Investment groups provide a system of pooling together capital, lowering risks per individual and availing cheap capital for individual and MSEs growth. The objective of the study was to assess the effect of the group composition and formalization on the financial performance of investment groups in Nakuru Town. Descriptive survey design was used to gather information that could be used for statistical inference on the target population through data analysis. Stratified and simple random sampling technique was used to select a sample of 130 investment groups. Since the information is sensitive as it contains financial matters, ethical issues were considered. A personally administered questionnaire was used to collect data necessary to answer research questions. Data was analyzed using both descriptive and inferential statistics. In order to determine the association between the variables, correlation analysis was used. Multiple regression models were used with the help of SPSS statistical tool to assess the effect of group composition and formalization on the financial performance of investment groups. The results show that group composition and group formalization positively and significantly influence financial performance of investment groups in Nakuru town. The study concludes that group composition components which are experience, gender, occupation, business training and ethnic diversity have significant positive effect on group financial performance. The group formalization components that have significant positive effect on group financial performance were organization form, financial management and accounting and auditing. The government should come up with policies that encourage gender mainstreaming in investment groups and registration of investment groups with members from different occupational backgrounds. Kenya Association of Investment Groups should facilitate training programs and forums to educate the members on business skills and proper financial management practices. Policies to encourage formalization of investment groups and as well that demand that investment groups prepare and file audited accounts are needed. The findings can further be verified by conducting a similar study on investment groups in specific economic sector investments. Research on the effect of technology adoption by investment groups can also be done.

Background of the Study 
In the last decade there has been a growing attention on investments as a tool of economic development across the world. Investments means the commitment of funds which have been saved from current consumption, to purchase financial instruments or other assets with the hope that some benefits will accrue in future in form of interest, income, or appreciation of the value of the instrument ( Patel & Patel, 2012). Typical working people across the world are joining forces to form investment groups which are voluntary associations of a few people who pool money to save in order to do joint investments. There is no ideal number of participants for a successful investment group. It should have a manageable size to facilitate constructive discussions regarding investments and enough members to generate sufficient funds through regular contributions for the main purpose of investing (Johnson et al., 2002). 

The investment groups have either been transformed into saving and investment groups from self-help groups or were formed for that purpose right from inception according to Kenya Association of Investment Groups (KAIG, 2013). They are not a get-rich-quick scheme, but members are individuals who are focused on the long term investments. Since they are ļ¬nancial partnerships, some investment groups may incorporate to protect members‟ assets and to facilitate compliance with the accounting rules observed by law (Harrington, 2008). An investment group represents an archetypal example of an organization in which interactional processes can be observed (Harrington & Fine 2000). Investment groups can be composed of people of different business experiences, gender, occupational and business training backgrounds. 

Based on a European model going back several generations, the first U.S. investment group was founded in Texas in 1898 and have existed in the United States for at least a century, though they did not become extremely popular until the 1990s when they constituted the major vehicle of the „popular finance‟ that has attracted so much attention from the media and policy makers (Harrington, 2008). During the 1990s the popularization of investing and investment groups in the United States was facilitated by several organizational and technical developments most notably being that of discount brokerage firms and the world wide web which lowered transaction costs and made it possible to invest efficiently as a group (Harrington, 2008). 

No comprehensive history has yet been written on informal savings groups in Africa, although case studies reflect on their vital supportive role for people who left the rural areas to settle in urban townships in South Africa since the early 1930‟s (Verhoef, 2001). In the course of the last quarter of the nineteenth century and especially the first quarter of the twentieth century, African people moved to the growing urban centers and the traditional patterns of economic subsistence were disrupted as alternative forms of social and economic organizations emerged. Urbanization fundamentally changed the economic, power and gender relationships in African communities and informal savings groups emerged as a conscious strategy for survival (Verhoef, 2001). 

The informal savings groups are Self- help groups divided into three categories which are financial, welfare and investment groups. The first category which is generally, the most common groups is financial Self-help groups. It could be defined in the name of “Rotating savings and credit associations (ROSCAs)”, or “Accumulating Savings and Credit Associations (ASCAs)". These are informal association that come together for savings (ROSCAs) and lend out with certain percentage of interest (ASCAs) in a regular basis. The second category is welfare groups are support groups, in which members provide each other with various types of help, usually nonprofessional and nonmaterial, for a particular common problem (Impio et al., 2009). 

The third category is investment groups, which are vehicles for investments usually in land, the stock market, or in new businesses ventures. The purpose of forming investment groups according to Malkamaki (2008) is to buy assets, exchange business ideas, network and mobilize funds for investments. The investment groups are better organized and differ from Saccos which members save to borrow, whereas in investment groups members save to invest. Currently, local investment groups in Kenya hold a total of about 35 billion Kenyan shillings, equivalent to US$469 million (KAIG, 2014). One of the major investment groups in Kenya is Transcentury Limited, a part owner of the Kenya-Uganda Rift Valley Railways. This together with Centum Investment Limited make Kenya a home to two of the region‟s leading companies that have origins of investment groups (Wainaian, 2012). 

Investment groups with members who are experienced in the field of business have a high chance of success. Rae & Carswell (2000) suggested that greater understanding of the ways in which people learn to work in entrepreneurial ways is needed if significant advance in entrepreneurial activity is to take place since learning is critical to entrepreneurial effectiveness. Learning is an experiential process through which concepts are derived from and modified by experience. According to Nofsinger & Wang (2011), the experience of the entrepreneur is one factor that explains the difference in external financing levels available to MSEs. Group members however, are usually amateur investors who connect with other investors to learn about investing techniques and to get advice and tips on investments (Entine, 2003). 

Men and women have different approaches to investing and the combination of this in a decision making group can produce a synergistic diversity of views that is well suited to a dynamic external environment (Harrington, 2008). Men are more overconfident than women, as the latter are more risk averse (Barber & Odean, 2001; Bajtelsmit & Bernasek 1996). According to Sellappan et al., (2013), younger and unmarried women are usually risk takers while older and married ones avoid taking risk. One of Harrington's most intriguing findings is that groups of men and women together are more profitable than single-sex groups (Harrington, 2008). 

An investment group can have members of varying careers, experiences and occupations from all walks of life. They can be medical doctors, engineers, telecommunications technicians, plumbers, accountants or financial directors. There is therefore a broad range of knowledge and experience not only about different companies that the group may invest in but also about broader issues such as economic (Johnson et al., 2002). Having members with different professional backgrounds can be critical in conducting due diligence on potential investment opportunities (Preston, 2004). 

Investors with different business knowledge and training levels could be members of an investment group. Stanger (2004) defines business training as an educational class or course that imparts business or vocational knowledge and skills to entrepreneurs in any stage of the business life cycle. Kuratko (2003) observes the decision by many tertiary institutions to design and implement relevant entrepreneurship teaching programs. This means that the investors who have gone through tertiary education have basic business knowledge which include having financial, marketing, operational, human resources, legal, communication, management and being able to formulate strategic plans (Van Vuuren & Nieman, 1999). 

In the past decade, most cities in many countries have seen a huge influx of people with different socio-cultural or ethnic origin (Massey & Denton 1993). An ethnic group is a tribalistic grouping that has a sense of common historic origins and frequently develops a sense of common destiny. An ethnic group shares a number of cultural traits and institutions, such as dress, food, language, and family patterns (Makoloo & Ghai 2005). Collier (2001) observes that the tribe and kin groups are the most powerful levels of social identity. In many developing countries, the ethnic makeup of local business communities is quite different from that of the population at large. It is not uncommon for members of a particular ethnic group to account for an overwhelming proportion of entrepreneurs (Fafchamps, 2000). 

Most investment groups in Kenya are informal (KAIG, 2014). Informality refers to the legal economic activity taking place below the radar of government (Oviedo, 2009). Formalization refers to the process whereby previously non-compliant investment group becomes integrated into formal sector and through which it obtains a PIN certificate in the name of the enterprise. A business group compares its perceived costs of being formal including both initial registration and ongoing costs like tax payments, with perceived benefits for instance access to credits for expansion (De Mel et al., 2011). These benefits are clearly driving the decision to formalize businesses groups in Kenya (Gelb et al., 2009). 

Locally, the word that is popularly known for an investment group is „chama‟. The Kenya Association of Investment Groups (KAIG) defines an investment group as “any collection of individuals or legal persons in any form whatsoever including but not limited to: societies registered under the Societies Act, Partnerships and Limited Liability Companies, whose objectives is the pooling together of capital or other resources with the aim of using the collated resources for investment purposes.” (KAIG, 2014). It is important that members decide how the chama is to be recognized before the law, since the law has not made any special provision for these types of entities. There are two common options; a Limited liability company or a partnership. 

A limited liability company is a business entity incorporated under the Companies Act CAP 486 of the laws of Kenya. It has a separate legal existence from management and its members (KAIG, 2014). It must be registered with Kenya Revenue Authority so as to acquire a PIN certificate. The group can also choose to be a general partnership which is another type of business relationship in which the terms of business relationship are clearly stipulated in the partnership deed. 

General partnership has a minimum of 2 members and a maximum of 30 (KAIG, 2014). The partnership is easier to operate because members are not required to hold annual shareholder or board meetings. A partnership avoids double taxation by passing the income, losses, and credits through the partnership to the partners to be taxed at potentially lower individual rates (McEowen 1992). The partnership form of course, has serious disadvantages because all partners are unlimitedly liable for the enterprise‟s debts (Lamoreaux & Rosenthal, 2006). It is however recommended to register a business name for the group. This will allow them to legally engage in any business activities, with minimal legal requirements. 

Some investment groups start initially as Self-help groups, but eventually transform to investment groups (KAIG 2014) but without registering either as a limited liability company or as a partnership. These are Chamas are registered also as Self-help groups, where members with a common goal come together and form a group that is aimed at improving their personal welfare. These groups can also be described as „mutual help‟ or the commonly known „merry- go rounds‟. They are registered under the Ministry of Labour Social Security and Services, department of Social development. Most investment groups fall into the category of Micro and small scale enterprises (MSE). MSEs‟ small size and flexibility permits them to specialize in narrow niches that are generally less interesting for larger enterprises (Kraus, 2007). 

Financial management is a crucial field within the endogenous environment of MSEs that presents numerous potential obstacles. Liquidity is a precondition to ensure that firms are able to meet its short-term obligations and its continued flow can be guaranteed from a profitable venture (Padachi, 2006). The lack of adequate liquidity to meet current obligations when they come due frequently results in problems which result in the failure of the enterprise (Dunn & Cheatham, 1993) but on the other hand, too much focus on liquidity will be at the expense of profitability (Padachi, 2006). Under capitalization is one planning deficiency which results from several errors made during the initial stages of financial planning and implementation. Cash flow problems are a common symptom among businesses with this problem (Dunn & Cheatham 1993). 

Investment groups generate capital from the monthly contributions from the members. Members can agree to have a target figure to kick start the investments where they are all required to put in a certain amount (KAIG, 2016). Sources of financing therefore can include equity which can be raised either internally or externally. Equity has a minimum cash outflow unlike debts in which interests are paid periodically (Ou & Haynes, 2006). Other sources of funds available to investment groups include debts. According to Jun and Jen (2003) short- term debt advantages include zero interest rate in some short-term debt cases such as in the case of trade credit and lower costs of flotation than those of long-term loans or equity. Interests are also allowable expenses in tax computations. Another source of finance is from government initiatives like women and youth funds (KAIG, 2016). 

One benefit of formalization among others is the fact that there will be proper book keeping, sound accounting systems and auditing by internal or independent external auditors which is a requirement for tax purposes. The auditor is one of the most important external business partners for an MSE in terms of knowledge transfer and the mitigation of internal risks (Aschauer et al., 2015). Audit helps stakeholders to make informed decisions about future directions, based on how an organization is performing (Kamarudin et al., 2012). 

Financial reporting, consistent and dependable accounting information is a prerequisite to effective communication to creditors, suppliers, and national governments (Fearnley & Hines, 2007). International Financial Reporting Standards (IFRS) were developed in advanced economies. IASB released IFRS for micro and small scale enterprises in July 2009. The standard for MSE was a result of a five-year development process with extensive consultation of MSEs worldwide (Vasek, 2011). They are increasingly being applied in emergent economies, potentially ignoring considerations of whether IFRS are appropriate or relevant to such economies (Tyrrall et al., 2007). The IFRS for SMEs is intended to be applied to the general purpose financial statements that do not have public accountability, but publish general purposes financial statements or follow generally accepted accounting principles (GAAP) (Fearnley & Hines, 2007). 

Tax compliance refers to fulfilling all tax obligations as specified by the law freely and completely (Marti 2010). It has been found that compliance burden fall disproportionately on medium and small enterprises internationally (Pope & Abdul-Jabbar, 2008). Internal compliance costs relate to the time spent by company staff on maintaining and preparing information for professional advisers, while external compliance costs arise from payments made to acquire the services of lawyers, accountants and investment advisers from outside a company (Hanefah et al., 2002). With regards to value-added taxes, investment groups that are not LLC often find it difficult to „pass‟ these on to their customers because they cannot claim back the VAT that they pay on inputs as they are not legally registered (De Mel et al., 2011). Investment groups therefore need to specify their tax obligation to include VAT as they register with KRA (KAIG 2016) 

The move towards economic liberalization proposed in the late 1980s and 1990s was aimed at reducing distortions in the economy although deregulation of markets has had adverse impact on MSEs. The effects include increased macroeconomic instability characterized by high inflation rate and fluctuating exchange rates. While the effects have been harmful to all private enterprises, the MSEs have been particularly hurt given their small size. The major variables that impact MSEs in Kenya include inflation, interest and exchange rates, unemployment, and government legislation. 

A high inflation rate raises the cost of living and results to a shift of resources from investments to consumption. High, and volatile, inflation is a threat to good financial performance and has negative effects on many of the investment groups. According to Akabueze (2002) inflation causes a rise in general price, making goods and services expensive to the common market targeted by MSE businesses. High inflations rates possess a great challenge to MSEs since they are the ones who have to increase the prices to match up the high cost of production. Inflation's effects on an economy are various and can be simultaneously positive and negative (Viviers et al., 2012). Negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings. Positive effects include ensuring that central banks can adjust real interest rates (to mitigate recessions), and encouraging investment in non-monetary capital projects (Ligthelm, 2010). 

An increase or a decrease in interest rate may affect the investment decision of the investors, if they consider interest rate as cost of capital. When for example there is a rise in interest rate and the opportunity cost goes up, individual investors would prefer to invest in non-fixed income securities such as bonds (Adam & Tweneboah, 2008). Many governments use the interest rate as a monetary policy tool to control other macroeconomic variables like investment, inflation and unemployment. 

The currency volatility has effects on the stock returns. When currency appreciates, in a situation where the country is export-oriented, it is expected that there will be a reduction in the competitiveness of her exports, and would therefore have a negative impact on the domestic stock market. This is because the export-oriented companies quoted on the stock exchange market would be less profitable and this may in turn become less attractive to investors (Muthike & Sakwa, 2012). Where there is high unemployment, a lot of people are pushed into entrepreneurship for survival (Wickham, 2009) although the spending power is limited. Little earnings will therefore mean that investments will be limited (Ligthelm & Cant, 2003). 

Regulations and procedures are requirements of any orderly development and business activities. They affect enterprises, the public, policy makers and administrators. Most written regulations and procedures in Kenya owe their origin to the colonial period, when regulations were aimed at controlling and regulating growth of indigenous enterprises (K'obonyo et al., 1999). Government policies should aim to encourage and promote investments. Trade and investment systems have an enormous influence on opening up economies to overseas markets and creating alliances with foreign companies (Volkman 2008). Volkman claimed that in developing countries various systems and regulations on trade and investment may burden enterprises trying to gain from international trade and investment. 

The current constitutional framework and the new Micro and Small Enterprise Act 2012 (MSE Act 2012) provide a window of opportunity through which the evolution of MSEs can be realized through the devolution framework. The current constitution provides for the establishment of counties and by extension, County led institutions and regulations. The county system will therefore be governed by the current County government Act enacted in 2012. The Act is expected to oversee the operation of the county system like enacting respective county legislations related to MSEs development through the county assemblies (Ong'olo & Awino, 2013). 

According to the Registration of Business Names Act (Cap 265, Laws of Kenya) firm founders who want to do business under a "business name" must register that name with the Registrar General's office in Nairobi. A number of businesses are known however not to be keen on registering their businesses for fear of paying tax (K'obonyo et al., 1999). Thus, although a business name is not mandatory, it facilitates access to credit facilities from formal banking as well as trust and recognition from other formal businesses. Once a business is registered, it is required to compile and file audited accounts with the registrar. Most MSEs, especially those run on sole proprietorship basis, hardly do proper bookkeeping and may not be in a position to satisfy such requirements (K'obonyo et al., 1999).

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