THE EFFECT OF LENDING BY MICROFINANCE INSTITUTIONS ON THE

FINANCIAL PERFORMANCE OF SMALL AND MEDIUM ENTREPRISES IN

KIAMBU COUNTY, KENYA.

BY

FRIDAH WAIRIMU KANYUIRA

HDB211-0778/2018

A Research Project Submitted to The Department of Business Administration, School of

Business as A Partial Fulfilment of the Degree of Bachelor of Commerce-Accounting of Jomo
Kenyatta University of Agriculture and Technology.

August, 2021.

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 DECLARATION
This project is my original work and has not been presented for a degree in any other university
or for any other award.

Signature: ______________ Date: ________________

Fridah Wairimu Kanyuira

Supervisor:

Signature: ______________ Date: ________________

Ms. Millier Ochingo

Department of Business Administration

School of Business, Jomo Kenyatta University of Agriculture and Technology.

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 DEDICATION
I dedicate this project to my loving mother, Juliah Njeri who with her constant motivation and
encouraging words pushed me to finish this project even when it seemed impossible to complete.
Through her prayers and support I have managed to complete this research project and I salute
you for this.

God bless you.

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ACKNOWLEDGEMENT
I am grateful to the Almighty God for gracing me with the strength and knowledge to pursue my
graduate level to this point and all glory to His Name forever.

Am grateful to my supervisor, Ms. Millier Ochingo for walking this journey with me and
patiently guiding me with support through this proposal.

I would also like to thank my family especially my loving mother, Juliah Njeri who supported
me through constant prayer and word of encouragement, being patient and supporting me during
the whole period to completion of the proposal.

I say thank you.

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LIST OF ABBREVIATIONS
CBK - The Central Bank of Kenya

GOK - Government of Kenya

KCB - Kenya Commercial Bank

KWFT- Kenya Women Finance Trust

MFIs - Micro Finance Institutions

NBFIs- Non Banking Financial Institutions

NGOs - Non Governmental Organizations

SMEs - Small and Medium Enterprises

UWFT - Uganda Women Finance Trust

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ABSTRACT
Financial services provision especially saving and credit facilities to the entrepreneurs are
essential in the economy’s development. With the microfinance institutions initiative using their
services to reach small, medium and poor enterprises, expansion and growth of the SMEs is
visible.

This study’s key objective was investigating the microfinancing lending institutions effect on
medium and small enterprises’ financial performance in Kiambu County, Kenya. The study
approved the research design descriptive survey and the study’s target population was 120
SMEs. The target population was clustered to similar categories as cosmetics, wholesalers,
service delivery, and retailers. The 120 SMEs’ sample was drawn proportionally from the
cluster.
Data was collected using the questionnaire whose reliability and validity and was analyzed.

From the findings, the study showed that the stiff competition from big firms affects SMEs
growth, poor SMEs management is a factor that affects development and growth, SMEs
increases productivity by getting funds from the MFIs leading to growth of the enterprises, MFIs
contributed to entrepreneurs increasing, and they start venturing will the SMEs fail expanding
the limited financial resources.

The study concluded that key capital for Medium and Small Enterprises is from the
Microfinancing institutions. They provided a comprehensive financial services range to the
people working in informal sectors, which fit their affordability and needs. They provide services
to clients in the loan form. The services make clients modifying microenterprise activities
leading to decreased or increased microenterprise income.

The study recommended access to financing should be identified as SMEs growth freedom. The
study recommended training as essential for quality and productivity and quality as it influenced
motivation, efficiency, and effectiveness, of employees. The study recommended strong
evidence of accessing financial services and result transfer of financial resources to the poor
women, over time, leads to women becoming assertive and confident. The study recommended
SMEs management as a factor affecting development and growth.

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 TABLE OF CONTENTS
DECLARATION...........................................................................................................................ii

DEDICATION..............................................................................................................................iii

ACKNOWLEDGEMENT...........................................................................................................iv

LIST OF ABBREVIATIONS.......................................................................................................v

ABSTRACT..................................................................................................................................vi

LIST OF TABLES……………………………………………………………………..………..x

LIST OF FIGURES……………………………………………………………………..………xi

CHAPTER 1: INTRODUCTION .............................................................................................1

1.1 BACKGROUND OF THE STUDY.................................................................................1

1.1.1 Lending by Microfinance Institutions .................................................................2

1.1.2 Growth Development of SMEs ...................................................................................2

1.1.3 Effect of Lending by MFIs on Growth and Development of SMEs .........................3

1.1.4 SMEs in Kiambu County ..........................................................................................4

1.2 Research Problem ............................................................................................................4

1.3 Objectives of the Study ..............................................................................................5

1.3.1 General Objective ................................................................................................5

1.3.2 Specific Objectives ...............................................................................................5

1.3.3 Research Questions ..............................................................................................5

1.4 Significance of the Study .................................................................................................6

1.5 Organization of the Study................................................................................................6

1.6 Scope of the study……………………………………………………………………….6

CHAPTER 2: LITERATURE REVIEW .................................................................................7

2.1 Introduction ................................................................................................................7

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 2.2 Theoretical Review ..........................................................................................................7

2.2.1 Loanable funds theory………………………………………………………………7

2.2.2 The classical theory………………………………………………………………….7

2.2.3 Neo-classical theory……………...………………………………………………...7

2.2.4 Joint liability theory………………………………………………………………….8

2.3 Empirical Review .............................................................................................................9

2.4 Summary of Literature Review ..................................................................................... 11

2.5 Conceptual Framework ................................................................................................. 12

CHAPTER 3: RESEARCH METHODOLOGY ................................................................... 12

3.1 Introduction .............................................................................................................. 13

3.2 Research Design ............................................................................................................. 13

3.3 Population ...................................................................................................................... 13

3.4 Sample Design ................................................................................................................ 13

3.5 Data Collection ............................................................................................................... 13

3.5.1 Data Validity and Reliability .................................................................................. 14

3.6 Data Analysis ................................................................................................................. 14

3.6.1 Analytical Model ..................................................................................................... 14

3.6.2 Test of Significance .................................................................................................. 15

CHAPTER 4: DATA ANALYSIS, RESULTS AND DISCUSSION

4.1. Introduction…………………………………………………………………………….16

4.2 Descriptive Statistics ………………………………………………………………….16

4.2.1 Response Rate …………………………………………………………………….16

4.3 General Information ………………………………………………………………….17

4.3.1 Gender of the Respondents ……………………………………………………….17

4.3.2 Type of business …………………………………………………………………….17

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4.3.3 Number of employees……………………………………………………………….18

4.3.4 Duration of SMEs Operation…………………………………………………….18

4.3.5 Preferred custodian of the business …………………………………………….19
4.3.6 Source of Capital for the Business (SMEs) ……………………………………….19
4.3.7 Challenges Faced in Accessing Loans from the MFIs ……………………………20
4.4 Extent of Statement on Growth and Development of Enterprises ………………….21
4.5 Regression Analysis ……………………………………………………………………22
4.5.1 Model Summary ……………………………………………………………………23
4.5.2 Analysis of Variance (ANOVA) Results ………………………………………….23
4.5.3 Coefficient of Determination ……………………………………………………24
4.6 Interpretation of the Findings ………………………………………………………24
CHAPTER 5: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Introduction …………………………………………………………………26
5.2 Summary …………………………………………………………………….26
5.3 Conclusion …………………………………………………………………….26
5.4 Recommendations for Policy …………………………………………………27
5.5 Limitations of the Study …………………………………………………….28
5.6 Areas for Further Research …………………………………………………28
REFERENCES .................................................................................................................. 29
APPENDIX I: TRANSMITTAL LETTER………………………………………………31
APPENDIX II: QUESTIONNAIRE……………………………………………………….32
INTRODUCTION ………………………………………………….……………………….32

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 LIST OF TABLES
Table 1: Response rate………………………………………………………….…….16
Table 2: Type of business…………………………………………….………….…….17
Table 3: duration of time business has been in operation…………….……….…….18
Table 4: Source of capital for the SMEs………….……………………………….……20
Table 5: Challenges faced in accessing loans from the MFIs………………………….21
Table 6: Extent of statement in growth and development…………………………….22
Table 7: Model summary…………………………………………………………...…….23
Table 8: ANOVA………………………………………………………………………….23
Table 9: Coefficient of determination………………………………………………….…24

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 LIST OF FIGURES
Figure 1: Conceptual framework………………………………………………….12
Figure 2: Response rate…………………………………………………………….16
Figure 3: Type of business………………………………………………………….17
Figure 4: Duration of time business has been in operation……………………….17
Figure 5: Source of capital for the SMEs………………………………………….20

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CHAPTER 1: INTRODUCTION
1.1 BACKGROUND OF THE STUDY
According to Thorsten Beck (2015), microfinance can be defined as efforts to provide financial
services that are exempted from traditional commercial banking to households and
microenterprises. Microfinance according to Ira W. Lieberman (2011) is referred to as the small
work capital loans provided to the poor who work, by financial institutions that are community-
based known as the MFIs (Microfinance Institutions). MFIs are non-governmental organizations
(NGOs) or not-for-profit or the majority, which are credit unions, savings and credit co-
operatives, commercial banks, or nonbank financial institutions, the latter because of NGOs
changing into commercial banks. The microfinance encompasses financial tools like cash
transfers, savings, insurance, credit, and leasing.

Microfinance is a well-known conception. Small processes starting since the beginning of the
18th century. The initial occurrence of microlensing is endorsed to Irish Loan Fund system,
started by Jonathan Swift, which aim was improving conditions for poor citizens in Irish. In the
modern form, microfinance became common in the 1970s. The Graeme Bank was the first
organization to receive attention, and was started by Muhammad Yunus in 1976 in Bangladesh.
Apart to providing credits to clients, Grameen Bank also proposes that the customers subscribe
to the "16 Decisions," a list of the ways poor individuals can improve their financial status.

Microfinance and microcredit can have used one in the place of another. It is important to note
what differentiates microfinance from microcredit. According to Sinha (1789), microcredit is the
small loan facility with shorter repayments provided to the people with less income, which is for
motivating them to become independent that includes credit activities. On the other hand,
microfinance offers a number of services for both credit and non-credit provided to the small and
medium entrepreneurs and enterprises who cannot take shelter of banks for banking and other
services.

On a global scale, it is approximated there are more than 10,000 microfinance institutions. The
microfinance institutions range from government agencies, non-government organizations,
commercial banks, and private companies. The top 100 MFIs are the known providers in the

xii
relevant markets and are found in 38 key markets, all together they have about 52 billion USD
assets under management and provide services to 25.5 million borrowers. In a research report
provided in 2014 authored by responsibility Investments AG, it is assessed that 30 most essential
micro finance markets could possibly grow at 19.3% approximation per annum to reach 14
billion SD of 2019’s extra demand.

In Kenya, Microfinance consists of microfinance regulations and facilities, which is developing

since mid-1990s. The Act of Micro Finance approved legislation in 2006, which was active in
2008. In 2010, there were twenty-four Kenya micro finance institutions, which provided $1.5
billion US up to close 1.5M dynamic borrowers. And above 100,000 clients, the Equity Bank had
the biggest business loans share that represented a 73.50% market share followed by 12.06%
Kenya Women Microfinance Bank. Most of the microfinance firms like seen in other countries
have an entitlement criteria including gender (in the scenario of special loans for women), age (at
least eighteen years), a business, a valid Kenyan Identity Card, ability of loan repayment
(Mwinyi, Abdulrahman Mohamed. and Bashir, Mohamed Sharif, 2021).

1.1.1Lending by Microfinance Institutions

MFIs provides diversified services to clients, and most of the times in a loan form. The services
lead to a client modifying the actions of a microenterprise, which leads to decreased or increased
microenterprise earnings. The microenterprise income alteration leads to change in the income’s
household, leading to a lesser or greater economic security of the household. The modified
economic security of the household leads to mortality change of the household members’, in
educational levels and in the forthcoming economic and social opportunities. The loans are
provided following a minimal approach where the loans necessities are not challenging for
customers to meet; character, little collateral, and loans co-signing between the members. The
loans are among the member’s savings (Schmidt, 1997).
1.1.2 Growth Development of SMEs
In a global economy, SMEs impact is a very essential in building a society, which is free from
poverty. They provide enough job opportunities to society sections’ and ensure a monetary flow
in several society levels. The SMEs play an essential role in the global economy by providing
employment set-up along with output and input. There are factors that should be understood in
this context. As per the 2015 published report, 600M jobs were required globally to serve the
next fifteen years. Mainly, formal jobs existing in developing markets will be created by the
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SMEs. Apart from laying the key function in an economy’s growth, it is clear that close to 50%
of SMEs cannot access capital or financial investment. At a period, the formal SMEs generate
about 33% of a nation’s income and a 45% of the whole employment in countries that are
developing. If we include the informal SMEs in the list, numbers will increase (Katua 2014).

SMEs contributes very greatly between regions and countries. Although they have vital roles in
nations’ increased-income, they are essential to countries with low-income, contributing to the
employment and GDP. Kenya’s SMEs development contribute close to 40% of GDP with a
common fall in an informal segment. There are around 7.41M SMEs in Kenya, only 1.56M are
licensed and 5.85M are unlicensed. The unlicensed SMEs show that time is enough to create
conducive space for the SMEs to be cost-effective and essential at regional and local levels
(Phyllis Wakiaga, 2021).

1.1.3 Effect of Lending by MFIs on Growth and Development of SMEs

According to Wasonga, Jack K (2008), a major constraint SMEs face is lack of accessing
finance from MFIs. It is because of lacking credit history, not having the needed collateral for the
financing security, businesses non-registration, lack of the financial statements needed to finance
and not keeping good accounting books. All the issues are challenges that hinder small
businesses financing by the commercial banks. Hence, the option to informal financing sources,
which prove to be expensive and no cash flow is being projected. The research showed that 33%
of the SMEs customers prefer loans for their businesses with 60% of applicants going for loans
that range between half a million to one million. Many SMEs do not agree to with the mandatory
documents needed for commercial banks financing.

MFIs improve the economic empowerment and financial stability. It extends small savings, lons
and other financial services to people that do not have capital access. It is a crucial approach
helping people that live in poverty to become independent financially, heling them become better
and stronger able to providing for the families during the economic difficulty. In this view, about
half of this world survives less than two dollars daily, microfinancing is a key solution. Through
providing accessibility to financial knowledge, resources, and the chance of savings
accumulation, the microfinancing programs allow the families to get great flexibility to manage
the resources and become resilient and provide for children.

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1.1.4 SMEs in Kiambu County
Kiambu Country is in Kenya and is the political and commercial hub in the region. Through
virtue of the opportunities and development level, the country homes several SMEs.

1.2 Research Problem

The barrier to the Medium and Small Enterprises event is the credit assessment. The enterprises
differ in their services and products provided by MFIs. Medium and small enterprises should be
financed differently therefore the financing will be decided if a firm is with a start-up of the
current one, and if it, growing unstable, or stable. Stable survivors are the people benefiting from
accessing MFIs financial services. The unstable survivors are considered not financial service
creditworthy to be provided in the growth enterprise and sustainable way are medium and small
enterprises with a high possibility for growth.

Provision of the monetary services, the saving and credit facilities play an essential role in the
economy’s development. Despite microfinance institutions, efforts to require standard economic
formal system, expansion and growth of the SMEs sector did not show signs of development and
growth (Kenya Economic Survey, 2009). The Kenyan government has provided measures, which
help in the economy’s development. These measures entail the devolved funds, Free Primary
Education implementation, Free Pedagogy Subsidization, expansion of social initiatives
protection (CT for the elderly, orphans, vulnerable children, and CT persons that are disabled,
among others. Regarding financial matters, the government adopted the replacement method to
compute the CPI, cushioning his index from the external shocks, while MPC, monthly was
setting the CBR, which was the base rate of lending for all commercial banks. Consistently, the
CBK, while implementing the mandate, it is also mopping the currency found in a market to
stabilize the interest and exchange the rates.

According to Coase (1960), the intermediation of finances involves the cost of transaction, and
according to Chijoriga and Cassimon (1990) costs of transactions entail costs included in
mismatch costs, finding lenders, and the premium risk. All the transactions increase the
borrower’s gross cost of credit. Conceptual framework reflects the transaction cost’s effect on the
SMEs when servicing and accessing the services of MFI. High costs of transaction limit effective
utilization of SMEs received thus limiting SMEs’ development and growth.

4
Although Act of Microfinance in 2006 stipulates Kenyan MFIs operations, many SMEs have no
gotten lending and loans acquire by MFIs loans are expensive to repay. In addition, the impact of
the studies on MFIs have mixed results. Kenya has adopted the system that devolves s and every
level has a mandate, with the constitution stipulation. Considering this structure, no study
investigated MFIs lending effect on the development and growth of Kiambu County’s SMEs.
The study is therefore the first step in that direction and investigates if capital services and loans
MFIs offer to Medium and Small Enterprises lead to organizations’ development and growth.

The study will seek to answer: What is the effect on SMEs development and growth in Kiambu
County when the Microfinance Institutions lend them?

1.3 Objectives of the Study

1.3.1 General Objective

The study’s purpose is investigating lending effect by MFIs on the SMEs in Kiambu County
financial performance.

1.3.2 Specific Objectives

The objectives of the study are:

I. To assess lending efficiency on SMEs financial performance in Kiambu, Kenya.

ii. To examine how lending rates affects SMEs financial performance in Kiambu, Kenya.

iii. To determine how expansion and growth affect SMEs the financial performance in
Kiambu, Kenya.

1.3.3 Research Questions

The following are questions for the study;

I. How does efficiency affect SMEs financial performance in Kiambu, Kenya?

II. How do the lending rates affect SMEs financial performance in Kiambu, Kenya?

III. In what ways does expansion and growth affect SMEs financial performance in

Kiambu, Kenya.

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1.4 Significance of the Study
The study provides understanding of the microfinance programs and how contribute to SMEs
expansion. The Government benefits by this study’s finding as it brings into light regulations and
policies to enact and assist SMEs growth, and address the factors in step with the
recommendations study.

The researchers found the study helpful since it added financial knowledge on the structures of
MFIs and SMEs. It was used for research and discussion for exploration and to develop studies
further. Investors also found the study essential as they were able to use opportunities in SMEs
sector, and every other person was enlightened on MFIs role in SMEs economic development.

1.5 Organization of the Study

The research study is as shown below; chapter one entails study’s the background reflecting on
the previous research studies on lending by the microfinance institutions, development, and
growth of SMEs, and the effect of MFIs lending is on the SMEs development and growth.

It also includes a problem statement that shows research gaps, objectives of research, and the
study’s significance in this study.

Chapter 2 will talk about the literature review on microfinance concepts, the role played in SMEs
development and growth and the conceptual framework.

1.6 Scope of the study

The scope of this study was mainly confined to identifying the lending effect by MFIs on the
SMEs in Kiambu County financial performance. The study findings are based on lending by
MFIs in 2021 when the study was carried out.

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 CHAPTER 2: LITERATURE REVIEW

2.1 Introduction
The chapter discusses theories and arguments from different authors’ microfinance concepts and
the roles played in SMEs development and growth. It discusses Opinions, Ideas, Concepts, and
Theories from Experts. It will also explain related studies. In addition, the literature summary,
research gaps and the conceptual framework is included in the chapter. Data in this chapter is
secondary and is obtained from internet, textbooks, and journals.

2.2 Theoretical Review

The sections highlights theory reviews of microfinancing lending on SMEs financial
performance and leads to Joint Liability Theory, Loanable funds theory, neo-Classical Theory,
and classical theory.
2.2.1 Loanable funds theory
The loanable funds doctrine was formulated in the 1930s by British economist Dennis Robertson
and Swedish economist Bertil Ohlin. Interest rates are determined by loanable funds supply and
credit demand. In this theory, the loanable funds demand originates from government, foreign
borrowers, consumers, and domestic business. While supply is generated by savings. Money
balance dispersion, bank system money creation, and foreign lending (Kennedy & McQuinn,
2011).
With factors that determine long-term and short-term interest rates will be decided by monetary
and financial conditions in an economy. There are factors put into consideration in this theory
mean that the equilibrium is reached when each factor in this equilibrium.
2.2.2 The classical theory
The theory determines interest rates, comparing the savings supply with a borrowing demand.  Its
main thinkers are held to be Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Robert
Malthus, and John Stuart Mill. Using the demand and supply curve, equilibrium rate will be
calculated through determining the point of intersection of the curves. Thus, if the savings are
more than the investments, interest rates drop until they are at the equilibrium and the vice versa
is true. If they are less than investment, interest rates will increase up to when the savings reward
encourage the increased rates of saving, and this causes equilibrium (Krainer, 2009). But, interest
rates classical theory fails accounting for the factors besides demand and supply affecting interest
rates like funds creation, importance of wealth and income in an economy’s primary borrowers.

7
2.2.3 Neo-Classical Theory
Robert Solow and Trevor Swan first introduced the neoclassical growth theory in 1956.Neo-
classical model emphasizes role of saving for the growth of the country’s economy. For the
capital stock, the function of production will determine the economy’s product. Capital stock will
change with time and these changes lead to growth in the economy. Depreciation and investment
will affect stock and there will be a single stock capital where investment amount is equal to the
depreciation amount. The steady capital state level is an economy’s long run equilibrium. The
rate of saving in the economy will determine the output allocation between investment and
consumption and thus is a key steady capital state stock determinant; if the rate of saving is high,
an economy has a large stock capital and high output level (Lipsey et al., 1999).

A key constraint for the poor households in the developing countries is lacking financial services.
It is the repercussion of the financial markets that are poorly developed, and the commercial
banks offer services exclusively to large and medium companies seen as creditworthy (Todaro et
al., 2003). It explains consumption and the savings constraints for people living in developed
countries and regarding neo-classical growth theories, implying that capital accumulation is
accelerated and the economy growth in Kenya is restrained (Lipsey et al., 1999).

Borrowing constraint proves impossibility for people to smoothen on consuming and following
the optimal pattern for consumption. Individuals will see themselves in the solution corner when
the desired consumption level at each point of life will not be reached. The possibilities
restriction to invest and consume makes it hard to get the basic services like healthcare, food,
housing, and education. To reduce the constraint or borrowing, the individuals wishing to obtain
credits and cannot access financial market borrow from the informal markets lenders that charge
high rates of interest, which in several case reach up to 20% daily (Todaro et al., 2003)

Microfinancing institutions emergence represent the option of going to informal moneylenders

and present a method of eliminating the constraint of borrowing in developing countries. In
countries where financial system and functioning has not developed well, microfinance will lead
to wealth increase and utility increase of a person by helping them increase savings and
consumption. It will allow a person save making it possible for every person to have a smooth
consumption and follow the optimal consumption in their lifetime. (Todaro et al., 2003,
Bayoumi, 1993).

8
2.2.4 Joint Liability Theory
The theory is interpreted in certain ways and is divided into 2 categories by Yunus. First, the
explicit liability joint occurring when the borrower will not repay the loan, the members of the
group are required contractually to pay within the members’ stead. The repayments are enforced
with a common punishment threat, the future denial of credit to the members in the defaulting
group or through drawing on the group savings funds, which is collateral (Banerjee et al., 1994).

The second group is implicit, which is mentioning that any belief among borrowers that if the
group member is defaulting, this group will not be eligible for future loans if or not the lending
contract will not specify the punishment. The form with which it happens is when the
microfinancing organization will choose to fold the operations when it faces delinquency.

2.3 Empirical Review

Morduch in 1999, wrote “The Microfinance Promise”. He wrote that, “in most of the poor
countries, individuals put hope in a financing sector that will change the social structure and
economic structure through providing microcredit.” He wrote that, ‘there are eight to ten million
households’ worlwidely that are microfinance program members’. In the paper, he reviewed
earlier studies about MFIs kinds concerning repayment rates, structure, outreach, financial
sustainability, and collateral, among others. He finds that very few kinds impacting studies are
made with control groups and trustworthy treatment and he stressed the importance of
researching on this object.

Khandler (2003) made the World Bank quantitative paper research. The study’s objective is
seeing microfinance long run effects on poverty and household consumptions in Bangladesh.
Khandler used the collected household fata first during 1991-1992 and second during 1998-1999.
Khandler chose Bangladesh because it was the country where the large operational microfinance
was in the world. Through estimating effects of the program, Khandler used the panel data at the
household level. In 1991 /1992, World Bank took a survey close to 1769 households from about
87 villages that were chosen randomly. They then surveyed households in banks for microcredit
Grameen Bank and BRDB`s (Bangladesh Development Board), BRAC (Bangladesh Rural
Advancement Committee) RD-12 households and project who were not participants program.
All villages chosen had been in the project for close to 3 years and this survey was done during 3
seasons. Similar households were used for a follow up survey, which was done in 1998 /1999,

9
and in the survey, new households were used and the household’s samples reached (Khandler,
2012).

Khandler result was that the poverty aggregate moderate a decline from 83% in 1991/ 19992 to
about 66% in 1998/1999, meaning the 17% points reduction of over 7 years. The participant’s
poverty program reduced with 20% where poverty for non-participants reduced with 15%. He
found that microfinancing program had an impact on non-food products consumption. Thanks to
the local economy growth, non-participants took advantage of microfinancing programs. Even
though the programs reduced extreme poverty, there is no reduction in the aggregate poverty,
meaning microfinance is not the instrument for solving the poverty problem in Bangladesh.
Khandler did not believe that microfinancing is an instrument of reducing poverty for this
country, and to reach this national level, the sector of microfinancing needs not to improve
financial services. They should improve borrower’s skills and educate them in marketing
improve income and productivity. He concluded that microfinancing is among the instrument
used to reduce poverty and add the key essential aspects, which are investment and growth in the
human capital.

High rates of repayment are achieved leading to new loans being granted for some periods.
Findings showed the self-selected groups have a high repayment willingness. In situations where
group members verify the outcome of the economic activities of other members and punish them
when they lie, incentives of cooperation are a proven string. According to Walid Seddiki et al.,
the group lend individual out-performance in the risk reduction view for MFI’Littlefield et al.
(2003) wrote a report seeing if the microfinance was the effective strategy to not reach or reach
millennial development goals.

To advance from poverty, Littlefield et al. examined 3 vital areas. First the need of promoting the
education of children. They meant microfinance clients’ children are like to attend school and
take long. The other aspect is improving the health of women and children.

They claim that a key reason of the microcredit clients not repaying the loans is expenditure and
illness coming with it. They continue proving that microfinance institutions’ member’s
households appear to have good nutrition and health practices when compared to non-clients.
The last aspect is women empowerment. It is seen that women likely invest income in the men’s
wellbeing. Littlefield et al believed that giving women credits results to women getting money

10
access, empowering them to become confident, taking more family decisions and in the society
and confront the gender inequalities. Littlefield et al, concludes: “Accessing financial services
will form a fundamental basis where many interventions are dependent”.

Muthoki (2012) tested a group hypothesis of the joint liability and group borrowers in an
experiment that used the game model with loan period amounts being limited. The game theory
suggest every player will not repay any amount in their last loan period, as there is no repayable
incentive.

Todaro et al., 2012 shows there are evidences proving that better education leads to children’s
good health. Good health, long and better education will lead to high incomes in future and
utility in accordance to human capital theory.

Increased incomes, education, and savings loan products help the poor with ability of investing in
the future of their children, particularly in education. The empirical evidence shows that, in poor
households that access financial services, children go to school in large numbers, but stay there
for long. Even when the children help family enterprises, imperative poverty –induced child
labor will decrease and the rates of school-drop-out in household’s client that in non-client
households. The study on microfinance impact on the children’s schooling indicate that;

In Bangladesh, almost of Grameen client households’ girls had schooling, compared to the 60%
in the households of non-client. The rate of schooling for boys was high- 81% of the boys in the
client households were schooled, compared to 54% in the non-client households.

2.4 Summary of Literature Review

A review of the SMEs financial performance show that a lot of SMEs fail expansion because of
the limited SMEs financial resources show that many SMEs do not expand because they have
limited financial resources, stiff competition from other firms, using outdated technologies,
account receivables poor management, poor management, and unfavorable polices. According to
Yaron (1997) the study showed that poor loans access and limited finances is the key cause
limiting SMEs growth. Carpenter and Peterson (2002) argued that firms with need that exceed
the internal resources are constrained to pursuing the potential growth opportunities. Internally
inadequate made liquidity is a factor that is frequently as the cause of the failure of SMEs in the
developing economies.

11
The literature review showed mixed results. There are studies arguing the size of the loan
borrowed positive and significantly contribute to SMEs financial performance, and other studies
show that SMEs accessed MFIs loans had no growth sign. Because of the mixed results, it is
okay to investigate if MFIs lending causes a positive effect on the SMEs financial performance.

2.5 Conceptual Framework

In the statistical perspective, the conceptual framework describes the relationship between study
concepts. It is organized arranged in a logical way to providing a visual display or picture of how
the ideas in the study relate to each other (Grant and Osanloo, 2015)

In the study, a researcher analyzed independent variables, which included efficiency, expansion
and growth, lending rates, versus dependent variables, which is the SMEs performance as the
chart below illustrates.

INDEPENDENT VARIABLES DEPENDENT VARIABLES

LENDING RATES PERFORMANCE OF THE SMES

Affordability
Return on Investment (ROI)
C redit uptakelevel
Enterprises sustainability
lending conditions andterms
Payback period
EFFICIENCY
Rate (speed) of loan approvals
Choice of delivery technique

GROWTH AND EXPANSION

Economy
Competition
Customer outreach

Figure 1: Conceptual Framework of the Study

12
 CHAPTER 3: RESEARCH METHODOLOGY

3.1 Introduction
The chapter represent the study’s research methodology. It discusses research design, target
population, sampling design and sample size, data collection procedures and instrument,
determination of reliability and validity as well as data analysis techniques.

3.2 Research Design

Research design determines the general strategy or approach adopted. The data in the study was
derived from the investigation questionnaire results. The questionnaire has two parts; part one
collects information from Microfinance Institutions, and part two collects it from selected
Medium and Small Enterprises.

3.3 Population
Population is a whole study unit aggregate. According to Ngechu (2004) it is the distinct or set of
elements, people, facilities, or group of things examined. The definition ensures the target
population is standardized.

The targeted population under this study was 2700 SMEs, out of which 120 of respondents are
picked by using the cluster sampling technique.

3.4 Sample Design

The study uses probability sampling technique in creating the SMEs sampling frame. Clustered
random sampling was used to select 120 SMEs constituting the sample size. Out of 120
respondents, the cluster of 60 represented small entrepreneurs and the cluster of the remaining
half, represented the medium entrepreneurs’.

3.5 Data Collection

Researchers have any ways they use to collect data. The function is ensuring that required data is
carefully and correctly collected. In the study, both secondary and primary data was used in this
study. The tool used in primary data collection was a questionnaire, which assembled the needed

13
data. Questionnaire is the tool, which sets questions in a formal way intending to bring the
desired data. It was developed regarding the objectives of the research and was pre-examined for
reliablity and validity on the small population. It had two sections; A and B. Section A collect
information from respondents and section B collected information of MFIs lending effects on
development and growth of the SMEs and other factors that had an impact on the development
and growth of SMEs. Secondary data was obtained through analyzing literature on effects and
trends of MFIs lending on development and growth of SMEs in the county, and the whole
country.

3.5.1 Data Validity and Reliability

The essential way to ensure the best instrument and the correct measure is used is that the
outcome should is in line with the two criteria used in measuring the quality; reliability and
validity (Ojo, 2003)

To make sure this questionnaire is reliable and valid from this research, a researcher used SPSS,
which he looks at the items in the questionnaire in relation to the ability of achieving the stated
research objectives, comprehensibility, sustainability, coverage level, and logicality for the
prospective respondents.

3.6 Data Analysis

Both qualitative and quantitative approaches are used to analyze and process data. The
quantitative analysis begins with coding the open-ended data, and together pre-coded data was
digitalized using SPSS and STATA. The verified data was run using STATA and SPSS to
generating descriptive statistics, significance tests, and cross-tabulations. In the qualitative
dimension, the data was organized and listed under areas based on the questions and objectives.
Analyzed results presentation was done using tables, graphs, and charts. The other start involved
describing qualitative data, analyzing thematic areas, and interpreting data. The regression model
showed the relationship between MFI lending effects and SMEs financial performance.

3.6.1 Analytical Model

Regression model was used since it adjusts independent variables easily, since it allows the
explicitly control of many factors affecting independent variables. Moreover, regression model
matched the general functionality relationships form.

14
The Regression Equation is;

YI=B0 + B1 X1 + B2 X2 +B3X3+ᵋ

Where;
YI= Performance of SMEs as measured by Return on Investment, sustainability of the enterprises
and the Payback Period

X1= The lending rate of MFIs in terms of terms and conditions, and the credit uptake level, and
affordability.

X2= the SMEs efficiency of in the collateral requirements and delivery technique choice.

X3=expansion and growth of the SMEs in terms of the competition, economy and customer
outreach.

B0 = is the intercept (Value of Y when all other variables take the value of zero)

Bi= is the Coefficient of independent variables ᵋ = is the error term.

To establish microfinancing lending institutions effect to development and growth of medium

and small enterprises in Kiambu County. The Regression Equation and the Investments Return
is as follows;

ROA=B0 + B1 (The MFIs lending rate in terms of its affordability, terms and conditions and the
level of credit uptake) + B2 (the efficiency of lending to the SMEs) +B3 (Growth and expansion
of the SMEs) +ᵋ.

The independent variables X1, X2 and X3 are the Microfinance Institution variables used in the
study, which was measured using the questionnaire. Change in Bo is the effect degree on the
SME financial performance and the negative and positive value sign shows the effects’ direction.

3.6.2 Test of Significance

Statistical significance test was done at a 95% confidence level. The significance test was
established and a determinant coefficient (R2) was used in predicting the independent variable
effect (the model’s strength) to dependent variables. The model uses ANOVA and regression
when revealing the relationship between dependent and independent variables.

15
 CHAPTER 4: DATA ANALYSIS, RESULTS AND DISCUSSION

4.1. Introduction

The chapter includes findings and analysis of the study with guidance of the objectives of the
research. The results are represented in a form of demographic information of the descriptive
statistics analysis, regression results, and study respondents testing the relationship between
SMEs performance and independent factors that affect it.
4.2 Descriptive Statistics
4.2.1 Response Rate

The study targeted 120 respondents to collect data regarding the microfinancing lending
institutions effect on the financial performance of medium and small enterprises in Nairobi
County. From the study, 76 out of 120 sampled respondents fan answered and returned the
questionnaire making a 63% contribution. The commendable rate of response was real after the
researcher made individual visits to remind the respondent to fill-in and return their
questionnaires.
Table 1: Response Rate
Response Frequency Percentage

Responded 76 63

Not responded 44 37
Total 120 100

16
Source: Research Findings

Response Rate

37%

63%

Responded Not responded

4.3 General Information

4.3.1 Gender of the Respondents
According to table 4.1 the respondents’ gender, many respondents as shown are 60% males, and
the females are 40%. The study shows males working in the microfinance institutions and
medium and small enterprises are more than females.

4.3.2 Type of business

The study found out the business SME engages in. From these findings of the study, many of
these respondents 35 showed that the business engages in wholesale, 28 respondents showed that
their business runs as a retail, 8 respondents show their business engage in delivery of the
services, and 5 respondents showed that their business engaged in cosmetics and is shown below.
Table 2: Type of business
Statement Frequency Percent
Wholesalers 35 46
Retailers 28 37
Cosmetics 8 11
Service Delivery 5 7
Total 76 100

17
 Type of Business
100%

80%

60%

40%

46%
37%
20%
11% 7%
0%
Wholesalers Retailers Cosmetics Service Delivery

4.3.3 Number of employees

The study wanted to find the employees in every enterprise. About 40% of respondents show that
SME has zero to fifty employees. 25% of respondents showed the SME had fifty to one hundred
employees. 13% showed the SME has one hundred to one hundred and fifty employees. 10% of
respondents showed the SME had one hundred to one hundred and fifty employees. 7% showed
the SME has one hundred and fifty to two hundred employees. 5% showed that SME has two
hundred and above employees. It shows many SMEs have small employees making them easy to
manage.

4.3.4 Duration of SMEs Operation

The researcher showed great interest in knowing the period SME have been operationally, as
analyze in table 4.2. 50% of the respondents showed that their SME was in operation before
2000. 25% of the respondents showed that their SME was in operation between 2000 and 2005.
11% 50% of the respondents showed that their SME started operating before 2000. 25% of the
respondents showed that their SME was operating between 2000 and 2005. 9% of the
respondents showed that their SME started operating between 2010 and 2015, 5% showed that
their SME started operating from 2015 till now. It indicates that the majority respondents in the
study worked for enough time, making them conversant with the study information sought
pertaining businesses. According to Holman, Joyous and Kask (2008), the duration of working is

18
related to great output, in an industry. Productivity hours of the working duration is associated
with great output, in a certain industry.

Table 3: Duration of Time Business has been in Operation

Frequency Percent
Before 2000 38 50
2000 - 2005 19 25
2005 - 2010 8 11
2010 - 2015 7 9
2015 to present 4 5
Total 76 100
Source: Research Findings

Duration of Time Business has been in Operation

60%

50%
50%

40%

30%
25%

20%

11%
9%
10%
5%

0%
Before 2000 2000 - 2005 2005 - 2010 2010 - 2015 2015 to present

4.3.5 Preferred custodian of the business

The respondents filled in the preferred custodians of the business finances. From the majority
respondents of 65% showed that MFIs as their finance custodians, 25% showed banks as their
finance custodians, and 10% showed mobile banks as their finance custodians.
19
4.3.6Source of Capital for the Business (SMEs)
The study aimed at investigating the SMEs capital. Around 47% agreed that the microfinance
institutions were the source, other 41% agreed that personal savings was the source. 12 %
strongly disagreed that family was the source.

Table 4: Source of Capital for the SMEs

Statement Frequency Percent

Personal Savings 36 47

Family 31 41

Microfinance 9 12
institutions

Total 76 100

Source: Research Findings

Source of Capital for the SMEs

60% 47%

41%
50%

40%

30%
12%
20%

10%

0%
Personal Savings Family Microfinance institutions

20
4.3.7 Challenges Faced in Accessing Loans from the MFIs
The researcher asked respondents to show the challenges the enterprises face when they access
MFI loans. 51% of the respondents agreed that the stringent repayment terms are the challenges,
24% indicated processing loan for a long time as the challenge, 17% indicated difficulty
collateral raising is a challenge, 8% disagreed that high costs of transaction as a challenge.
Table 5: Challenges Faced in Accessing Loans from the MFIs
Statement Frequency Percent

Long time taken processing

the loan
18 24
Difficulty raising the

collateral
13 17
Stringent repayment terms 39 51

High transaction costs 6 8

Total 76 100

Source: Research Findings

4.4 Extent of Statement on Growth and Development of Enterprises

The researcher asked respondents to show what was related to development and growth of the
enterprises. Man respondents showed that competition from large firms affects SMEs growth to
the big as they 2.5902 means score shows. Unfavorable regulations and policies of the
government contribute to SMEs development and growth to the moderate extent as the 2.6393
means score shows. SMEs poor management is a factor affecting their development and growth
and to a moderate extent as the 2.7049 means score shows, SMEs increase the productivity in
getting funds from the MFIs leading to growth of enterprises growth to a moderate extent as the
2.7541 means score shows. MFIs increases entrepreneurs that start new ventures to the moderate
extent as the 2.7965 means score shows, while the SMEs fail to expand because of limited
financial resources to moderate as the 3.7705 means score shows.

21
Table 6: Extent of Statement on Growth and Development
Statement Mean Stud Dev.

I. SMEs fail expanding because of limited financial resources 3.7705 1.60177

ii. MFIs contribute to the entrepreneur’s increase who start new venture 2.7965 1.36545

iii. SMEs increase productivity through funds from 2.7541 1.51279

MFIs leading to enterprises growth

iv. Poor management of SMEs is a factors affecting development and growth 2.7049 1.28250

v. Unfavorable Government regulations and policies contribute to the 2.6393 1.43797

development and growth of SMEs

vi. Stiff competition from large firms affect SMEs growth 2.5902 1.41865

Source: Research Findings

4.5 Regression Analysis

In the research, regression analysis tested the relationship between the Return on Investments
(Dependent Variables) and factors affecting variables (Independent Variables; the lending rates
of MFIs, the MFIs services efficiency to SMEs, and the expansion and growth of SMEs).

The research used (SPSS V 21) to code, enter and compute the multiple regressions equations.

The determination coefficients explain the extent to which dependent variable are explained by
change in dependent variables or the independent variable percentage variation (effects of MFI
lending and the growth of SMEs in Kiambu County, Kenya) explained by all the independent
variables.

22
4.5.1 Model Summary

Table 7: Model Summary

R R Square Adjusted R Std. Error of
Model the Estimate
Square
1 0.893 0. 7974 0.744 0.4645

Source: Research Findings

The 3 independent variables examined, explain 79.7% of the microfinancing lending institutions
effect on the financial performance of medium and small enterprises in Kiambu County. as
represented by R2. It means that the factors not studied in this research contribute 20.1% of the
microfinancing lending institutions effect on the financial performance of medium and small
enterprises in Kiambu County. Therefore, more research should be done to investigate more
factors (20.1%) the microfinancing lending institutions effect on the financial performance of
medium and small enterprises in Kiambu County.

4.5.2 Analysis of Variance (ANOVA) Results

Table 8: ANOVA
Model Sum of df Mean F Sig.

Squares Square
1 Regression 2.453 3 1.267 7.623 .0214

Residual 9.313 82 2.327

Total 11.766 85

Source: Research Findings

The value is 0.0214, which is less than 0.05 thus this model significance statistically and predicts
how lending rates by MFIs, the MFIs services efficiency to SMEs, and the expansion and growth
of SMEs affecting the microfinancing lending institutions effect on the financial performance of
medium and small enterprises in Kiambu County, Kenya. The F critical at a 5% level of
significance was 3.23. Since F calculated is greater than the F critical (value = 7.623), showing
that the model was significant.

23
4.5.3 Coefficient of Determination
Table 9: Coefficient of Determination
Unstandardized Standardize d

Coefficients Coefficients

Model B Std. Error Beta t Sig.

1 (Constant) 1.142 1.335 1.615 0.359

MFI `s lending rates 0.891 0.223 0.167 4.423 .0209

MFI`s service efficiency 0.813 0.241 0.076 3.752 .0217

Growth and expansion of the 0.857 0.233 0.186 3.867 .0224

SMEs
Source: Research Findings
Multiple regression analysis was done to determine the relationship between the microfinancing
lending institutions effect on the financial performance of medium and small enterprises in
Kiambu
County, Kenyaand the three variables. As per the SPSS generated table above, the equation
(YI = β₀ + β₁ X₁ + β₂ X₂ + β₃ X₃ + е) becomes:

YI = 1. 142 + 0.891X1+ 0.857X2+ 0.813X3+0.765

4.6 Interpretation of the Findings

The section provided an interpretation of findings relating to the objectives. To investigate the
microfinancing lending institutions effect on the financial performance of medium and small
enterprises in Kiambu County. The regression equation established considering every factor in
MFIs lending rates, MFIs services efficiency to SMEs, and the expansion and growth of SMEs
constantly at zero, the microfinancing lending institutions effect on the financial performance of
medium and small enterprises in 1.142. The findings show that if independent variables are at
zero, the unit increase in MFIs lending rates to a 0.891 microfinancing lending institutions effect
on the financial performance of medium and small enterprises. A unit increases in MFIs services
efficiency to SMEs leads to a 0.813 the microfinancing lending institutions effect on the financial
performance of medium and small enterprises. A unit increases in the expansion and growth of
SMEs leads to a 0.857 microfinancing lending institutions effect on the financial performance of
24
medium and small enterprises. It infers that microfinance institution contributes most to the
growth of the countries followed by medium and small enterprises. At a 5% significance level
and 95% confidence level, MFIs lending rates had a 0.0209 significance level. The MFIs services
efficiency of the SMEs had a 0.0217 significance level, and the expansion and growth of SMEs
showed 0.0224 significance level hence the key significant factor.
CHAPTER 5: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Introduction
The chapter provides a summary of findings, discussion of findings, and also provides a
conclusion and recommendations on microfinancing lending institutions effect on the financial
performance of medium and small enterprises in Kiambu County, Kenya. In addition, it gives an
overview of future research areas.

5.2 Summary of findings

The study objectives investigated the microfinancing lending institutions effect on the financial
performance of medium and small enterprises in Kiambu County, Kenya. It provided two data
analysis types; inferential and descriptive analysis. The descriptive analysis helps the study to
describe relevant phenomena aspects under consideration, providing the detailed information
about essential variables. For the inferential analysis, the study used a panel regression data
analysis. From this study, it is clear that many respondents showed their business engaged in
service delivery, wholesales, and retail. It also discovered that the key capitals source for
business is from microfinance institutions, families, and personal savings. It also discovered that
challenges faced in the enterprise in accessing MFI loans are stringent terms of repayment, long
period taken to process loan, and challenges in raising the collateral.

The study showed that the stiff competition from big firms affects SMEs growth, poor SMEs
management is a factor that affects development and growth, SMEs increases productivity by
getting funds from the MFIs leading to growth of the enterprises, MFIs contributed to
entrepreneurs increasing, and they start venturing will the SMEs fail expanding the limited
financial resources.

5.3 Conclusion
The study concluded that key capital for Medium and Small Enterprises is from the
Microfinancing institutions. They provided a comprehensive financial services range to the

25
people working in informal sectors, which fits their affordability and needs. They provide
services to clients in the loan form. The services make clients modifying microenterprise
activities leading to decreased or increased microenterprise income. The change in the income of
microenterprise will change the household income, leading to lesser or greater household
economic security.
Many respondents said that limited finance and loans services are key factors limiting SMEs
growth. The study is similar to the one carried out by Carpenter and Peterson (2002) he argued
that the firms that need to exceed internal resources to be constrained to pursuing the potential
growth opportunities. The insufficient liquidity generated internally is a factor that is frequently
cited as the SMEs failure cause in the developing economies. Respondents agree that stiff
competition from big firms will affect their growth. The facts that SMEs shares increased, it
suggests that SMEs deploy new strategies for maintenance, or enhance competitiveness in the
globalized economy. More study showed that poor SMEs management is the factor that affected
development and growth. SMEs should improve the poor borrower’s skills and educate them to
improve marketing and management of their income and productivity.

The study established microfinancing lending institutions effect on the financial performance of
medium and small enterprises in Kiambu County, Kenya. Data in the study was analyzed using
inferential and descriptive analysis. A large number of SMEs in Kiambu are beneficiaries of
loaning services from MFIs. It is concluded that microcredit will allow poor people plan for their
future and put their children in school for long. MFIs should encourage low repayment rate,
leading to new loans being granted for some periods. These findings indicate that the self-
selected groups have high willingness to repay. In situations where group members verify
economic activities outcome of other members and punish for defaulting, incentives to cooperate
are strong. Business management is improved to increase income.

5.4 Recommendations for Policy

In view of the conclusions and findings drawn from this study, recommendations will help
enhance a sustained and accelerated growth in the SMEs sector and provides recommendations
to help improve services of MFIs. The government and other partners should facilitate credit
accessibility in Medium and Small Enterprises from Microfinancing Institutions and minimizing
the collateral conditions.

26
The study recommended access to financing should be identified as SMEs growth freedom. The
study recommended training as essential for quality and productivity and quality as it influenced
motivation, efficiency, and effectiveness, of employees. The study recommended strong evidence
of accessing financial services and result transfer of financial resources to the poor women, over
time, leads to women becoming assertive and confident. The study recommended SMEs
management as a factor affecting development and growth.

5.5 Limitations of the Study

To cover SMEs in Kiambu it was impossible since the research study has a time frame and the
limited resources. The research used 120 SMEs who have operated for 5 or more years in
Kiambu County. Choosing Kiambu County was because a big number of SMEs operates in the
County providing good data source for this study.
The findings were not enough to the respondent’s literacy level in providing responses to the
questionnaire, and limited the participation number.
In addition, collecting data from the SMEs was challenging as assurance of the respondents
would giving back complete questionnaires was not known, forcing the researcher to administer
the questionnaires.

5.6 Areas for Further Research

There is no requirement for further research on the economic challenges affecting microfinance
Institutions in financing Medium and Small Enterprises.

The same study on the effect of Microfinancing Lending Institutions on the financial
performance of medium and small enterprises in other Counties in Kenya apart from Kiambu
County can also be explored.

In addition, it is interesting to research ways, which Government promotes credit by SMEs

accessibility from other financial institutions apart from microfinance Institutions.

27
 REFERENCES
Bangladesh Bank. (2007). Inspection Report on Grameen Bank. Dhaka; Bangladesh Bank

Carpenter, R E. & Petersen, B.C. (2002). Is the Growth of Small Firms Constrained by Internal?
Finance? The Review of Economics and Statistics

Central Bank of Kenya. (CBK). Bank Supervision Annual Report 2013.

Chijoriga, M. (2000). The performance and sustainability of microfinance institution in Tanzania.

Unpublished manuscript.

Kenya, Government of the Republic. (2006). Microfinance Act of 2006. Nairobi, Kenya:
Government Printer.

Kenya Institute of Management (2009) Fundamentals of Management Research Methods;

Nairobi Macmillan Publishers. (n.d.).

Kothari, C R (2004). Research Methodology: Methods and Techniques. New Delhi: Wiley
Eastern.

Mordurch, J. (2009). The microfinance promise. Journal of Economics Literature.

Muthoki, M. (2012) SMEs face uphill task getting credits from Banks. The Daily Nation pp.30.

Peterson, K. (2009). Effects of K-rep loans on small businesses in Kenya. Nairobi: University of

UNDP, (2000). Micro and small enterprise development for poverty alleviation in Thailand.
International best practice in micro and small enterprises development work, paper No. 2, Edited
by Gerry Finnegan.

UWFT, (2005). Evaluation of micro and small enterprises in Uganda, Kampala: Uganda Women
Finance Trust.

World Bank, (2004), World Bank group support for small businesses, Washington DC. World
Bank. Retrieved from www.worldbank.org

28
Yaron, J., Benjamin & Piperk, S (1997). Rural Finance issues designed and World Practices.
Washington, D.C World Bank Agriculture and Natural Resources Development.

Yunus, M. (1976). Microfinance and Poverty in Bangladesh. Journal development Studies, 37(4),
101-132

29
APPENDICES
APPENDIX I: Transmittal Letter
Fridah Wairimu Kanyuira,
Jomo Kenyatta University of Agriculture and Technology,
School of Business
P. O. Box 62000- 0200. NAIROBI,
KENYA.
Dear Respondent,
I am a student at Jomo Kenyatta University of Agriculture and Technology pursuing a degree in
Bachelor of Commerce-Accounting Option course. In partial fulfillment of the course requirements,
am conducting a research survey on the effect of Lending by Microfinance Institutions on the growth
and development of small and medium enterprises, a Case Study of Kiambu County, Kenya. With
regards, I request you to spare a few minutes to fill in the questionnaire as diligently as possible. The
information in this questionnaire was strictly confidential and was not be used for any other purpose
other than for this research. Your assistance in facilitating this research was highly appreciated.
Thanks in advance.
Yours Sincerely,
Fridah Wairimu Kanyuira.

30
APPENDIX II:
QUESTIONNAIRE SURVEY FOR RESPONDENTS

THE EFFECT OF LENDING BY MICROFINANCE INSTITUTIONS ON THE

FINANCIAL PERFORMANCE OF SMALL AND MEDIUM ENTREPRISES IN
KIAMBU
COUNTY, KENYA. This questionnaire is aimed at gathering primary data on the effect of
Lending by Microfinance Institutions on the Growth and Development of Small and Medium
Enterprises, a Case Study of Kiambu County, Kenya.
Please note that your views and answers to these questions will be treated with greatest
confidentiality.
Instructions on how to fill the questionnaire
i.Fill in your answer to all the Questions in the spaces provided
ii. Do not indicate your name anywhere in the questionnaire
iii. It is absolutely important that all questions have a response
iv. There are no wrong or right answers
**The views of the respondents will be assumed to be confidential and used for research
purposes only and will not be disclosed to external parties. Please do not indicate your
name on the questionnaire.
SECTION A: BACKGROUND INFORMATION
(Please tick where applicable)
1. Type of business
Service based []
Product based []
Service and product based []
Others [] please specify ………………………………………………………………………………………………………………
2. Number of employees
0 – 50 []
50 – 100 []
100 – 150 []
150 – 200 []
200 and above [] please specify……………………………………………………………………………………………………
3. Which year did you venture into business?
Before 2000 []
2000 – 2005 []
2006 – 2010 []
2011 – 2015 []
2016 to present []

31
 4. What is your preferred custodian for your finances?
MFIs []
Banks []
Mobile money services [] Others [] please
specify………………………………………………………………………………………………………………

If you selected other brackets other than MFIs, please skip the remaining question and submit this
questionnaire back to the interviewer. Otherwise proceed to next question

5. Which MFI do you transact with?......................................................................................................

SECTION B: LENDING RATES AND CAPITAL STRUCTURE

1. Which source of finance does your SME use?

Loan from MFI []
Personal savings []
Borrowing from family and friends []
Others [] specify……………………………………………………………………………………………………
If you answered loan from MFI, please answer the following question.
2. Did the MFI institution offer you your requested loan amount?
Yes []
No [] please explain…………………………………………………………………………………………………………………….
3. At what interest rate did the MFI offer you the loan?
9% – 11.9% []
12% - 14.9% []
15% - 16.9% []
17% and above [] please specify…………………………………………………………………………………………………
4. Did you incur any other transactional cost on the loan?
Yes []
No []
If yes, what category of transactional cist did you incur?
Loan application fees (original fee) []
Loan servicing fee []
Others [] please specify………………………………………………………………………………………………………………
5. Did MFI give you a favorable payback period?
Yes []
No []
Kindly tick where applicable
Below 2 years []
2 – 3 years []
4 – 5 years []
Above 5 years [] please specify…………………………………………………………………………………………………

32
Please tick the following table where appropriate.
MFI STRONGL AGREE NEUTRAL DISAGREE STRONGLY
Y AGREE DISAGREE
The rate of interest
favorable to the SMEs
The transactional cost
offered on the loan
terms where fair and
transparent
The collateral on loans
where justifiable
Customer service by
MFI was
recommendable

SECTION C: EFFICIENCY, GROWTH AND EXPANSION

1.How would you rank service delivery from your financial institution in terms of loan approval?
Where
1 = least efficient 2 = most efficient
1. () 2. () 3. () 4. () 5. ( )
2. How would you rank the government policies for SMEs in Kenya?
1 = least efficient 2 = most efficient
1. () 2. () 3. () 4. () 5. ( )
3. As an SME, do you have an expansion plan on your enterprise?
Yes ()
No ()
If yes, please tick on the below range on time to expand.
0 – 2 years ()

3 – 5 years ()

6 – 9 years ()

Above 10 years ()

4. Kindly list the challenges you face as an SME which may not have been included in this
questionnaire. (please give detailed
description) ………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………

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the following details:
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