Influence of Micro-Finance Institutions on Transforming Micro, Small and Medium Enterprises in Kenya

Abstract

Micro-financing has over the recent past gained prominence among the developing countries of Asia, Latin America, Eastern Europe and Africa as a financial solution to challenges faced by micro, small and medium sized enterprises. The growth and prominence of micro-financing has been propelled by the intensive search for solutions to poverty alleviation. The general objective of this study was to establish the influence of Microfinance Institutions in transforming micro, small and medium enterprises in Kenya. The study relied on a positivist research philosophy and used a cross-sectional research design, in the form of a survey. The population of the study was 45 micro finance institutions registered as members of AMFI Kenya. Stratified random sampling was used in this study with a sample size of 135 respondents. Respondents were grouped into three strata; top management, middle management and supervisory employees. Pilot testing was done equivalent to 10% of the sample size from MFIs other than those involved in the study. Primary data collected using questionnaires was used in the study. Data was analyzed and presented using the Statistical Package for Social Sciences (SPSS).. Information was sorted, coded and input into the statistical package for social sciences (SPSS) for production of graphs, tables, descriptive statistics and inferential statistics. Spreadsheets were also used to supplement SPSS results. The study established that, taken together, three out of the five predictor variables contributed the most to the total variability in the transformation of MSMEs. The three predictor variables are; institutional policies, management functions and effective financial management systems. The study findings revealed that MFIs have a significant transformative influence on MSMEs through the establishment of effective institutional policies aimed at improving business climate in which MSMEs operate. A critical priority of the MFIs is thus to develop a regulatory and business environment that removes impediments to accessing and providing financial support to the MSMEs. To address the challenges of changing customer needs and tastes, MFIs should ensure that policy and regulatory instruments applied on MSMEs clients are developed upon empirical data that clearly shows market trends. Instituting proper managerial structures and processes in MFI operations was also found critical in transforming the operations of MSMEs. Effective management structures and processes were found to permit institutions to attenuate and amplify talent that is critical for organizational stability and support to the MSMEs. The study further revealed that strong communications systems within MFI organizations are critical for the transformation of MSMEs. In additions, MFIs should develop strong financial bases with good revenue streams for them to be of transformative support to MSMEs. Strong MFI liquidity position, with adequate cash flows assist in addressing the borrowing needs of MSMEs supported. To enjoy good revenue streams and attain adequate cash flow positions, MFIs should possess excellent financial management skills which will have extended effects in the transformation of MSMEs clients. Management of credit periods on loans offered to MSME significantly enable MSMEs to attain desired transformative positions. These findings will benefit policy makers, MFI Finance Managers, Credit Officers, as well as officials in leadership and governance in terms of developing effective policy to regulate MFIs operations in a bid to transform the ever increasing number of MSMEs in Kenya. These results will also benefit scholars, researchers and students in terms of opening up a new frontier of information that will enhance their understanding of this important and steadily growing thematic of MSMEs and micro-financing in Kenya. The study makes two recommendations for further studies.