its innovations have been replicated from country to country, each time with renewed enthusiasm and innovation leading to international best practices that have benefited and guided the practice of microfinance (Kiweu, 2009; Stauffenberg, 2001; Rhyne, 2001; Labie, 2001). Given the ongoing developments in microfinance, there is considerable interest for many MFIs in Africa to keep pace with the changing landscape in the industry. However, the microfinance industry in most African countries remains largely underdeveloped (Gupta, 2008). African MFIs have continuously faced many challenges including lack of proper regulatory environment and lack of funds. Despite the series of financial sector reforms that the African countries have undertaken since the 1980s, financial systems still exhibit substantial degrees of inefficiencies in their savings mobilization and allocation of resources into productive activities (Senbet & Otchere, 2006). Operating and financial costs are high, and on average, revenues remain lower than in other global regions (Manroth, 2001). 

It is therefore important to find cost-effective ways of improving standards while at the same time minimizing restrictions and encouraging competence. Technological innovations, product refinements, and ongoing efforts to strengthen the capacity of African MFIs are needed to reduce costs, increase outreach, and boost overall profitability (Lafourcade, et al., 2005). Consequently, the MFIs should develop viable financial products relevant to the target markets. 

According to Omino (2005), different types of financial services providers for poor people have emerged that is non-government organizations (NGOs); cooperatives; community-based development institutions like self-help groups and credit unions; commercial and state banks; insurance and credit card companies; telecommunications and wire services; post offices; and other points of sale - offering new possibilities. In the past, MFIs established using either an NGO or a savings and credit co-operative societies framework have been important sources of credit for a large number of low income households and MSEs in the rural and urban areas of Kenya. The microfinance sector has, however, operated without an appropriate policy and legal framework. There is therefore need to focus more on these institutions to enhance their effectiveness in the provision of savings, credit and other financial services to the poor and MSEs (Omino, 2005). 

Over 100 organizations, including about 50 NGOs, practice micro finance business in Kenya. About 20 of the NGOs practice pure micro financing, while the rest practice micro financing alongside social welfare activities. Many microfinance NGOs have successfully replicated the Grameen Bank method of delivering financial services to the low-income households and MSEs (Omino, 2005). The Government of Kenya recognizes that greater access to, and sustainable flow of financial services, particularly credit, to the low-income households and MSEs is critical to poverty alleviation. Therefore, an appropriate policy, legal and regulatory framework to promote a viable and sustainable system of microfinance in the country has been developed through the Deposit Taking Micro Finance which has since been enacted. In enacting the Bill into law, the Government had consulted with stakeholders to get their views on the best way to create the required enabling environment for the microfinance sub-sector. Despite this important contribution, only 10.4% of the MSEs receive financial services (Omino, 2005). The greatest challenge faced by MFIs is to meet the capital requirements of the MSEs and also to reach all entrepreneurs.

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Item Type: Kenyan Postgraduate Material  |  Attribute: 60 pages  |  Chapters: 1-5
Format: MS Word  |  Price: KSh900  |  Delivery: Within 30Mins.
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