An investigation of factors affecting performance of micro-finance institutions: a case study of Central Division of Embu district

Abstract

The Small and Micro enterprises sector has a major role to play towards poverty alleviation in Kenya. However their capacity to create employment and optimal performance will depend to an extent on the accessibility of credit facilities provided by Micro finance institutions (MFIs). The objectives of this study were to evaluate the performance of MFIs in Central Division of Embu District especially as relates to provision of credit to small and micro enterprises. It also intended to determine factors affecting their outreach Several MFIs will be covered including NGOs, DFIs, SACCOs and Commercial MFIs as well as departments of commercial banks that offer micro-credit. This is in the light of differences as regards demand and supply of micro-credit. The significance of this was to create a basis for formulation of policy on measures to be undertaken for enhancing performance and outreach. Performance in this study focused on indicators like sustainability, outreach, profitability, financial performance, loan repayment, loans issued etc. The MFIs attitude towards recipients was captured through the formers requirements before advancing loans e.g., business status, gender, and affiliation to groups. Study objectives were captured through a descriptive research process focusing on MFIs operating in Central Division of Embu District as at July 2004. Stratified sampling was applied with samples of at least two institutions from each stratum. Primary and secondary data on these institutions was used. Descriptive statistics were used to analyze data with expected output being reasons as to the low outreach and performance of MFIs. It emerged from the study that the key reasons behind low performance of the institutions included: limited financial resources, loan defaults by recipients, poor management information systems and poor research& development departments. In addition, factors restricting supply of credit to SMEs include lack of collateral, high perceived credit risk, lack of business skills and lack of management skills contribute negatively. General performance of the Institutions was found to be improving. Recommendations as regards what the Government can do in terms of policy and structural changes are provided. In addition, what actions the MFIs can take to boost performance levels are put forth, including improving on marketing, research and development, adoption of policies that increase their working capital base. Limitations of study and suggestions for further research are also provided.